Stockhouse Movers & Shakers: Diamond junior aims to go it alone

Peter Kennedy Peter Kennedy, Stockhouse
0 Comments| October 25, 2010

As the global diamond industry regains some lost luster following the ravages of the 2008 financial crisis, a small Vancouver company is working to position itself as a rarity in the sector.

Part of the Lundin Mining Group of companies, Lucara Diamond Corp. (TSX: V.LUC, Stock Forum) is hoping to take advantage of the diamond market recovery  by bringing two new mines in Southern Africa into production during the next four years.

But unlike the vast majority of its peers, Lucara wants to develop mines in Botswana and Lesotho without the technical help and financial assistance of a major mining company.

If it can achieve that goal, the company expects its AK6 project in Botswana and Mothae property in Lesotho to produce in excess of 700,000 carats by 2014, generating from $100 million to $120 million in annual revenue.

During an interview in Vancouver, Lucara chief executive officer William Lamb said the strategy may present some challenges for analysts and investors who are trying to put a valuation on the junior’s share price, which on Monday was trading at 84 cents, in a 52-week range of $1.20 and 65 cents.

At current levels, Lucara has a market value of $184 million, based on the 222 million shares outstanding.

When the junior completes the $72 million acquisition of African Diamonds Plc --  its partner in the AK6 project -- the number of shares outstanding is expected to rise to about 300 million.

“It’s difficult for us to find peers against whom we can compare ourselves,’’ said Lamb.

He was referring to the fact that junior companies generally bring in major mining companies such as De Beers, Rio Tinto Plc (NYSE: RIO, Stock Forum) and BHP Billiton Ltd. (NYSE: BHP, Stock Forum) when they are attempting to put diamond projects into production.

Harry Winston Diamond Corp. (TSX: T.HW, Stock Forum) leaves the diamond mining at the Diavik site in the Northwest Territories in the hands of partner Rio Tinto.

Canadian junior Mountain Province Diamonds Inc. (TSX: T.MPV, Stock Forum) is developing the Gahscho Kue diamond project in Canada’s Northwest Territories with joint venture partner De Beers Canada.

Lamb said Firestone Diamonds PLC – which also has properties in Botswana and Lesotho --is among a handful of small resource firms who are developing diamond projects “and will probably get it right.”

Rio, BHP and De Beers

“Historically everything else has only been successful because there has been a Rio, a BHP or a De Beers involved,’’ he said.

A 39-year-old engineer from Johannesburg, Lamb followed his father into the industry and worked for Rand Mines, Kvaerner Metals and De Beers before moving to Canada in 2002.

He was hired by the Lundin Mining Group in 2008 after a 6-year spell with De Beers Canada, where his responsibilities included process management during the development of the Victor diamond mine in northern Ontario.

In that role, he was charged with ensuring that the project achieved the maximum possible diamond recoveries.

He is now trying to position Lucara as a mid-tier diamond producer that is developing projects which have moved beyond the grass roots exploration stage, but are still too small to attract major mining companies like De Beers and Rio Tinto.

In the longer term, the junior hopes to use its financial resources [about $43 million in the bank] and expertise to become a go-to company for other juniors with promising projects that they are unable to develop in their own.

“We do believe that we have a strong team that understands what it takes to get a diamond mine up and running,’’ said Lamb, who has been to South Africa eight times this year.

“When people ask, what car do you drive, I say I have a 747,’’ he said. “British Airways is my friend.”

The AK6 mine in Botswana is expected to reach the commercial production stage in early 2012. Under an agreement, the government will receive a 10% royalty based on the final sale price. Once the rough stones are cleaned and evaluated, a diamond marketing agent will take over.

“That is the end point for us,’’ said Lamb. “We get the money from the marketing agent. It goes into our bank account and that is where it ends for us.”

At AK6, the company envisages spending about $156 million to develop an open pit mining operation which is expected to produce about 620,000 carats annually.

Global diamond industry

Lucara envisages a similar arrangement at Lesotho where the government has a 25% stake in Mothae and where commercial production is scheduled to start in 2014.

The $160 million Mothae project is targeting a production rate of 72,000 carats annually.

About  75% of that output is expected to be gem quality stones. Of the other 25%, at least half would be near gem, with the balance falling into the industrial category.

Lucara is working to achieve its targets as the global diamond industry continues to recover from the impact of a global financial crisis that sent the price of rough diamonds tumbling by as much as 60% in the first quarter of 2009.

Now that prices are trading at about 15% below the 2008 high, analysts and industry officials are hoping that an expanding middle class in countries like China and India will continue to boost demand.

China is currently the world’s second largest consumer (behind the U.S.A) and is expected to account for 16% of global demand by 2016, up from 8% in 2008, according to Des Kalilea, a diamond marketing analyst with RBC Capital Markets.

Speaking to the Mining Journal, Kalilea said he expects India’s share of global demand to rise to 11% from 7%. Meanwhile the U.S. is expected to see its share of global demand fall to 35% from 40%, Kalilea predicted.

“We are cautiously optimistic that the recovery will continue,’’ said Tom Ormsby, director of corporate communications for De Beers Canada. However, he said the near-term outlook will be influenced by consumption in the United States, which still accounts for about 40% of the downstream retail market.

Lamb believes rising consumption in China will be driven by efforts there to boost the ranks of the middle class, by closing the gap between rich and poor. “If China continues to grow, it continues to have significant positive aspects for the diamond industry,” he said.

William Lamb Bio

Born in South Africa, Lamb has over 16 years experience in the mining operations and project development industry. After starting his career with Rand Mines, he worked in the research laboratories of De Beers before moving to Canada in 2002. He completed an MBA through the Edinburgh Business School.

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