POLARBEAR, from a Midland Walwyn update, March 11, 1998:
"RECOMMENDATION: Acquisition could help boost company to Tier 1
diamond company status
In our opinion, DiamondWorks is delivering on its plans to become
a new and important diamond producer. The company has shown the
market that it is capable of mobilizing equipment and personnel to
what is one of the more difficult countries in the world to do
business (because of a lack of basic infrastructure resulting from
decades of civil war). In our opinion, the speculative upside in
DMW shares is dependent of the success of the company in developing
the kimberlite-hosted diamond resources. while work to date has
focused on the Camatchia kimberlite pipe in Angola, the new
acquisition will enable the company to advance two projects, in the
hopes of bringing larger, open pit mining operations into
production to achieve Tier 1 diamond company (greater than 500,000
carats of production per annum) in the next few years.
RECENT EVENTS: Company makes acquisition in Southern Africa
Yesterday, DiamondWorks announced that they have secured an option
to purchase a 100%-interest in a property which hosts about 40% of
the Kao diamond pipe located in the Kingdom of Lesotho. The
Kingdom of Lesotho is a small, land-locked country which is
surrounded completely by the Republic of South Africa.
DiamondWorks is required to make payments of US$445,000 over the
next two years while it completes it due diligence (including test
mining of the pipe), after which further payments of US$3 million
(half cash/half DMW shares) to exercise the option. The vendor will
also receive a 1.5% royalty on all future diamond sales from the
property.
We are not familiar with the Kao diamond pipe, but DiamondWorks has
reported that their portion of the Kao pipe represents about 40% of
the surface area of the pipe, but contains 65-75% of the diamond
value. Past exploration has outlined a diamond resource of some 15
million tonnes grading of 0.18 carats per tonne (giving a total
resource of some 2.7 million carats) on the option portion of the
pipe. Sampling to date have indicated an average value of US$135
per carat. DiamondWorks has also indicated that they are
negotiating to acquire the rest of the Kao pipe.
VALUATION/SHARE PRICE IMPACT: No change in our valuation until we
review the acquisition
We think that this is a good strategic acquisition for
DiamondWorks, both in terms of gaining access to a second,
large-resource, open-pit diamond deposit target, and for the
diversification benefit of becoming involved in a more stable
country than DMW's existing asset base (in Angola and Sierra
Leone). We need to learn more about the property and the past work
which has generated the resource estimates before we incorporate
the project into our valuation. We are comfortable with the
Kingdom of Lesotho in terms of its political risk, based on our
tracking of Messina Diamond Corporation and their Liqhobong
project.
We think that the acquisition, as presented, has potential to be an
economic diamond deposit. The grade and value reported suggest that
the pipe could host diamonds worth US$20-US$25 per tonne. In an
open-pit mining scenario, this ore could likely be mined at a cost
below US$10 per tonne (our estimate), suggesting an attractive
profit margin.
In terms of the acquisition price, we believe that it is a good
deal for DiamondWorks, as there is a low initial payment in the
first two years as they complete their due diligence before
exercising the option to purchase. DiamondWorks would also likely
recoup a significant portion (if not all) of the payments to the
vendor from sales of diamonds recovered during the due diligence
evaluation and test mining. The US$3 million purchase price seems
reasonable as it represents just over 22,000 carats of production
from the estimated 2.7-million-carat resource."
Happy investing,
Andras |
