Friday, August 14, 2009

Kopane Diamond Developments – hidden value

Kopane Diamond Developments (formerly European Diamonds plc) is a growing diamond mining company with substantial production and development assets in Lesotho. Kopane is developing a major diamond mine in Lesotho with over one million carats per annum target production. Kopane’s principal focus is the development of its Main Pipe project in Liqhobong, Lesotho which has the potential to produce at a rate of over one million carats per annum. The project is located in the Maluti Mountains, 120 kilometres North East of the Capital Maseru. The Liqhobong project covers an area of 390 hectares and is situated at an elevation of 2,600 meters, within which the two most important kimberlites are the Satellite and Main Pipes.
Monday, September 08, 2008

The word “kopane”, in the language of the Kingdom of Lesotho, means “unity” or “togetherness” and it was in this spirit that new Chairman Tim Read joined the board last July, and with COO Stephen Lay brought about a sea change at the company previously known as European Diamonds.

As the company moved forward from exploration and small scale production to serious project development at its Liqhobong kimberlite project in Lesotho, the new management was a symbol of the essential changes required to bring the project to fruition. Project discovery and project implementation require different skill sets, and more importantly, different mindsets. By bringing in Read, with his international financial, mining and engineering expertise, the company equipped itself to go forward and achieve its long term ambition of becoming a mid-tier diamond miner.

Liqhobong comprises two kimberlite pipes, set high in the Lesotho mountains – the small Satellite Pipe, and the much larger Main Pipe, some 300m away. Historically, the plan at the outset was to mine the relatively well-developed Satellite pipe at the rate of 290,000 carats per year to generate revenue, whilst conducting a programme of exploration and development on the adjacent Main Pipe. Satellite’s life was estimated at about 5-6 years, by which time the lower grade but higher value Main Pipe would have taken over as the major breadwinner and augmented production to almost the million carat mark.

With a proven reputation for producing desirable fancy yellows as well as good run of mine diamonds, Liqhobong seemed like a good bet when it was first acquired in 2004. Tentative figures of the period suggested that when both pipes were in production, attributable post tax profits – assuming 25% ownership by the Government of Lesotho - would have been running at around £7.5 million per annum.

But plans change along with circumstances, and as the Satellite plant built up towards design capacity during 2006, drilling and sampling at the Main Pipe began to indicate that its potential was far greater than originally envisaged. It’s a much larger pipe than Satellite, at some 8.5 ha, and although initially assumed to be lower in grade at about 17 cpht, the stone value was higher at around $70 per carat. First serious exploration by Kopane showed the pipe to be multiphase – the kimberlite contained within the pipe having been emplaced at different times – and some zones were significantly higher in grade than others. This concentrated minds towards developing the pipe as a priority, and whilst Satellite continued to be mined, its main role evolved to become that of processing weathered kimberlite from Main Pipe and treating bulk samples of Main Pipe ore.

Current diamond production is running at approximately 160,000 carats per year, the stones being sold in Antwerp by BHP Billiton on Kopane’s behalf. Since the commencement of production at Liqhobong in 2005, some 280,000 carats have been sold, raising over $16 million in revenue, of which $3.1 million was generated by sales in the first half of 2008. The majority of sales until now have been of a blend of stones produced from both Satellite and Main ore, and in the most recent auctions average value was $54 per carat. But a separate bulk sample from the K5 zone of the Main Pipe produced almost 17,000 carats which sold in July for an average of $99 per carat. This Main Pipe sample included three high-quality, high-value yellow stones, the best of which was over 13 carats in size and fetched $35,136 per carat, the highest value of any stone thus far mined at Liqhobong.

This value far exceeded that estimated by the preliminary feasibility study completed last year for the Main Pipe. Delivered in July 2007, this models a 55.5 million tonne resource at 27.6 cpht, with an initial mine life of 16 years. Recoverable carats are estimated at 15.3 million, of which 11.5 million are attributable to Kopane, with a run of mine value of $70 per carat. This gives a recoverable gross in-situ value of over $1 billion, of which Kopane can claim $805 million. Cash costs were estimated at $38 per carat, and capex of $100 million – which includes working capital and contingencies - was forecast.

The current resource and mine model in the PFS goes to 280 metres below surface, but diamond drilling shows that mineralisation is still present at 650 metres depth, so there is considerable upside to the resource tonnage. Further upside exists on grade, with a 2007 bulk sample showing 41 cpht. And as if more were needed, it is estimated that each 200,000 tonnes of Main Pipe kimberlite from the K4 and K5 zones could yield four stones larger than 50 carats and one stone of 100 carats or more – the so-called bonanza stones which have made mines like Gem Diamonds’ Letseng highly profitable in spite of an almost risible overall grade. Such stones have been specifically omitted from grade and value calculations at Liqhobong.

A C Howe, who reviewed the PFS, recommended the commencement of a Definitive Feasibility Study without delay, and it was to plan and implement this – as well as to conduct a complete reappraisal of the business - that Tim Read and Stephen Lay came to the company last July. They have recently been joined by Michael Wittet as a non-executive director, whose 36 years with De Beers will prove an asset, and last November, to mark this key turning point in the company’s direction and focus, the new name of Kopane Diamond Developments was almost unanimously approved by shareholders. The selection of the name also affirmed the company’s new focus on Lesotho, now that the kimberlite assets in Finland are under a JV arrangement whereby Mantle Diamonds, a privately owned UK company, can earn 70% of the properties.

The Definitive Feasibility Study now well under way, having been significantly upgraded to provide a bankable document, may capitalise on some of the upside suggested by the PFS, as it includes a programme of wide diameter drilling, the ore from which will be processed in a specially imported 5tph dense media separation plant currently being commissioned on site. Bulk sampling programmes – to be processed through the Satellite plant on a controlled basis – and core drilling may further develop the grade, large stone frequency and tonnage estimates. A new resource statement, with a higher proportion of measured and indicated resources, is planned for Q4, and the whole thing should be complete before the end of the year.

With all this going on, and a 20 year mining licence in their pocket, it seems odd that Kopane cannot attract interest from investors, particularly in the retail sector. The price has been in a steady decline for some years, in spite of all the promise of the company’s assets, and is presently at its all time low of just 7p per share, giving a market capitalisation of under £12 million.

Part of the reason for this has been the perception by investors of continual dilution of their interest. Shares in issue at June 2003 were 19,214,962. By June 2004, after the acquisition and initial fundraising for Liqhobong, shares in issue were 26,147,561.Today, Kopane has 169,611,283 shares in issue, accompanied by nearly 60 million warrants and options. Investors do not like dilution. In fact, retail investors are getting almost paranoid about the issue of further shares for cash, even when that cash is to be translated into balance sheet assets such as plant and equipment, or – as in the case of Kopane Developments – a full-frontal feasibility study which will allow them to secure project finance from lenders.

The most recent fund raising, undertaken to finance the DFS to completion, and set against the background of difficult market conditions, was not well received by retail investors. Even less well received was the accompanying announcement that the board had turned down 17p per share in an unsolicited and unidentified all-cash bid. Acceptance of this bid would – according to the company - have prevented the fundraising and damaged the company’s ability to complete the DFS. Chairman Read explained further: “This conditional approach was unsupported by cash in the bidder’s bank account, yet would have prevented us from continuing with our financing. What would you choose? Cash in your own bank account from already committed new investors of the stature of HSBC, or a stalled development programme whilst the bidder – with no guarantee of success – tried to arrange his bid finance in an appallingly difficult market?”

“Having canvassed our key shareholders for their opinion, we chose the bird in the hand,” he continued, “because completing the Main Pipe DFS needed to take priority over all other considerations. And at the end of the day, we expect that 17p will prove to be a massive understatement of the project’s value.

“We have a fantastic asset there, in the Main Pipe, and in a few months, when the DFS is complete, our investors should realise it.”

In the meantime, Read and his fellow directors – including Edward Marlow of 16% shareholder HSBC who is also chairman of Santana Diamonds - will have their work cut out to raise the mood of retail investors, who are already talking of the “next placing” with some despondency. The full DFS with bankable parameters, coupled with news of significant debt finance for Main Pipe construction, cannot come soon enough.

by Wendy Durham
European Diamonds called an EGM in November to change the company's name to "Kopane Diamond Developments plc". "Kopane" they explained, is a Sesotho word meaning "Unity". As a step towards the total repositioning of the company in the market, the name change to "Kopane" comes as a clarion call that the company's management is determined to change the market's perception of the company. The market doesn't seem to have noticed that the company has been selling diamonds since March 2006, and that between May and September 2007, four packets of diamonds from run of the mill production at the company's Satellite Pipe in Lesotho, (with some diamonds blended in from its nearby Main Pipe development project) realised US$3.4 million.
Back in July 2007, the company reorganised its top management: Chairman, Buddy Doyle, stepped down and became a non-executive director, Roy Spencer stepped down as CEO and also became a non-executive director, and was retained as an advisor on the company's exploration activities in Lesotho and Finland. Newcomer Tim Read took the top job as Executive Chairman and Stephen Lay became Chief Operating Officer. Tim Read has years of experience in the mining industry, having served as CEO at Adastra from 1999 to 2006, he has also been Managing Director of investment banking at Merrill Lynch in London. Stephen Lay's 30 years of experience as a mining engineer and senior executive will stand him in good stead as he takes on the task of progressing Kopane's Main Pipe project to full feasibility and on to production. The company also announced at this time that it was actively considering spinning off its Finnish assets, and changing its name to more accurately reflect the focus on Lesotho.
Also in July 2007, the company announced the upgrading of the Main Pipe project resource figure and something that shareholders had long awaited ? the completion of the Preliminary Feasibility Study for the Main Pipe project, under the supervision of ACA Howe, which highlighted the following technical and financial elements:
Kimberlite resources modelled: 55.5 million tonnesProposed kimberlite processing rate: 3.5 million tonnes per annumInitial mine life: 16 yearsProvisional cost estimates: Capital US$100 million; Operating US$11 / tonneIndicated grade: 27 carats / hundred tonnesApproximate recoverable carats: 15 million caratsIndicated run of mine value: US$70 / caratProvisional value of recoverable diamonds: US$1.05 billion
ACA Howe also pointed out that there may be significant revenue upside above this level because the numbers used for the Preliminary Feasibility Study deliberately excluded several large diamonds, such as a 27.7 carat clean D flawless stone recovered from the Main Pipe bulk sampling in December 2006 that realised US$27,000 per carat. ACA Howe also provided a estimate of macro-diamond size distribution of the Main Pipe ? more about that later.
So plenty of potential upside on the $70 per carat level, assessed and vouched for by a specialist organisation whose qualifications to make such an assessment are beyond doubt. A resource statement issued just two months before, on 17 May, had valued the Main Pipe at a significantly lower level than this, based on drilling/sampling results available at the time. The May assessment - prepared by expert diamond consultant Dr Leon Daniels - had covered a mix of indicated and inferred resources down to the 130m level of the pipe, coming up with 30.4 million tonnes at just under 28 carats per hundred tonnes, equating to 8.44 million carats and thus valuing the resource at $591 million. This assessment had enabled the company to conduct a successful fund-raising during May and June at 20p, to put another £5.2 million in the bank.
So the July announcement was very good news all-round. An executive chairman with some clout, a chief operating officer who is a mining engineer, the spinning off of the company's Finnish assets which might create a dividend for shareholders, and the value for Main Pipe almost 80% higher than just two months earlier!
For the last twelve months, operations at the Liqhobong diamond project in Lesotho have progressed steadily, and the plant which serves the producing Satellite Pipe, with an average grade of 69 carats per hundred tonnes, is now at full output, handling both ore from Satellite and bulk samples of ore from the Main Pipe. Meanwhile, the Main Pipe is under continuing development, aiming for the final full feasibility study and production start-up in 2009.
Recently, Kopane announced that it had signed a joint venture agreement with Mantle Diamonds for Kopane's Finnish assets. The agreement will see Mantle earn up to 70% from 28 mineral claims including Lahtojoki, Kuusumo and Lentiira which were placed in the JV by Kopane. Mantle will be required to spend US$5 million on exploration and evaluation, including a bankable feasibility study on the Lahtojoki property, which is the most advanced project in the portfolio. Mantle will also issue 10 million shares to Kopane in tranches as agreed milestones are reached.
"The creation of this Finnish joint venture is the final and fundamentally important component in the restructuring of Kopane. It allows us to concentrate Kopane's managerial, technical and financial resources on the development of our assets in Lesotho, whilst continuing to benefit from the exploitation of the Finnish assets. It furthermore provides a look-through value on our Finnish assets of some £3.6 million." said Kopane's new chairman, Tim Read.
Good news came from Lesotho in the same update, confirming that bulk sampling and other testwork was continuing on Main Pipe, with the expectation that a full bankable feasibility study will be complete by the end of 2008. Meanwhile, with production underway at Satellite Pipe in the second half of 2007, the company sold 77,575 carats of diamonds for US$49.09 per carat, bringing in US$3.81 million. Sales since March 2006 total 180,268 carats, which have yielded an average price of US$57.54 per carat, and revenues of US$10.37 million. As of December 31, 2007, Kopane had a further 22,392 carats being held ready for the next diamond sale in Antwerp.
In a recent note, Ambrian Capital rates Kopane as a "buy" with a current target price of 38p. Ambrian opines that Main Pipe represents most of the upside for Kopane and that its run of the mill grade bests that of Letseng, a similar kimberlite pipe also in Lesotho, which operates profitably. Letseng is unprofitable on the basis of recovering only run of the mill sized stones, and is dependant for profitability on recovering large stones ? e.g. greater than 10 carats. However, Main Pipe is likely to be profitable on the basis of its run of the mill stones, and "hugely profitable" on recovering large stones. The incidence of larger stones is difficult to predict; however, an ACA Howe study of the macro-diamond distribution at Main Pipe estimated that on average 200,000 tonnes of kimberlite would yield four stones in excess of 50 carats and one stone in excess of 100 carats. In 2006, a bulk sample of less just under half a million tonnes of kimberlite at Main Pipe has yielded four large fragments which sold for US$18,333 per carat, whereas the run of the mill stones from the same batch yielded US$70 per carat. So bonanza stones will be important, and Ambrian considers Main Pipe to be a "bonanza-stone kimberlite".

Tuesday, February 12, 2008
Ian Mclelland

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