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Diamond juniors on the rise Posted: Tue, 28 Aug 2007 [miningmx.com] -- THE reason there are so many junior mining and exploration companies looking for diamonds is because of the "incredible returns" when an economic kimberlite pipe is found. Those returns are good enough to keep attracting juniors to the business despite the fact that less than one per cent of the kimberlite pipes ever found have been economic to mine. That’s according to Des Kilalea, London-based analyst for RBC Capital Markets, who was addressing last week’s 'Diamonds in Kimberley' symposium organised by the Geological Society of SA. "The world’s most profitable major mines are in the diamond space," he told delegates pointing out that at the top of the heap are De Beers’ Jwaneng and Venetia mines in Botswana with profit margins (profit to revenue) estimated at 88% and 82% respectively. "I have been told by someone in the diamond business that my figures on Jwaneng are totally wrong and the correct (profit to revenue) margin is actually 92%," he quipped. Kilalea pointed out there are more than 100 diamond exploration, development and mining companies listed on stock exchanges world-wide but fewer than 20 of them had any meaningful diamond production. There were also "dozens" of unlisted companies ranging in size from "diggers" up to "Chris Potgieter’s massive alluvial business in South Africa." Kilalea did not go into the details of Potgieter’s operations but Potgieter, who was not at the conference, keeps an extremely low profile and is virtually unknown outside the diamond sector. That’s despite the fact that his Sonop Diamond Mining company is nearly as large as the South African operations of listed Trans Hex. Sonop produces around 93,000 carats annually compared with the 116,200 carats Trans Hex mined in South Africa in its last financial year. AIM-listed Diamondcorp has just set up an option agreement to buy Sonop for $45m in cash and the issue of 7.5 million Diamondcorp shares. Kilalea said exploration spending is targeting mainly the existing diamond producing areas, in particular Botswana, Angola and the Democratic Republic of Congo (DRC). He listed a number of advantages that the juniors have over major players like De Beers and BHP Billiton starting with flexibility and entrepreneurial flair. "Juniors are not burdened by head office and are generally quicker on the ground. They have generally been the first into new territories since they have more stomach for risk. "Examples are Petra which moved into Angola and Archangel Diamonds which went into Russia," Kilalea said. He added juniors have lower overhead costs; can get a mine into production faster than a major and many of them are owned and/or run by highly skilled professionals. Many of those executives originally came from the major diamond producers. Despite this there are some advantages that juniors can gain from linking up with majors through JV’s including access to capital and access to political influence. "BHP Billiton renders Petra less exposed to a potentially difficult operating environment in Angola," Kilalea pointed out. But he then sounded a warning about the possible costs to juniors of getting into bed with the majors. "Capital costs may be inflated because large groups may plan a ’Rolls Royce’ when a ’Toyota’ will do. Click Here to subscribe to our daily newsletter
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