www.miningmx.com | diamonds Cullinan sale will attract suitors

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Clifford Elphick

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Cullinan sale will attract suitors
Brendan Ryan
Posted: Wed, 28 Feb 2007

[miningmx.com] -- JUDGING by what happened with the sale of the Letseng diamond mine, it is likely there will be plenty of bidders for Cullinan, the diamond mine near Pretoria producing some 1.3 million carats annually which De Beers no longer wants to own.

For starters, Letseng and Cullinan have an important feature in common. While the average value of their production is low - at Cullinan it's around $50 per carat - both mines regularly produce large stones of more than 100 carats in size and these are extremely valuable.

Such stones can sell for prices of $10,000 a carat and more. No sooner had Gem Diamonds CEO Clifford Elphick bought Letseng last year than the mine produced a 603 carat diamond which subsequently sold for $12.4m. This is equivalent to $20,500 per carat. Letseng followed up with the discovery of a 216 carat diamond in February.

everybody scrambling to secure production

Gem Diamonds paid around R880m for the mine in Lesotho, a price Elphick's competitors viewed as being "over the top". But it was a decision that has paid off handsomely in terms of the diamonds so far recovered, and Gem's highly successful listing on the London Stock Exchange.

Elphick differentiated Gem from competitors by emphasising the company already owns an important producing mine setting it apart from the rank and file of diamond exploration outfits trying to get their projects up and running.

The problem is how to value such a mine given the sensitivity of the operation to the discovery of such valuable large stones.

"Let's say 2% of a mine's production consists of those kind of stones. A minor positive adjustment to the recovery rate or valuation per carat of those stones can treble the estimated net present value. A minor negative change can result in a negative NPV (net present value)," said a diamond executive.

Cullinan is a huge mine by comparison with Letseng, which currently produces 50,000 carats annually although Gem is in the process of doubling output. That's one of the questions bemusing diamond industry players about De Beers' action.

Said one: "I don't understand why they are selling Cullinan in a situation where everybody is scrambling to secure production volumes given the predicted shortage of rough diamonds that is looming."

De Beers spokesman Tom Tweedy said the decision was taken because Cullinan no longer fits the revised De Beers business model, focused more on profitability than on securing production volumes.

He points out the 1.3 million carats of production De Beers will lose through no longer owning Cullinan will be compensated for by output from two new operations.

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These are the Voorspoed mine in the northern Free State, which will produce about one million carats annually, and the 250,000 carats/year De Beers expects to recover through its new marine diamond mining operations off the west coast of South Africa.

Several years ago, De Beers had proposed spending some R6bn on the C-Cut project at Cullinan which involved creating a new mine at deeper levels. The project was shelved with the main reason given being the negative impact from the strength of the rand against the US dollar on the economics of the proposed mine.

Tweedy said De Beers' estimate on the remaining life-of-mine at Cullinan without the C-Cut project is some five years with operations running through to about 2012.

Other diamond operators may well believe they can extend that life - and improve the profit margins at Cullinan - by mining more efficiently than De Beers.

Suggestions from diamond industry executives to explain De Beers' decision focus on two aspects. These are the proposed royalty on diamond mine turnover from 2009 which must further adversely affect the economics of the C-Cut and the demands about to be placed on the De Beers management from its other, more important mines.

Said one diamond executive: "Within ten years, De Beers has to start putting in place the infrastructure for the switch from open pit to underground mining at its three most important mines, Venetia in South Africa along with Orapa and Jwaneng in Botswana.

"One their biggest problems is going to be finding the technical skills to handle these projects so management may have decided not to waste time and effort on Cullinan."

Tweedy confirmed the impending shift to underground mining at the three mines but cannot provide specific dates for when the work will start. He said that, on current planning, Venetia is expected to be an underground operation from 2020. Industry sources point out sinking of the vertical shafts to allow this will have to begin several years in advance of 2020.

Whatever the reasons for the sale the bidders should be queuing up to get into the "data room" that De Beers will set up as part of the process of selling Cullinan.

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