Firestone Diamonds – Kopane makes great fit

We publish courtesy of Mineweb

Firestone Diamonds is looking to become a much more significant player in the global diamond market with its proposed acquisition of Kopane Diamond

Author: Lawrence Williams

LONDON

In a special presentation earlier today in London to investors and to Mineweb, Firestone Diamonds CEO Philip Kenny put forward his personal views, and those of his Board, on what he sees as a “Great deal for both companies”.  Firestone has marginally the smaller current market capitalisation so, in effect the proposed acquisition would be a reverse takeover with the smaller, but more proactive and quick-on-its-feet Firestone management taking the lead in the combined company.

There are some big contrasts between the two diamond companies.  Firestone is already a past producer and has just brought its BK11 diamond mine near Orapa in Botswana to production.  It also has other significant cashflow potential through tailings reprocessing deals on De Beers’ huge Jwaneng diamond mine tailings and with Namdeb and is negotiating other similar deals, and also has some great exploration and development potential on satellite diamond pipes in the Orapa area which it is planning to work in conjunction with BK 11, and then further down the road huge potential with the unexploited Tsabong diamond field in southern Botswana.

BK11, though, is a fairly small operation and in Kopane’s Liqhobong diamond pipe in Lesotho, which Kenny describes as world class, indeed the pipe is considered by Firestone to be “one of the most attractive undeveloped kimberlite resources in the world” with the third largest contained carat volume of any kimberlite and the fourth largest in tonnage terms.

Development of Liqhobong by Kopane came to a halt when the bottom dropped out of the diamond market in late 2008, and even with prices recovering more recently Kopane seems to have been unable to get the financial support to kick start the project again.  Firestone, on the other hand, feels that the time is right with rough diamond prices accelerating, and Firestone developing cashflow from its mining operations for a more aggressive small company to push things forward, while the larger combined market capitalisation of the merged company should give potential financiers more confidence to support the development of Liqhobong.

As is the pattern with its other developments, Firestone would have a much more ‘softly, softly’ approach to the Liqhobong operation.  Initially it would restart the existing satellite plant there which was already producing at the rate of 160,000 carats/year when operations were suspended in December 2008 because of low diamond prices.  At that time the plant was treating material from the smaller 1 hectare (2.47 acre) satellite pipe, together with some material from the much, much larger main pipe (8.6 hectares).  Firestone would mine another 2 million tonnes from the satellite pipe and then use the resulting pit for water storage, concentrating on the Main pipe which has an estimated resource of 90.6 million tonnes grading 34.3 carats per hundred tonnes (cpht) for a total of 31.1 million carats.  Kenny reckons the combined entity has enough cash to be able to do this without having to raise capital.

With a definitive feasibility study near completion for a full scale operation, Firestone reckons it could build a full scale 4 million tonnes per year plant at Liqhhobong for around $100 million using refurbished equipment for the most part as it has done with BK11.  However Kenny stresses that a go ahead for the full-scale would not be made unless it was seen to generate a sufficient rate of return based on market conditions, cashflow from Firestone’s other operations and the satellite plant and cash in hand and available.

For Firestone shareholders Kenny reckons the combination of the two companies offers huge potential with estimated costs under its development scenario of revenues of $29/tonne mined and operating costs of $12/tonne.  In addition the Lesotho pipes tend to produce a number of large stones of exceptionally high value (Liqhobong has already shown this potential in the work to date) which ae not accounted for in the production/cost analyses.

For Kopane shareholders Kenny says the merger will give them exposure to a broad range of diamond projects and excellent exploration potential rather than being dependent on a single mine.  Firestone is already generating cash flow which will give the company a much firmer base to work from.

Kenny obviously has his eye on Firestone becoming the third significant  junior to mid-tier kimberlite based diamond miner after Petra and Gem Diamonds, and perhaps one day outgrowing them.  The industry remains dominated, though, by major players De Beers, Alrosa and the big diversifieds, Rio Tinto and BHP.

While the logistics of developing a diamond mine in mountainous Lesotho and flat lying Botswana are like cheese and chalk, Firestone management does have particular insights into Liqhobong as its chief operating officer, Tim Wilkes, worked on the mine in the past and has intimate knowledge of what is needed to reinstate and expand the mine and plant in the relatively hostile Lesotho mountain environment.

Kopane also has an exploration jv with Mantle Diamonds in Finland but, in answer to a question, Kenny said that the Finnish operations, as far as Firestone was concerned, were in the deal at no value and he seemed disinterested in continuing work there, effectively saying the combined company would be happy to dispose of the Finnish interest if an appropriate offer were to be made.

The acquisition still has to be approved by shareholders of both Firestone and Kopane.  Both are holding General Meetings in early September to approve, or reject, the deal and hope the acquisition will be completed by the end of that month


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