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The diamond hunters Posted: Tue, 21 Nov 2006 [miningmx.com] -- “BEING a diamond miner is the worst kind of gambling,” says Theo Botoulas, MD of Johannesburg’s Diamond Core Resources. “That’s if you’re not working to a plan,” he hastens to add. And even with a working plan in hand, life can be precarious. “It can get exciting. After two weeks of no results, people can get worried,” says Botoulas. He should know. Diamond Core raised R232m earlier this year from mainly institutional shareholders in order to develop mines in the Northern Cape province. He’s hoping the company won’t have to ask shareholders to dip into their pockets again. But Botoulas, who worked with the diggers in Kimberley as a child, knows tangible results must soon replace promises. The fact of the matter is that prospecting for diamonds can be a hit and miss affair, a fact of their ancient geology. Violent volcanic eruptions pushed diamonds from depths of more than 150km to the earth’s surface. The remnants of these eruptions are known as ‘kimberlite pipes’, carrot-like formations that taper deep into the earth. But not all volcanic eruptions transported diamonds with them. That means that although the world has many kimberlites, very few of them contain economic quantities of diamonds. Says Clifford Elphick, CEO of GEM Diamond Mining (GEM): “De Beers spends about $90m/year looking for diamonds. They find kimberlites every year. But not economic ones.” Of the 6,000 discovered kimberlites, only about 50 are commercial. And less than 2% of diamonds contain no chemical impurities. Diamonds are rare. Rare, and difficult to extract, even in good mines such as GEM Diamond’s Letseng mine in Lesotho. A low-grade operation, diamonds occur in Letseng at a rate of 0.4g per 100,000 kg. Compare that to a particularly low-grade gold mine which might yield 2g/ton. In some cases, diamond miners prefer to dig for stones buried among the shales of the sea where rivers deposited them over millions of years. Or in the case of alluvial mining, miners search ancient river beds. In all three cases, diamond miners don’t have the same peace of mind as, say, a copper miner who is digging a relatively discrete and predictable orebody. That hasn’t halted the progress of the ₤10bn (R140bn) worth of diamond miners, many of them exploration firms, that have listed on London’s Alternative Investment Market (AIM) since 2004. That’s the value of interest in a sector that has many failures, and precious few successes. Driving this flowering of new ventures, is an expected chronic shortage of diamonds. According to James Allan, a former diamond analyst, and now founding member of James Allan & Associates, De Beers’ decision to restructure its business in the Nineties has had far-reaching effects today. It placed more responsibility for advertising diamonds on its customers, the cutters and polishers, and simultaneously reduced its $5bn stockpile of diamonds in 1998 to an estimated $800m in 2004. It’s now mere weeks separating the mining of diamonds at its mines in Botswana and SA from the sale of rough (uncut) diamonds to the diamond manufacturers in London. That has made the market more dynamic: “The market is now driven by its own forces although the wealth effect is also a factor,” says Allan. Growth in world retail sales of polished diamonds has increased from a negative 0.2% between 1994 and 1998 to 3.6% from 1998 to 2003. In 2004, demand for diamonds grew 8.5%, according to statistics from De Beers’ Diamond Trading Company in London. “The baby-boomers are at their peak spending capacity, aged between 45 and 65 years old,” says Allan. Assuming 5% demand growth, some seven million new carats have to be discovered and mined every year. That’s equal to another Venetia - by far De Beers Consolidated Mines’ best asset - every year. Back in the field, diamond exploration firms are working up a sweat. The lottery of geology means diamonds are best found in rocks older than 2.5 billion years. This is why many of the diamond explorers wind up in Africa’s forests and deserts: Liberia, Democratic Republic of Congo, Angola, Central African Republic. Interestingly, AIM’s largest listed diamond business is Sierra Leone Diamonds. Elphick, whose GEM Diamonds may list in London before the year-end, has a different approach. “We’ll go wherever the opportunity is, but not to Sierra Leone or Liberia,” he says. GEM’s proposed profile is, in the words of Elphick, as a ‘blue chip’ mining firm that takes on projects. “We’re strictly not exploration,” he says. The plan therefore is to tackle known diamond prospects that are either in financial and technical distress. It’s more expensive access to diamond production, but less risky. As already demonstrated by its R900m-odd purchase of the Letseng mine, GEM has access to capital. Quite whether London will recognise in GEM features that separate it from exploration remains to be seen. Certainly investment appetite for new mining ventures across all metals and commodities on AIM has been cooling of late. One analyst in London reckons there’s been a definite slowdown in demand for new mining ventures. “Appetite has definitely dulled owing to a few disappointments and softer diamond prices. But I reckon Elphick has a better chance than most at completing a good IPO,” he says. Elphick has said that his company would be roughly three to four times as large as the recently listed ₤70m Pangea Diamond Fields, billed as something of a rival to GEM. In its favour, GEM has cash flow from Letseng. It’s also ploughing $45m into doubling production at the mine. “It’ll be twice as profitable,” Elphick says of the mine. Having uncovered the Lesotho Promise, a fabulously wealthy 603 carat stone earlier this year, GEM has been able to pay back about 8% of Letseng’s acquisition cost. “That also helped dispel any remaining myths that Brett Kebble was salting Letseng,” says Elphick. There are others, many of them South African, prepared to pick their way through Africa’s troubled climes. Rob Still, a former new business director at JCI, listed Pangea Diamond Fields in November. A wiley character, Still’s Southern Mining sold the $500m Corridor Sands heavy minerals deposit in Mozambique to Australia’s WMC Resources at a fantastic profit. The ₤190m Petra Diamonds, listed on AIM and in Australia, is led by Adonis Pouroulis, the son of well-known South African entrepreneur, Loucas Pouroulis. It has been able to commit joint venture partner, BHP Billiton, to $60m in investment in an Angolan prospect called Alto Cuilo. Petra also has a strategic understanding with Xceldiam, another London-listed South African company, in Angola. Enter more South Africans. Xceldiam is backed by Mike Nunn, formerly of De Beers, and led by Tim George who is a graduate of Anglo American. Nunn’s Afgem is a new, Johannesburg-listed, diamond company following its demerger from TanzaniteOne in 2005. Charles Mostert, formerly of DRDGOLD, is now CEO of London’s Nare Diamonds. These diamond explorers are motivated by the gamble that years of fruitless searching can yield spectacularly profitable results. Take De Beers: it spent 12 years tapping rocks before discovering Orapa. Producing 17 million carats/year, Orapa is now the world’s largest diamond mine with a full 260 metres separating the ever descending base from the top of the mine, says Orapa GM Seb Sebetlela. The mine’s 2.5km length appears so vast that in the heat of a typical Botswanan summer, the opposing side shimmers. What’s more, there’s an estimated 300 metres to 400 metres further still to mine and with further potential to take the mine underground, says Sebetlela.Free news alerts: click here to subscribe
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