Firestone Diamonds: Bright future
The past three years for Firestone Diamonds CEO Stuart Brown have been very different from his previous career as CFO, and later joint acting CEO, of the giant De Beers Group.
This month Firestone will produce its first diamonds from commercial, as opposed to trial, mining operations at Liqhobong in Lesotho.
Since he joined the company, Brown has been watching the purse strings and has been fully involved in all aspects of bringing the project to fruition. At De Beers, there were big budgets, plenty of staff and decision making took far longer than a small company can afford.
Liqhobong is in northern Lesotho, near Gem Diamonds’ Letseng mine, which is famous for producing special, large stones, such as the 198-carat white diamond found last year. Before the latest investment, Liqhobong was also finding large stones, but its processing systems were not designed to accommodate them and at least 10 were crushed.
Brown says the occurrence of exceptional stones is impossible to predict. The expanded mine and new processing plant are designed specifically to ensure that stones of up to about 500carats can be extracted without being crushed.
Though Liqhobong’s diamondiferous kimberlite pipes were discovered by De Beers about 50 years ago, the remote resource was not considered attractive . Liqhobong is 300km from Maseru, with minimal infrastructure. It is in a narrow valley, where it snows in winter and the only source of water is summer rain, which falls in torrents and has to be pumped out so open-pit mining can continue.
Brown says construction was very complex, with about 14 cranes and 1,000 people on site at peak activity.
Liqhobong is coming on stream two months ahead of its revised schedule and slightly below its revised R2.1bn budget. The final expenditure item is the recovery sort-house, which is the high-security, hands-free area at the end of the process.
Firestone will have about US$9m cash and another $15m in standby facilities left over to see it through its first few months of production.
Budgets and timelines had to be revised because of the need to remove more overburden than anticipated and the need for risk-mitigation measures like an extra water-storage dam.
The mine, which will produce 1mcarats of diamonds a year on average for 15 years, will add 5% to the GDP of Lesotho.
Brown intends to stay with Firestone through the mine’s ramp-up and operation.
"You cannot build it and leave it. I will be around for a while to bed it down. People are relying on me because we have borrowed a lot of money that we have to pay back. We are going to run this mine properly."
Beyond the mine’s first 15 years lies the possibility of further extensions, probably underground. Over the next three years, says Brown, Firestone will gain better knowledge of the orebody to enable it to make longer-term plans. Firestone is looking at other growth opportunities, but is not interested in greenfields developments.
The shares, currently at 52p, have more than doubled since the beginning of this year, when they were 19.25p. Gem Diamonds, a far bigger company, has fallen to 120.7p from 125p in the same period.
In a report on September 27, RBC Capital Markets analyst Des Kilalea lifted the price target to 60p/share, based on a better outlook for diamond prices in 2018, the imminence of Liqhobong’s production and free cash flow generation. There could be further upside potential if large stones are discovered.
Kilalea says there are three reasons to be positive about Firestone. It has the potential for large stones, which would boost average recoveries; it could be an acquisition target; and it could be in a position to start paying dividends from its 2018 financial year.
Poor liquidity in the shares is a drawback, but in the medium term larger strategic shareholders could exit.
In a note issued in July, Macquarie analyst Patrick Morton also upgraded Firestone’s shares to "outperform", with a 40p-60p valuation and a 12-month price target of 45p.
Morton says this is based on Liqhobong’s likely early project completion, its solid operational team, potential for diamond price upside and the fact that Firestone will be one of only three new diamond miners producing 1mcarats or more.