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African Diamonds sparkles on AK6 go-ahead
Brendan Ryan
Posted: Mon, 13 Oct 2008
[miningmx.com] -- AFRICAN Diamonds shares have jumped 26% reaching 56p on London’s AIM bourse on Monday, since release of the news that the AK6 mine in Botswana is to go ahead.
The share has strengthened despite mining licence conditions indicating that De Beers has had its way over the development of the mine in terms of timing and marketing.
African Diamonds is the junior partner, holding 28% in the Boteti JV which controls AK6 with De Beers owning 71%. The remaining 1% is owned by a Botswana company called Wati.
RBC Capital Markets analyst Des Kilalea said the resolution of the dispute between African Diamonds and De Beers has resulted in a production delay from end-2009 to April 2011.
Kilalea’s assessment was that “the fact that the project is now going ahead is positive for African Diamonds”, but he could also see the company becoming “a target for
corporate action, given that it is now close to production and fully funded by De Beers”.
The bust-up between African Diamonds and De Beers became public in July, when African Diamonds instituted legal proceedings against De Beers. These have now been dropped.
African Diamonds chairman John Teeling commented on July 24: “We had expected to develop AK6 with De Beers, but its agenda differs from ours.
“We are prepared to accept the terms of the mining licence of June 17, 2008 as offered by the Botswana government. De Beers is not.
“We have offered to buy out De Beers at a generous price. However, De Beers, while not being prepared to proceed with the project on the grounds of viability, is not prepared to sell to African Diamonds to allow us to proceed immediately.
“We will build an efficient, effective, reliable mine cheaper than the De Beers model. By auctioning the diamonds we will obtain prices up to 40% higher than those estimated by De Beers. The economics are not in doubt.”
Last week, Teeling’s assessment of the revised mining licence was that “we believe the agreed terms are equitable to all parties”.
In July, Teeling and African Diamonds MD James Campbell had claimed De Beers wanted to stall development of the mine because it could not agree on marketing terms with the Botswana government.
De Beers
denied this, saying its position was motivated by concern over the supply of power to the mine, given future power supply constraints in southern Africa.
Terms of the mining licence, which will be issued on October 10 for 15 years, are that production will start within 30 months - effectively April 9, 2011 - and that the mine’s production will be sold through the Diamond Trading Company (DTC) Botswana.
According to Campbell, terms of the June 17 mining licence were that the diamonds should be auctioned through a marketing channel in Botswana independent of the DTC.
He said that, while African Diamonds was prepared to accept this condition, De Beers was not and that was why it had proposed holding off on development of the mine.
Kilalea said: “To come to a firmer valuation of the project for African Diamonds, we need more clarity on capital expenditure and operating expenditure as well as a clearer picture of final diamond prices. Our
recommendation and valuation will be revisited when the capex details are known.”
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