Firestone Finalises Funding for Liqhobong in Lesotho
Issue 57, September 2013
Firestone Diamonds is close to finalising funding for its Liqhobong mine in Lesotho and is in talks to sell its BK11 mine in Botswana, incoming chief executive Stuart Brown told Global Mining Observer this week.
Liqhobong is due to produce over 1m carats per annum from 2015, vaulting Firestone into the world’s five largest publicly held diamond producers, behind De Beers, Rio Tinto, Dominion and Petra Diamonds. Led by hedge fund Audley Capital, the company has undergone an aggressive restructure in recent years, shuttering production in Botswana and gaining a new board, including Audley’s lead partner Julian Treger and Glencore’s former head of Russia, Lucio Genovese.
The revamp was crowned in August by the appointment of diamond market insider, Stuart Brown, who joined De Beers in the 1990s, rising to group finance director and interim chief executive. “The reason I joined Firestone, having done a lot of work looking at the project, was that I saw that it had a huge amount of potential,” says Brown, his trademark De Beers cropped haircut final proof of his pedigree.
“I went in with my eyes wide open. I looked at exactly how the plant was going to be designed, whether the capital was adequate, the resource-reserve statements and all the assumptions used in the models.”
“I then ranked it according to my knowledge of the projects I’d seen at De Beers and against the projects out there in the market and saw that this was going to be one of the few mines that’s going to produce over 1m carats per year.”
Over a 15-year mine life, Liqhobong is expected to generate over $100m per annum, a sixfold increase on its existing pilot plant. Firestone’s models assume a base price of $100 per carat and operating profit margins of 57 per cent.
Factoring in large stones, which the pilot plant has failed to recover intact, Brown considers this conservative. Independent estimates suggest Liqhobong has produced 10 stones over 100 carats to date, with one weighing in above 800 carats. Diamond prices rise exponentially with a stone’s weight, but Brown categorises each as plus-100 or plus-200 carats, contributing a further $15 to $25m of sales per annum.
Modelling the $15m, the mine’s per carat price rises to $140. By placing his estimates firmly at the bottom of each range, Brown’s calculations leave ample upside. “This project at $140 per carat is extremely attractive,” he says. “Anything up from that is beyond extremely attractive.”
Lenders are applying “further conservatism” to the figures. “It’s passing all the bank tests and we are going through the credit approval process, so we’ve ticked all the boxes. They have pulled it apart and they still can’t find anything wrong with it.”
Firestone’s stock has been trounced by concerns over financing for Liqhobong, with capital costs of $167m outweighing the company’s market cap of £22m ($36m). Brown holds fast to the $167m capital bill, before insurance, which lifts total funding needs close to $200m. He expects project finance to account for $75m, leaving $125m to other debt instruments, off-take agreements and equity.
“Although in isolation it looks very significant in relation to the current market cap,” says Audley Capital’s Julian Treger, “I think as we make announcements people will start to see it become a reality and not so much of a mountain to climb.”
“Some of the equity will come from existing shareholders,” adds Treger, the company’s largest shareholder with over 12 per cent of the stock, “but we’re in discussions with a number of strategic investors who have a private equity approach.”
Firestone is also exploring options to sell its BK11 mine in Botswana, shuttered in February. The project sits less than 3km from Lucara’s Karowe mine, which recovered a 257-carat diamond on Tuesday alongside a parcel of other big stones, adding C$26m ($25m) to the company’s market cap, a coarse indication of the diamonds’ worth.
Lucara has said it aims to takeover another producer to diversify output from Karowe, but scope for an all-paper deal seems limited, given Firestone’s discount to Liqhobong’s estimated net present value of $440m, or its resource of 30m carats. “The current market cap is a fraction of what it could be,” Treger says. “We see a tremendous amount of upside.”
Brown says Firestone’s returns at BK11 are not comparable to those from Liqhobong. “There are very, very few projects of this scale in the world that are going to come to fruition at this time,” Treger concludes. “I think we’re well poised now to execute.”
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