rbc valuation @ 1.50

Kimberley Diamond Company NL - Positioned for Sparkling Growth

Valuation and Recommendation
· We recently initiated coverage on Kimberley Diamond Company NL (KIM) with a rating of Outperform, Speculative Risk. Our one-year price target of A$1.50/share is set in line with our base case NAV of A$1.48/share.
· KIM is an emerging global diamond producer targeting production of more than 700,000 carats (ct) per annum. Its mining operations are based at its 100%-owned Ellendale Diamond Project, in Western Australia's Kimberley Region. KIM has a resource of 68 million tonnes at 7.4 carats per hundred tonnes (ct/ht) for approximately 5 million ct of contained diamonds. It currently operates the 2.8-million-tonne-per-annum (Mtpa) Ellendale 9 mine and is developing the 4.4-Mtpa Ellendale 4 mine. Kimberley produces a high-valued rare fancy yellow diamond, which is attracting very high prices. Kimberley Yellows are currently achieving prices of over US$300/ct (average US$220/ct), making them some of the highest priced diamonds in the world.
· The company is entering an exciting growth phase with forecast diamond production increasing sixfold from 123,000 ct in F2005 to over 700,000 ct in F2007. Earnings are set to climb from A$7.3 million in F2006 to A$35.8 million in F2007. Mine life is currently nine years, however, upside potential to the resource base is likely through ongoing exploration.
· Besides our base case we have examined a probable upside case, assuming that additional resources may be found, leading to an expansion of the current processing facilities at Ellendale 9 from 2.8 Mtpa to 4.4 Mtpa. Under our upside case scenario, our valuation increases to A$1.78/share, which is approximately 20% above our base case. While we believe there is a high probability that this scenario could occur, we have taken a more conservative view at this stage in light of the upcoming commissioning risk with the development of the Ellendale 4 mine, and have set our A$1.50/share price target in line with our base case valuation of A$1.48.

Investment Thesis
· Strong diamond market fundamentals. We believe that prices will continue to climb in the medium term on the back of market tightness, due to a combination of (1) low production growth in the medium term; (2) limited global stockpiles; and (3) continued strong retail demand.
· Entering high growth phase. Production should increase six-fold, from 123,000 ct in F2005 to over 700,000 ct in F2007.
· One of few small diamond plays. There are limited global opportunities for investors to gain exposure to pure diamond producing companies. KIM is one of only a handful of diamond mining companies already in production.
· Producing high proportion of fancy yellows. Current average prices are about US$220/ct, but some recent sales over US$300/ct have been made, indicating these are some of the highest priced diamonds in the world.
· Exploration upside. Kimberley has 218 hectares of unexplored pipes, which includes the large Pipe 6 with a surface area of approximately 106 hectares, equal to about the same surface area as the Pipe 4 and Pipe 9 mines combined. The company has a proven history of significantly adding to the resource base, and we believe it will continue to do so. We rate the exploration upside potential as very exciting.
· Summary. We believe KIM offers investment in a unique product, with premium pricing in an industry with a strong fundamental outlook. In our view, its investment arithmetic is attractive and the company holds a strong ground position with very exciting exploration potential.

Chris Lancaster (612) 9033-3060 [email protected]
Paul Young (Associate) (612) 9033-3064 [email protected]

Paul Johnston
Global Mining Sales
Capital Market Services
Royal Bank of Canada
Tel: +612 9033 3091
Mob: 0400 844 495