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Liqhobong looks to the future

AIM-listed diamond producer Firestone Diamonds, who has been in diamond production for a year and a half, has in recent times been faced with lower diamond values.

The company is therefore focused on controlling its costs and achieving its production targets as it rides out the current depressed market for smaller stones until conditions improve, CEO PAUL BOSMA tells CHANTELLE KOTZE.

This article first appeared in Mining Review Africa Issue 3, 2019

The diamond market and pricing environment has changed since Firestone Diamonds first embarked on delivering its Liqhobong project, Bosma admits.

“The company’s diamond price assumption as per its definitive feasibility study (DFS) in 2012 and updated DFS in 2013 was US$107/ct. The current average price of around $75/ct which its diamonds are currently fetching is in stark contrast to this,” he notes.

As a result of falling diamond prices, Liqhobong now has a shorter life-of-mine (LOM) following the release of a revised mine plan in 2017 which took the 15 year LOM down to nine years, and a high gearing ratio.

Firestone Diamonds’ share price is also currently at a long-term low (3.12 pence as at 22 January 2019 from a high of 59 pence at the end of 2016).

Moreover, the company’s $26.2 million cash balance, currently exceeds its market capitalisation of $17.05 million.

As a means to address this, the company has put in place a short-term strategy that focuses on ensuring that its balance sheet is appropriately modelled on the lower pricing environment.

Firestone Diamonds held a rights issue in December 2017 in which it raised $25 million as a buffer and at the same time restructured its senior debt with its lender and senior debt holder Absa Bank which afforded the company two extra years to repay the debt (until December 2023), with a debt holiday of 18 months (from 1 January 2018 to 30 June 2019).

Moreover, Firestone Diamonds is also taking steps to restructure its bonds, which are held by the company’s two cornerstone investors – RCF and Pacific Road.

“Once we have achieved this, we will ensure our survival in the current tough diamond market,” says Bosma, who notes that there is light at the end of the tunnel for the company when the supply side of the market comes under pressure once the oversupply works its way through the pipeline.

According to data by diamond analyst Paul Zimnisky, in the last two years, a basket of diamond producer stocks were down 28.9% in 2018, following a decline of 17.3% in 2017.

This, according to Zimnisky, is in part due to operational challenges that most of the miners are dealing with in one way or another.

However, investor sentiment is also undeniably low by valuation standards, projected by future diamond price expectations, he notes.

Despite the current negative sentiment, the slowing down of diamond production in 2019 and eventual closure of Rio Tinto’s Argyle mine in Western Australia by 2021 – currently producing around 14 Mctpa of mostly low value stones – bodes well for producers of these kinds of diamonds, who expect a turn in the market when this significant producer closes its doors and diamond demand starts to exceed supply in the longer term and prices begin to increase.

Firestone Diamonds is one such producer of smaller stones, who recovered 465 680 carats at a grade of 25.4 cpht for the half year to end-December 2018.

Despite its mainstay production comprising smaller, lower value diamonds, the mine does produce higher value, special diamonds.

During FY2018, a number of high value stones were recovered at Liqhobong, including its largest stone to date (a 133 carat gem quality stone that sold for $0.9 million); its second most valuable stone to date (a 45 carat white that sold for $1.2 million); and the highest dollar per carat for a stone to date (a 4 carat fancy pink, which achieved a sale price of $112 781/carat).

On 12 February 2019, Firestone announced the recovery of a 70 carat white gem diamond which is due to go on sale during the next tender in March.

During this tough pricing environment, Liqhobong has successfully ramped up production to nameplate capacity and has consistently reached its diamond production targets, Bosma enthuses.

The operation is also on track to meet its market guidance for FY2019 of treating 3.6 – 3.8 Mt of ore and recovering 820 000 – 870 000 carats of diamonds.

Liqhobong has upside potential when prices recover

Bosma believes that Firestone Diamonds is well-positioned to benefit from the future recovery in diamond prices – to which the operation is so sensitive.

“Owing to the price sensitivity of Liqhobong, we only need $10/ct of additional revenue to double the cash position at the end of our life of mine,” he illustrates.

Once prices increase, we can consider a LOM extension plan made possible by our large mineral resource (6.5 million carats of which are indicated resources and 11.4 million carats of which are inferred resources).

As per Liqhobong’s current mine plan, the Liqhobong pit currently comprises Cut 1, which is currently being mined, and a Cut 2 South and North. Firestone Diamonds will focus on the northern part of the orebody during the coming months to confirm the overall diamond value and average dollar per carat price of the lower grade kimberlite facies.

“We have at least another two years to decide on the viability of a LOM extension plan, which entails the establishment of Cut 3 open pit extension, which could add an additional three or four years and 40% more carat recoveries to the LOM plan, based on slope angles, diamond price and exchange rate,” Bosma explains.

While diamond grade and quality is one of the unpredictable aspects of the Liqhobong assets, Bosma has seen encouraging signs that there is potential for further special diamonds to be recovered – a feature of the kimberlite pipe that may be a game changer were more larger diamonds recovered.

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