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Mining Stock Of The Week

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Issue Date 13/08/2004
Back Issues
Kimberley Diamond Company, 13 August 04 KIM; Buy up to $1.52

Becoming Bigger than Ben Hur!
Symbol Definitions
$334m
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Kimberley Diamond Company is one of only two diamond producers in Australia. Its key asset is the Blina diamond project, located in the Kimberley region, around 100km east of Derby. This project includes the Ellendale Field which hosts at least three diamondiferous pipes, Ellendale 9, Ellendale 4 and the newly discovered Ellendale 28.


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"The Kimberley Diamond Company is fast tracking production growth on its successful Ellendale Project. Combined with exploration upside, it offers an attractive leverage investment to the strengthening rough diamond market."

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The success of the company has stemmed from its ability to secure the Ellendale field from the Argyle Joint Venture Partners (now wholly owned by Rio Tinto and operators of the Argyle Diamond mine). Additionally it was the realization that the earlier explorers had incorrectly sampled the previously discovered pipes on the field. This was due to the large 'nugget effect' in diamond sampling meaning that larger samples were required to more accurately estimate the grade.

The importance of the sampling size issue cannot be underestimated. The Argyle Joint Venture partners originally tested some of the pipes using 4 inch diameter drill holes in comparison to Kimberley Diamonds using an imported Bauer drill rig which drills 2.5m diameter holes. The difference is highlighted in part of Ellendale Pipe 9. In this area, the previous explorers estimated that the pipe was not diamondiferous whereas Kimberley Diamonds discovered that it was not only diamondiferous, but it was also economic to mine.

Kimberley commenced mining at Ellendale 9 in May 2002 and after a successful first year, embarked on a Stage 2 expansion involving the installation of a new 2.2mtpa production plant (being tweaked up to 2.4mtpa). The success of the operation in FY 04 along with the large resource base has stimulated Kimberley to review the potential of constructing a new 4.4mtpa plant at Ellendale Pipe 4 as well as a new 2.2mtpa plant at Ellendale 9. The feasibility study is due in the September 2004 with preliminary capex estimates of $55-60m total for both plants. Both plants could be completed and operational by late CY 2005 or early CY 2006 and would lead to ore processing at a 10mtpa rate producing in excess of 700,000 carats per year.

2.2mtpa Production Plant

Source: Company

While this growth is impressive, FP Mining is particularly upbeat on the Kimberley Diamond Company given:

A recent surprising increase in microdiamond counts in drilling below the ore being mined at Ellendale 9. Historically, the microdiamond count has corresponded with the average diamond grade of the area being mined and this could suggest that the company will be mining higher grade ore than previously estimated.
The company also has 27 diamondiferous kimberlite pipes within the vicinity of the existing mining operations of Ellendale 9 providing significant scope for further economic discoveries within the mining lease.
The Blina Diamonds spin off (see this week's report) also provides Kimberley with a well funded exploration arm to explore the surrounding prospective area.

Recommendation
Kimberley Diamond Company offers an attractive investment in a growing diamond producer combined with significant exploration upside. Within two years, the Kimberley Diamond Company will potentially be the fifth largest diamond producer in the world and could start to represent an attractive takeover target for the larger diamond producers like DeBeers. Accordingly, FP Mining recommends Member's Buy the Kimberley Diamond Company up to $1.52 per share.