DiamondCorp fighting to stay afloat as Lace mine hits problems

Paul Loudon, CEO, DiamondCorp

COMPLICATIONS in ramping up production at the Lace diamond mine has forced DiamondCorp into urgent refinancing in order to remain a going concern.

It also said it had held discussions on a potentially transformative deal which would see it import fresh executive mining and finance skills whilst significantly refinancing the balance sheet.

The UK- and South African-listed firm said in an announcement today that commercial production at the mine, situated in the Free State province, would be delayed until February. Commercial production was first planned for December, 2015.

The latest delay was owing to tonnage constraints related to drilling complications caused by falling kimberlite rock. Diamondcorp now has to use three drill rigs instead of one and adopt complex blasting techniques.

The outcome from a mining perspective is that monthly tonnages will be restricted to half of full commercial production which is 30,000 tonnes of ore per month.

From a financial viewpoint, these developments see the firm sailing close to the wind. There would be “pressure on cash flow” which could result in lower than anticipated sales or a deferral of sales, it said.

As a result, Diamondcorp is trying to finalise a £500,000 (R8.9m) convertible debt instrument in order to keep it afloat in the short-term. It is also hoping to raise between £2.5m and £3m (R44m to R53m) to finance the company until February.

In addition, it said it had made progress in renegotiating repayment of a loan to shareholder, the Industrial Development Company (IDC), the state-owned lender.

DiamondCorp now wants to start repaying capital on the loan when “significant positive cashflow is achieved from the first 100,000 tonnes per month mined from the block cave on the 500 metre level”.

Repayment installments on the loan, which was earlier restructured in which the loan amounts was rolled up with capitalised interest in December, were due in the first half of 2017. The outstanding balance, including interest, stood at R311m in December.

Perhaps the most important part of DiamondCorp’s announcement today, however, was that it was seeking to “… significantly strengthen[ing] the group balance sheet” and add key corporate executive finance and mining skills through contact with investors outside South Africa and the UK.

Paul Loudon, CEO of DiamondCorp, declined to provide details of the discussions as they were confidential, but he said it was “potentially transformative”.

“This was always a difficult project – all mining projects are difficult – but we are opening up an old mine and there are bound to be problems with that,” he said.

In more uplifting news, DiamondCorp said its grades had recovered in September with diamond recoveries now average 25 carats per hundred tonnes (cpht) against a budget of 29cpht.

Stone recovered have been up to 19.4 carats in size and that there had been “a pleasing” number greater than eight carats in size, the company said.

“Management is confident that achieved diamond values will continue to be in line with its estimated $164/ct base case,” it said.

SP Angel, a brokerage in the UK, said DiamondCorp’s difficulties “… highlight the practical challenges of mine development, particularly where old mine workings add to the complexity of mining”.

Said Investec Securities: “Sad to see continued challenges being faced at Lace and we hope to see management’s determination to win out eventually. The difficulties highlight the issues with re-opening old underground mines”.