Kopane Diamond Developments (formerly European Diamonds plc) is a growing diamond mining company with substantial production and development assets in Lesotho.
The Liqhobong Satellite plant is now producing at a rate over 150,000 carats per annum. A Definitive Feasibility Study has commenced on the Main Pipe which could demonstrate a viable project, capable of producing up to one million carats per annum. Kopane is also committed to bringing its exploration assets in Finland to full value.
The word “kopane”, in the language of the Kingdom of Lesotho, means “unity” or “togetherness” and it was in this spirit that new Chairman Tim Read joined the board last July, and with COO Stephen Lay brought about a sea change at the company previously known as European Diamonds.
As the company moved forward from exploration and small scale production to serious project development at its Liqhobong kimberlite project in Lesotho, the new management was a symbol of the essential changes required to bring the project to fruition. Project discovery and project implementation require different skill sets, and more importantly, different mindsets. By bringing in Read, with his international financial, mining and engineering expertise, the company equipped itself to go forward and achieve its long term ambition of becoming a mid-tier diamond miner.
Liqhobong comprises two kimberlite pipes, set high in the Lesotho mountains – the small Satellite Pipe, and the much larger Main Pipe, some 300m away. Historically, the plan at the outset was to mine the relatively well-developed Satellite pipe at the rate of 290,000 carats per year to generate revenue, whilst conducting a programme of exploration and development on the adjacent Main Pipe. Satellite’s life was estimated at about 5-6 years, by which time the lower grade but higher value Main Pipe would have taken over as the major breadwinner and augmented production to almost the million carat mark.
With a proven reputation for producing desirable fancy yellows as well as good run of mine diamonds, Liqhobong seemed like a good bet when it was first acquired in 2004. Tentative figures of the period suggested that when both pipes were in production, attributable post tax profits – assuming 25% ownership by the Government of Lesotho - would have been running at around £7.5 million per annum.
But plans change along with circumstances, and as the Satellite plant built up towards design capacity during 2006, drilling and sampling at the Main Pipe began to indicate that its potential was far greater than originally envisaged. It’s a much larger pipe than Satellite, at some 8.5 ha, and although initially assumed to be lower in grade at about 17 cpht, the stone value was higher at around $70 per carat. First serious exploration by Kopane showed the pipe to be multiphase – the kimberlite contained within the pipe having been emplaced at different times – and some zones were significantly higher in grade than others. This concentrated minds towards developing the pipe as a priority, and whilst Satellite continued to be mined, its main role evolved to become that of processing weathered kimberlite from Main Pipe and treating bulk samples of Main Pipe ore.
Current diamond production is running at approximately 160,000 carats per year, the stones being sold in Antwerp by BHP Billiton on Kopane’s behalf. Since the commencement of production at Liqhobong in 2005, some 280,000 carats have been sold, raising over $16 million in revenue, of which $3.1 million was generated by sales in the first half of 2008. The majority of sales until now have been of a blend of stones produced from both Satellite and Main ore, and in the most recent auctions average value was $54 per carat. But a separate bulk sample from the K5 zone of the Main Pipe produced almost 17,000 carats which sold in July for an average of $99 per carat. This Main Pipe sample included three high-quality, high-value yellow stones, the best of which was over 13 carats in size and fetched $35,136 per carat, the highest value of any stone thus far mined at Liqhobong.
This value far exceeded that estimated by the preliminary feasibility study completed last year for the Main Pipe. Delivered in July 2007, this models a 55.5 million tonne resource at 27.6 cpht, with an initial mine life of 16 years. Recoverable carats are estimated at 15.3 million, of which 11.5 million are attributable to Kopane, with a run of mine value of $70 per carat. This gives a recoverable gross in-situ value of over $1 billion, of which Kopane can claim $805 million. Cash costs were estimated at $38 per carat, and capex of $100 million – which includes working capital and contingencies - was forecast.
The current resource and mine model in the PFS goes to 280 metres below surface, but diamond drilling shows that mineralisation is still present at 650 metres depth, so there is considerable upside to the resource tonnage. Further upside exists on grade, with a 2007 bulk sample showing 41 cpht. And as if more were needed, it is estimated that each 200,000 tonnes of Main Pipe kimberlite from the K4 and K5 zones could yield four stones larger than 50 carats and one stone of 100 carats or more – the so-called bonanza stones which have made mines like Gem Diamonds’ Letseng highly profitable in spite of an almost risible overall grade. Such stones have been specifically omitted from grade and value calculations at Liqhobong.
A C Howe, who reviewed the PFS, recommended the commencement of a Definitive Feasibility Study without delay, and it was to plan and implement this – as well as to conduct a complete reappraisal of the business - that Tim Read and Stephen Lay came to the company last July. They have recently been joined by Michael Wittet as a non-executive director, whose 36 years with De Beers will prove an asset, and last November, to mark this key turning point in the company’s direction and focus, the new name of Kopane Diamond Developments was almost unanimously approved by shareholders. The selection of the name also affirmed the company’s new focus on Lesotho, now that the kimberlite assets in Finland are under a JV arrangement whereby Mantle Diamonds, a privately owned UK company, can earn 70% of the properties.
The Definitive Feasibility Study now well under way, having been significantly upgraded to provide a bankable document, may capitalise on some of the upside suggested by the PFS, as it includes a programme of wide diameter drilling, the ore from which will be processed in a specially imported 5tph dense media separation plant currently being commissioned on site. Bulk sampling programmes – to be processed through the Satellite plant on a controlled basis – and core drilling may further develop the grade, large stone frequency and tonnage estimates. A new resource statement, with a higher proportion of measured and indicated resources, is planned for Q4, and the whole thing should be complete before the end of the year.
With all this going on, and a 20 year mining licence in their pocket, it seems odd that Kopane cannot attract interest from investors, particularly in the retail sector. The price has been in a steady decline for some years, in spite of all the promise of the company’s assets, and is presently at its all time low of just 7p per share, giving a market capitalisation of under £12 million.
Part of the reason for this has been the perception by investors of continual dilution of their interest. Shares in issue at June 2003 were 19,214,962. By June 2004, after the acquisition and initial fundraising for Liqhobong, shares in issue were 26,147,561.Today, Kopane has 169,611,283 shares in issue, accompanied by nearly 60 million warrants and options. Investors do not like dilution. In fact, retail investors are getting almost paranoid about the issue of further shares for cash, even when that cash is to be translated into balance sheet assets such as plant and equipment, or – as in the case of Kopane Developments – a full-frontal feasibility study which will allow them to secure project finance from lenders.
The most recent fund raising, undertaken to finance the DFS to completion, and set against the background of difficult market conditions, was not well received by retail investors. Even less well received was the accompanying announcement that the board had turned down 17p per share in an unsolicited and unidentified all-cash bid. Acceptance of this bid would – according to the company - have prevented the fundraising and damaged the company’s ability to complete the DFS. Chairman Read explained further: “This conditional approach was unsupported by cash in the bidder’s bank account, yet would have prevented us from continuing with our financing. What would you choose? Cash in your own bank account from already committed new investors of the stature of HSBC, or a stalled development programme whilst the bidder – with no guarantee of success – tried to arrange his bid finance in an appallingly difficult market?”
“Having canvassed our key shareholders for their opinion, we chose the bird in the hand,” he continued, “because completing the Main Pipe DFS needed to take priority over all other considerations. And at the end of the day, we expect that 17p will prove to be a massive understatement of the project’s value.
“We have a fantastic asset there, in the Main Pipe, and in a few months, when the DFS is complete, our investors should realise it.”
In the meantime, Read and his fellow directors – including Edward Marlow of 16% shareholder HSBC who is also chairman of Santana Diamonds - will have their work cut out to raise the mood of retail investors, who are already talking of the “next placing” with some despondency. The full DFS with bankable parameters, coupled with news of significant debt finance for Main Pipe construction, cannot come soon enough.
by Wendy Durham; Source: http://www.proactiveinvestors.co.uk/companies/news/2918/kopane-diamond-developments-hidden-value-2918.html
