BlueRock Diamonds
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AIM-listed diamond producer BlueRock Diamonds has established a new route to market, which involves selling its diamonds through Antwerp.

Having recommenced mining operations on 11 May at its Kareevlei diamond mine in the Kimberley region of South Africa, the company hasadapted its working practices to comply with the South African Government regulations and has also established a new route to market together with associated finance.

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The company believes that being an opencast mining operation, it can operate at full capacity whilst abiding by the regulations and therefore anticipates returning to the monthly tonnages achieved during the dry season with its current processing plant.

This response, the company believes, should allow it to operate in the current environment.

New sales strategy

BlueRock had also been reviewing its sales strategy prior to the COVID-19 pandemic to gain access to the Antwerp diamond market, which attracts significantly more buyers than the local South African diamond market. 

The company is also of the view that the Antwerp market is likely to recover earlier than the domestic market primarily due to expected ongoing travel restrictions to and within South Africa and the fact that many of the international buyers have offices located in Antwerp.

Accordingly, the company has entered into an agreement with diamond brokerage and consultancy firm Bonas-Couzyn N.V, part of the Bonas Group, to market the Kareevlei diamonds through its Antwerp facility.   

Bonas will present its diamonds for sale as Kareevlei Diamonds therefore helping to further establish the brand of Kareevlei diamonds, which the company believe will add value in selling the high-quality diamonds that Kareevlei recovers.
 
The company expect to export its first consignment of diamonds to Bonas towards the end of June 2020. 
 
Diamond financing

The near-term diamond market remains uncertain and until the tender houses re-open, which is expected to be in June, in Antwerp, the impact of COVID-19 on diamond prices will not start to become clear.  Accordingly, the company has, together with Bonas, been in discussion with Delgatto Diamond Finance Fund (DDFF), a New York based fund, which is the largest non-bank lender to the diamond and jewellery industry, to provide pre-sales finance. 

The pre-sales finance will enable BlueRock to have greater flexibility over when sales are made allowing it to delay sales until a time when market prices have recovered.
 
A non-binding letter of intent has been agreed with DDFF to enable BlueRock to finance each monthly parcel at 70% of an agreed valuation for up to 12 months at a cost of 1.25% per month on the initial funding amount. 

The mechanism for achieving this is through the sale of monthly consignments of diamonds to DDFF together with a 12 month option on each consignment to repurchase the diamonds at the same price. 

BlueRock will be entitled to exercise this option, and thus sell its diamonds, at any time up to the end of each 12 month period.  If the option has not been exercised by the end of the period, the option will lapse and DDFF will take ownership of the diamonds, unless both parties agree to extend.
 
Mining and operations strategy
BlueRock has taken the decision to focus on keeping the cost of production as low as possible to minimise the risk that its selling or finance price (being 70% of market value) exceeds its cost of production.

Accordingly, the decision has been taken to reduce the level of development mining to align with the lower annual production, remove contract crushing and freeze employment whilst continuing to manage overhead costs. The company will also benefit for a period from the weaker exchange rate and the material drop in the oil price.  

Moreover, the company’s expansion plans are on hold until the position becomes clearer, although the company wishes to implement them as soon as is practicable.

Despite having kept costs to a minimum whilst the Kareevlei operations have been in care and maintenance, the total cash cost of the COVID-19 lockdown has been significant in large part because the company has had to settle all of its creditors in order to restart operations without having any diamond sales.  Some of this impact can be expected to reverse in due course as working capital levels normalise. 

After careful consideration, the company believes that the new sales channel and expected  financing arrangements will maximise the chances of BlueRock’s operations being cashflow positive.  The management of Kareevlei have put in place all the required procedures for operating, nevertheless, Kareevlei is not an isolated unit and there remains a risk that operations may need to be suspended if the situation changes.

The company’s guidance for the year remains suspended but it hopes to reissue guidance during Q3.