Paul Loudon, CEO of exploration and emerging diamond company DiamondCorp, which operates the Lace mine in South Africa’s Free State, says the junior diamond sector has a lot of work to do to overcome a significant credibility gap with bankers and investors.
During a keynote address to the South African Institute of Mining and Metallurgy‘s Diamonds Source to Use conference in Johannesburg, Loudon added that as a sector we have ignored basic mining fundamentals and abandoned critical judgement. There has been way too much over promising and under delivering.
Mining is a simple business. It is revenue per tonne less cost per ton, yet many diamond projects which have attracted exploration and development capital in the past seven years have based revenue and cost assumptions on wishful thinking and unrealistic projections that could never be delivered on.
Loudon further pointed out that the perception by junior diamond companies has resulted in a lack of credibility by investors and bankers. There has been too much dont worry, things will be different this time that diamond prices would keep on going up without correcting, that you can go alluvial mining without proper bulk testing, that you can go commercial scale mining with sampling plants, that you can use financial engineering and unrealistically low discount rates to make a marginal project look attractive or that you could overcome fundamental flaws in a mining project by throwing money at it.
He conceded that many of the diamond projects that have attracted exploration and development capital in the past seven years should never have done so and as a result, the junior diamond sector now had a lot of work to do to overcome the significant credibility gap that the industry has with bankers and investors.
Ultimately, Loudon recommends that companies return to mining fundamentals, focus on their core competencies, seek out alternative financing sources with robust projects and above all, rebuild investor confidence.
DiamondCorp is following this path having built a strong management team with underground development experience, raised funding through a combination of debt, bonds, equity and an off-take agreement while working towards adding shareholder value through the development of a financially robust, long life mine.
In January, the company legally cemented a loan and supply agreement with Tiffany & Co subsidiary Laurelton Diamonds, entering into an off-take agreement for diamond production, in exchange for a term loan of US$6 million from Tiffany.