Canadian Diamond Juniors Sparkle

- November 11th, 2009

Canadian Venture listed diamond junior, Lucara Diamond Corp, is set to acquire De Beers’ 70% stake in the AK6 diamond project for US$ 49 million. What gives? Why is a Canadian junior acquiring a diamond major’s interest? That too in Africa? Remember, De Beers doesn’t take kindly to juniors?

By Kishori Krishnan Exclusive To Diamond Investing News

The fate of the AK6 diamond project, in the heart of Botswana’s world class Orapa district, took a new twist after it was announced on Wednesday evening that Canadian Venture listed diamond junior, Lucara Diamond Corp (TSX-V: LUC) would be acquiring De Beers’ 70 per cent stake in the project for US$ 49 million.

The sale is subject to conditions including permission from the government of Botswana.

What gives? Why is a Canadian junior acquiring a diamond major’s interest? That too in Africa?

Remember, the privately run South African behemoth, De Beers Group, doesn’t take kindly to juniors. Remember its sabre rattling with Saskatoon-based Shore Gold Inc (TSX: SGF)?

Shore Gold saw the value of its shares plummet more than 20 per cent following news in early February that De Beers Canada Inc had launched a lawsuit against the company and its partners over voting control of what could be one of the richest diamond deposits in Canada.

The dispute stemmed from Shore’s merger in August 2008 with Vancouver-based Kensington Resources Ltd. As a result of the $180-million all-stock deal, Shore and De Beers became equal partners, with each controlling about 42 per cent of a joint venture to look for diamonds in the very promising Fort à la Corne region, just east of Prince Albert, Sask.

The remaining interest in the venture was held by Cameco Corp (TSX: CCO) and UEM Inc, two of Canada’s largest uranium producers.

Why now?

So, why is De Beers so eager this time round?

The sale had been considered by De Beers, since the global economic crisis constrained the project to a smaller mining plan. Since smaller mines are not part of De Beers’ global production portfolio the firm is considering hiving it off.

A mining license was awarded to the project in October 2008. The development of AK6 is planned as an open pit operation. Detailed design is to commence as soon as the feasibility study has been updated, which is expected to be completed in the first half of 2010.

It is expected that the AK6 mine will be in production within 18 months of completion of the feasibility study update.

William Lamb, President and COO of Lucara, commented, “We are extremely excited about this acquisition. The company’s mission since inception has been to build a leading African-focused diamond production and development company.”

Lucara also has the Mothae project in Lesotho going into pre-production test mining next year.

Win-win deal

For Botswana it is a win-win deal, as it is for African Diamonds.

Stephen Lussier, chairman of De Beers Botswana said: “While De Beers will focus its resources in Botswana on large-scale projects that give us a better strategic fit – and in this regard expects to announce a major $500 million expansion project at the Jwaneng mine in the coming month – smaller operators will have the opportunity to bring AK06 into production, helping to reinforce Botswana’s position as the world’s leading diamond producing country.”

For African Diamonds, which at one stage threatened legal action against De Beers, the sun has not stopped shining.

African Diamonds holds a 29 per cent stake in the Botswana mine. As part of the arrangement, the firm has the option to increase its share to 40 per cent by acquiring a stake from Lucara.

Obviously, it is intending to exercise that option within the 120-day option period. African Diamonds would then develop the site, which chairperson John Teeling said had high-value diamonds, “including the big, rare and beautiful Type II nitrogen-free stones”.

Mine development would start in mid-2010, and first production would take place in 2011.

The company reckons AK6 has the potential to become a 1 million carat a year mine. However, studies commissioned by the company show that it will cost US$ 63 million to establish the mine at two million tonnes a year output.

A further $25-million in capital expenditure would double the output of tons and carats.

A gushing Teeling said: “It will come on stream at the right time. The economics are compelling. Prices are rising. Demand in the Far East is growing, while supply is at best flat. By 2012, there will be only a few kimberlite diamond mines in the world.”

Prices up

That could very well be the scenario in the near future. Rough diamond prices are on the rise after collapsing late last year.

Other Canadian miners are waking up to the potential. The Ekati and Diavik mines in Canada have canceled their planned winter shutdowns. And even some junior companies like Shore Gold Inc, Stornoway Diamond Corp, Peregrine Diamonds Ltd, amongst others are eager to build the next generation of diamond mines.

BMO Capital Markets analyst Edward Sterck wrote in a note to clients: “Rough diamond prices have recovered strongly from lows at the beginning of 2009. At the same time, diamond mining company share prices have lagged the share prices of companies mining other commodities, a discrepancy that the market is only just waking up to.”

At RBC Capital Markets, analyst Des Kilalea joins in. “The merits of the diamond sector are starting to emerge again,” he told investors.

Analysts pick: Harry Winston Diamond Corp, Gem Diamonds Ltd and Petra Diamonds Ltd.

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