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Want to Buy A Diamond Mine? Grab Your Checkbook.
The London Financial Times reports today that Debeers is looking to sell one its most famous diamond mines...The Cullinan Mine.
Cullinan, which was first opened in 1902 and includes the legendary 3,106 carat Cullinan Diamond among its gems, is still a major mine. It produced 1.3 million carats in 2006. By comparison, the Letseng mine in Lesotho which Gem Diamonds bought in 2006 for around R860 million and which was the main reason for Gem's successful London listing last month produces only 50,000 carats annually, though Gem is now investing to double that rate of production.
Cullinan will make an attractive acquisition opportunity, says James Allan of corporate advisory firm Allan Hochreiter. The problem for most diamond explorers and juniors is to get their first project developed into a producing mine. De Beers is now putting one up for grabs, says Allan.
Some diamond industry executives are confused by De Beers' decision to sell such a valuable asset. The group is also selling its underground operations at Kimberley, but they have already been shut down.
One CEO says: "I don't understand why they are selling Cullinan when everybody is scrambling to secure production volumes, given the predicted shortage of rough diamonds. The sale seems to be part of a radical shakeup of De Beers by new managing director Gareth Penny, who took over last year."
De Beers spokesman Tom Tweedy says Cullinan no longer fits into the new De Beers business model, which is focused more upon profitability than production volumes. He points out that Cullinan's output will be replaced by production from two new operations: The Voorspoed mine in the northern Free State, which will produce about 1 million carats annually, and the 250,000 carats a year that De Beers expects to recover from new marine operations off the west coast of South Africa. Until now De Beers has carried out marine mining only off Namibia.
For the past decade De Beers has been considering extending the life of Cullinan through a project called the C-Cut. This would have cost around R6 billion and would have involved a new mine at greater depths on the kimberlite pipe, which is being mined at Cullinan. De Beers shelved the C-Cut project several years ago, citing the negative impact of the strength of the rand against the dollar.
Tweedy says De Beers estimates Cullinan's remaining life at five years without the C-Cut, meaning operations would shut down in about 2012. There are two key attractions for would-be buyers of Cullinan. The first is that junior diamond mining companies might be able to operate at Cullinan more cheaply than De Beers, because of lower overheads. That would improve profitability and probably extend the life of the mine, so delaying the need for a project like C-Cut. Secondly, Cullinan like Letseng is an unusual mine in that it's known to produce large diamonds of greater than 100 carats on an erratic basis. Such diamonds are extremely valuable.
Since Gem bought Letseng, the mine has produced two stones of this type, of 603 carats and 216 carats. The 603-carat stone sold for $12.4 million, equivalent to $20,500/carat. The average value of the production from Cullinan is $50/carat but the large stones sell for around $10,000/carat and upwards. It's not all good news for would-be buyers, because of the sensitivity of the net present value calculations on the worth of the mine to the discovery of these large stones.
One industry executive says: "Assume that 2 percent of a mine's production comes in the form of that kind of stone. A minor positive adjustment to the recovery rate or the valuation per carat of those stones can treble the estimated net present value. A minor negative change can result in a negative net present value."
Mining is a risk-taking business and some diamond industry executives believe De Beers is selling because it is no longer prepared to accept the risk at Cullinan. Not only would it have to invest around R6 billion, but the group faces paying the proposed 6 percent royalty on turnover from 2009, which could be fatal for a marginal operation.
There's one other aspect: Within the next 10 years, De Beers must start to prepare for the shift to underground mining from open-cast mining at its three most important mines Venetia in South Africa and Orapa and Jwaneng in Botswana. One of De Beers' biggest problems, says the executive, is going to be finding the technical skills to handle these projects, so management may have decided not to waste time and effort on Cullinan.
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Comments
Never been in a diamond mining bussiness but i have a clue of wht goes on in shalow water minig. Please advise on how to best go about buying a mine
Posted by: Phaphama on May 30, 2008 9:42 AM