African Diamonds AK6 stake to rise

Irish-listed exploration group African Diamonds said today that the valuation of its AK6 diamond discovery in Botswana could be greater than previously reported.

The company, which last month confirmed it had brokered a deal to buy-out De Beers' 71 per cent stake in the project, also announced plans to offset the cost of running the AK6 mine.

African Diamonds said the valuation methods of AK6 diamonds used by De Beeers valued broken stones as broken diamonds and downplayed the impact of the rare Type II diamons contained in the South Lobe of AK6.

It said a full evaluation of all diamonds recovered would be completed in early 2010.

Type II diamonds contain little or no nitrogen so they tend to be pure, colourless, class D, E, or F colour diamonds. A 2008 Letseng Type II stone of 478 carats sold for $38,500 a carat, while a recent Sotheby’s auction saw a 29.53 carat D colour Type II cut diamond sold for $118,000 a carat.

"The impact of the beautiful, rare Type II diamonds on values should not be underestimated. Less than 1 per cent of the world’s diamonds are Type II. Estimates suggest up to 15 per cent of the diamonds in the South Lobe are Type II. If this is true, it will be the highest ever mined,” said African Diamonds chairman John Teeling.

The company also described how African Diamonds, with new joint venture partner Lucara, will build the AK6 mine for $88 million, 30 per cent of the cost quoted by former partner De Beers.

“We will outsource as much as possible, build a “Fit for Purpose” plant and upgrade the existing infrastructure, which in Botswana is excellent. Mining and treatment will be outsourced, while security and diamond recovery will be kept in-house. We will recover as many, if not more, diamonds. Operating costs will be slightly higher, due to the outsourcing, but partially offset by lower indirect and overhead costs," said Mr Teeling.

The company said it will take up its option to go up to 40 per cent of the AK6 project, a move which would cost less than £5 million and which must be committed by the second quarter of 2010.

"Phase 1 cost of the mine is expected to be £30 million. Assuming 60 per cent debt finance and 40 per cent equity, African Diamonds may have to subscribe for about £5 million in equity in mid to late 2010. This is a small figure to gain such a prize. There are numerous financing options,” said Mr Teeling.

African Diamonds said it has offers from parties interested in the marketing rights for the diamonds found at the project.

"Early stage indicative offers of project finance have been received by the company and a project finance team, comprising of Lucara and African Diamond executives, will seek out the best package," the company said.

"Due to low operating costs in Botswana, a scaled down capital cost, a distribution of large stones, and the presence of the rare and valuable Type II diamonds, AK6 has the potential to generate significant profits," it added.