JOHANNESBURG (miningweekly.com) – Diamond juniors needed to rebuild investor confidence in diamond mining, which had been damaged by wishful thinking, DiamondCorp CEO Paul Loudon said on Wednesday.

Speaking at the South African Institute of Mining and Metallurgy diamond conference, Loudon reported that the value of equity capital raised between 2005 and 2012 for African diamond projects had halved to $1.5-billion in March 2013, from $3-billion in 2005.

DiamondCorp operates the Lace mine in South Africa’s Free State province.

Named after the celebrated Randlord, Dale Lace. The mine is renowned for its coloured stones.

“If we start delivering on our promises, then confidence will return,” former journalist Loudon told the conference.

As soon as juniors began under-promising and over-delivering, value would return and investors would continue to back diamond projects.

With all the value destruction that had occurred and the inherent banking risks in diamond financing, it was unsurprising that traditional banks were reluctant to finance new diamond mine developments.

However, if the project economics were sufficiently robust, and if the mining fundamentals were place, then alternative funding sources were available.

In South Africa, the Industrial Development Corporation (IDC) was a good source of funding.

In DiamondCorp’s case, the State-owned IDC had provided R220-million of project financing and Tiffany had loaned the company $6-million for eight years at 9% interest.

There were no repayments for the first three years, allowing time for positive cash flow to build up.

In return, Tiffany had the right to purchase all diamonds from Lace which met the quality standards to produce Tiffany-quality polished diamonds.

These purchases would be made on commercial terms and represented the equivalent of a right of first refusal.

Special stones and diamonds that did not meet the Tiffany standard were excluded from the agreement.

“We view this form of offtake financing as a win-win arrangement,” Loudon told the conference, adding that there was little that bankers or investors hated more than losing money.

But in the past 18 months, there had been widespread destruction of shareholder value across the sector.

Junior and major mining companies across all commodities had made large write-downs on their investments.

He flashed a list of 2011 mining initial public offerings onto a screen, which exposed a sea of red ink.

Eighty per cent of the companies were trading below their listing price.

“Little wonder that investors prefer to put their money into Bidvest or Shoprite,” Loudon said.

The situation was serious for the mining industry as a whole, as it had a knock-on effect for consultants and suppliers, as exploration and development was wound down in the face of increasingly scarce capital.

“We must return to mining fundamentals. We must focus on our core competencies. We must seek out alternative financing sources. But above all, we must rebuild investor confidence,” he reiterated.

Funding of marginal projects had to stop.

The Lace mine produced around 800 000 ct at an average grade of 16 ct for every 100 tons from 1900 to 1931.

DiamondCorp has treated 1.3-million tons of its tailings and recovered another 7 ct for every 100 tons.

Lace was shut down when diamond prices crashed in the Great Depression, and kept shut by De Beers from 1939.

The pipe had an 85% gem content, produced quality white stones and had a potential for vivid pinks and purple diamonds.

Historically, it produced up to a 122 ct stone and had recovered up to a 35 ct from the dumps.

The project generated $179-million of after-tax cash flow at a healthy internal rate of return of 65%, using current diamond prices and a discount rate of 10%. 

Operating margins were more than 50% at current prices and production would be an eventual 550 000 ct a year.

But even with such strong project economics, financing had been a struggle.

Lesser projects were going to find it difficult to win banker support.

Yet the diamond business continued to be a good one in which demand was forecast to outstrip supply.

But he urged diamond juniors to refrain from wishful thinking when working out revenue and cost assumptions.

“We’ve seen a 3% compound yearly growth in diamond prices in the past 30 years and, in all likelihood, the future outlook for prices will be strong,” he added.