Diamondcorp Plc : Tiffany loan agreement signed, lace development financing complete, first draw down of $3m in 3 Days

Tiffany loan agreement signed, lace development financing complete, first draw down of $3m in 3 Days 7 January 2013 Source: www.oceanequities.co.uk News & comment

DiamondCorp Plc and Laurelton Diamonds Inc, a subsidiary of Tiffany & Co, have signed a loan agreement for the development of DiamondCorp's Lace mine. The Tiffany loan is an offtake backed agreement whereby Tiffany will have the right to purchase 'Tiffany Quality' stones from DiamondCorp at market related prices. This is a great deal for both companies as it has enabled DiamondCorp to finance development of its core asset at minimal dilution to shareholders and Tiffany has been able to secure supply of high quality diamonds helping it to maintain its profit margins.

Our model suggests that DiamondCorp's attributable stake in the NPV10 of Lace equates to approximately £70m based on a more conservative diamond price of $140/ct. On a per share basis this equates to 26p per share, or roughly five times this morning's share price.

Today's announcement marks a pivotal moment in the history of DiamondCorp. At last the Company will be able to get development of Lace up to full speed with confidence as it is backed by one of the most stringent diamond jewellers as well as the Industrial Development Corporation, an organisation mandated to stimulate growth in Southern Africa.

Laurelton offtake backed loan facility

Tiffany's subsidiary has agreed to provide DiamondCorp with a $6m loan facility. DiamondCorp will be able to draw down on this facility it two equal tranches, the first on 10th January 2013 and the second on 10th April 2013. The offtake agreement will take effect from 10th January and will be in effect until the end of the mine life. The offtake agreement gives Tiffany the right to purchase the stones that meet its colour and quality standards. Stones that do not meet these standards and special stones are excluded from the offtake agreement. The loan will bear interest at 9%. There will be no repayments during the first three years of the loan and the total loan amount it to be fully repaid by 8th anniversary of the second funding date (10th April 2021).

This loan facility and the convertible bonds sold by the company, equal to £4.2m, are supplemental to the R220m loan facility provided by the Industrial Development Corporation. Combined the financing package exceeds the total financing requirements to develop the Lace mine to the point of steady diamond recovery. The mine will achieve this within 22 months from the startup of development.

Diamond market fundamentals

Numbers from the Diamond Trading Company, owned by Debeers, suggest that demand returned to the market in Q4'12 linked to pre-Christmas sales. This led to a slight recovery in rough stone prices as reported by Roughprices.com (www.roughprices.com) and their proprietary index is now at roughly 206.5, up from a year low of 200 in Q3'12. Rapaport (www.diamonds.net) also reported improved market conditions in Q4 and highlighted above expectation demand from North America as a major theme. Going forward we expect more stability in diamond prices to be underpinned by lack of near term development options. DiamondCorp will be particularly well placed to take advantage of a diamond production slump that is expected to start in 2016. If diamond demand continues to improve this will lead to a distinct supply deficit in the mid-term.

Near term objectives

The next task for DiamondCorp is to increase the ventilation capacity to allow for increased underground development. To achieve this the Company will develop a 4.7m raise bore from the development level. While work is underway on this front the Company will also complete the refurbishment of the plant at Lace. This will allow DiamondCorp to re-start tailings reprocessing in Q2'13. When the mine was in operation in the early part of the 20th Century, the more rudimentary processing techniques meant that a low recovery rate was achieved. This has led to the tailings carrying a significant diamond grade. Currently the tailings grade at roughly 5cpht, processing of which could produce 5,000cts per month. There is good potential for a portion of these stones to be of Tiffany quality given the overall quality of the mine's stones recovered previously. This will allow the Company to develop its relationship with its offtaker prior to ramp up to full production.

Other objectives for the Company include increasing the workforce at Lace to a full complement of 240 workers during development, 200 of which will remain as full time employees during production. During a period of low employment in South Africa and the relatively easy working conditions of the Lace mine compared to gold and PGM operations in the region, we believe the staffing risk for DiamondCorp during development is low.

We expect steady news flow from the Company as it completes the different development stages. This will mark the reduction of development risk for the operation. Overall we think the development risk is low for the Lace mine because of the existing plant, the previous development and the experience the Company now has in working with this kimberlite.