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Diamonds an investor’s friend

 

RISING prices for nickel, gold, platinum, iron ore and most other commodities appear to be having a positive effect on the ultimate item of investor speculation, diamonds.

Last week there was the release of a prospectus for a new Australian diamond float, this week there should be a revival of interest in the Ellendale project, and soon there might be news on the Argyle Deeps development.

Macarthur Diamonds is the float, not that there was much notice paid to its launch.

The Queensland-based company is seeking a very modest $3.5 million to help pay for exploration in the far north Kimberley region, around Boulia in Queensland and, just to add a bit of spice, in the ice-covered mountains of Greenland.

Briefcase is not paid to be a judge of float quality but it suspects that Macarthur will find it tough going to convince the market that $3.5 million will last long when your staff are operating in two extremely difficult locations on different sides of the world.

Ellendale, however, is a different kettle of fish.  This is the project being acquired from Rio Tinto by Kimberley Diamond Company and doing something that very few Australian diamond hopefuls ever do, actually produce diamonds, sell them and put the cash in the bank.

Interest in Ellendale, located near Derby, has been muted over the past year because Kimberley has been forced to delay settlement on the acquisition and because of a belief in the market that if Rio Tinto could not succeed with the discovery then any other owner would struggle.

Since a mid-year stoush between Kimberley boss Miles Kennedy and Sydney promoter Warwick Grigor doubts about Kimberley have faded.

The better mood has also rubbed off on associated diamond stock, Namakwa Diamond Company. The share price of both has been rising in line with reports of strong demand (and rising prices) for diamonds in the US and Europe and increasing confidence at Ellendale and Namakwa’s namesake diamond project on the west coast of South Africa.

Kimberley should get a bit more of a kick along after a media and analysts site visit this week.

Better than expected drilling results have been reported from known kimberlites (the host rock of diamond), the Falcon airborne gravity tool has identified another 20 prospective targets and diamond sales have been at prices ranging from $US158 a carat to $US181, significantly above budget of $US132. The good news flow has drawn Kimberley from a 52-week low of 28 cents to trade recently at 61 cents.

Namakwa has done almost as well despite a more difficult project. It is up from 6.5 cents to 14.5 cents and is moving closer to launching a full-scale mine after receiving an excellent average price of $US103.20 at its second sale of diamonds produced in a trial mine.

A deal has been struck with the well-connected New African Mining Fund and additional tenements secured.

The prices won by Kimberley and Namakwa are in line with a new-found mood of optimism in the diamond world, largely a result of the one-time monopoly De Beers organisation loosening its tight grip on the business to encourage competition and win the right to do business in the US.

Russia’s state-owned Gokhran diamond business has been among the winners from the changed game, lifting its list price for small gems by 5 per cent in August.

All this good news on demand and price could not come at a better time for Argyle’s owner, Rio Tinto, which is spending $70 million to decide whether to develop an underground mine beneath the existing open pit.

Without the new mine Argyle could close in four years, a possibility that drifts towards the probability category as the Australian dollar rises – with closure also creating the remarkable possibility of Kimberley becoming the only Australian diamond miner, thanks to its deal with Rio Tinto.

When the Argyle underground feasibility was launched earlier this year the dollar was around US60 cents.

At its current rate of close to US68 cents Argyle’s profit margins are being squeezed. Above US70 cents and the pain gets real, along with the likelihood of the Deeps development being dumped.

As one Rio Tinto staff member said recently “we’re damned lucky we started the study when the dollar was so low because today it would not be approved by the investment committee”.

 

ON the question of projects that might struggle in a rising-dollar environment, or projects that have been long on promise and short on delivery, there is a lesson to learn from the off-on-off roller-coaster of the Pilbara’s now-dead Methanex project – it will not be the last of the big ticket resource projects to die at the hands of the dollar.

The heavily promoted Gorgon gas project will also be feeling the squeeze, along with doubts about demand for its liquefied natural gas and the profit margin in a project that will always be dogged by its remote location and high level of costly impurities such as carbon dioxide.

Adding fuel to the debate last week was a study of Gorgon by Deutsche Bank, with the aid of data from petroleum industry specialist Wood McKenzie.

The conclusion to their report Gorgon LNG, assessing its viability was that customers might be looking elsewhere for future gas supplies.

With the collapse of Methanex, and a few other withdrawals from the north-west gas-to-liquids game, those sobering words from Deutsche and Wood McKenzie should give the football loving Minister for Resources Clive Brown, a bit to think about

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