LONDON () -- Shares in Firestone Diamonds [AIM:FDI] have traded erratically but essentially statically for the past few months; however, the attractive outlook for the company's Groen River alluvial diamond project in South Africa could soon win the company more fans in the market.
The Groen River Valley
The ancient river systems of South Africa's west coast have often proven prolific sources of alluvial diamonds in the past, and the Groen River Valley, controlled by Firestone but covered by a joint venture agreement with South African diamond giant De Beers, is the last of these systems to remain unexplored. Hence, the company hopes that in time that the aged channels of the valley will support a sizable alluvial mining operation.
Firestone is just about to commence initial bulk sampling of the Groen River area; a crucial milestone for any would-be diamond mine. According to Phillip Kenny, Firestone's Managing Director, the results of this are expected by Q1 of next year and will if they are positive be followed by a more comprehensive "cross channel" bulk sample. At this juncture, then the joint venture partners will be in a position to decide either to develop a mine, or to walk away from the project.
Initial estimates are that what Firestone terms Phase 1 of a mining operation could be established for around ZAR30 million, approximately $4.5 million at today's exchange rates. This operation would focus on Firestone's four most advanced mining targets, though these are described by Tim Wilkes, the company's Director of Resource Development, as "not necessarily its best". The remaining, and perhaps better quality, targets could be mined some time down the line during Phase 2 of any operation, which Firestone would expect to develop alone, outside of its joint venture with De Beers.
As it is, Phase 1 would be funded to bankable feasibility study by De Beers, in return for 61% ownership. De Beers could then increase its stake up to a maximum of 70%, in return for full funding of mine construction, which would essentially leave Firestone with a 30% carried interest; somewhat reassuring to investors who know that assuming the project goes ahead, they are guaranteed a share of the spoils whether Firestone provides funding for construction or not.
Just how substantive could those spoils be? Firestone's current geological model, created after extensive drilling, pre-bulk sampling and aeromagnetic surveying, among other methods, estimates a potential resource available to the entire project of 360 million tonnes at a grade of 3 carats per hundred tonnes (Cpht), equating to 10.8 million carats and revenue of between $3.24 million and $5.4 billion. Revenue parameters assume average diamond values per carat of between $300 and $500; fairly conservative given the buoyancy of today's rough diamond market.
Phase 1 of the project as envisaged now would have a potential resource of 60mt graded on average at 3Cpht, equating to 1.83 million carats and revenue of between $549 million and $915 million, based on the same supposed diamond values per carat. Initial Phase 1 production would be targeted for commencement in 2007, with full production levels to be reached a year or so later and an intended mine life of five years.
Prima facie, the expected Phase 1 capital expenditure of $4.5 million does not seem like a lot in return for such large revenues, but this is down to the fact that with alluvial diamond mines, operating expenses tend to form an especially large portion of overall costs. Projected operating costs for the Groen River project though compare well with similar operations. Average mining costs are estimated by Firestone at $4.17/tonne, equating to a margin of $4.83/tonne even at a base case diamond value of $300/carat.
This is thought by the company to be achievable partly due to the relatively low overburden and relatively high grade of the Groen River project's estimated potential resource. Although all these modelled numbers are susceptible to change over time, early indications look to be of an economically robust project.
Investment Outlook
If the Groen River project conforms to Firestone's expectations of it as they stand at this point, then it could perhaps be the making of the company. A successful Phase 1 could position Firestone well financially and operationally for the development of Phase 2, which the company would wish to carry out without De Beers and hence retain a full share of the profits. However, in this scenario one wonders if De Beers might not rather just buy out Firestone in order to secure a large chunk of the new diamond resources the major badly needs if it is to try and avoid further erosion of its global market share.
In any case, there is plenty of potential for investors who back Firestone now to make gains before a buyout by De Beers might become an issue. A successful bulk sampling programme on the Groen River project followed by a feasibility study and the construction of Phase 1 would add significant value to Firestone. This, plus in particular the company's significant joint ventures with De Beers in Botswana, minor South African diamond production interests and the longer term prospects of the Groen River Valley might make it a diamond play worth noting.
