AIM-listed Firestone Diamonds will look to raise £18.5 million (before expenses) to fund the on-going operations of its Liqhobong diamond mine in Lesotho.Firestone commenced production at the Liqhobong diamond mine in Lesotho in October 2016, making it one of the newest diamond mines in Africa. Unfortunately, the company has achieved lower than expected diamond prices in its sales for the last two quarters.
Notwithstanding an improvement in the average diamond value received at the most recent sale on 9 October 2017 of US$83 per carat, Liqhobong is still being affected by the combination of lower than expected occurrence of larger, better quality diamonds and on-going subdued market conditions for the lower quality diamonds.
Since commencing operations in October 2016, around 0.6 million carats have been sold at an average value of US$82 per carat. This compares to the company's updated definitive feasibility study in 2013 which was based on an estimated average base case value of US$107 per carat.
Firestone also requires additional financing as well as a restructuring of its near-term debt obligations should it continue to achieve the current levels of diamond pricing.
The company has had productive discussions with its lender ABSA and its major shareholders, the conclusion of which has been that the fundraising, in conjunction with the amendments to the ABSA debt facility, is the best way to protect the interests of all stakeholders whilst enabling the company, in the short term, to transition to a nine-year mine plan with higher near-term cash generation.
A revised mine plan will be focused in the near term on mining and treating ore over the whole ore body to obtain a more representative footprint than has been possible to date, as well as increasing the opportunity for the recovery of large gem stones which, by nature, are typically scarce and unpredictable
In the medium term, the company will also be able to retain the flexibility to revert to the original 14-year plan should diamond prices recover materially.
The net proceeds of the fundraising will be used:
- to fund mining activities and to provide sufficient headroom while diamond market prices remain subdued, thereby enabling the company to achieve its objective of better understanding the true potential of the ore body;
- to service the December 2017 capital repayment of US$5.2 million under the ABSA debt facility;
- to fund the debt service reserve account of the Group with US$4.6 million in respect of the interest due under the ABSA debt facility during the standstill period; and
- for other general on-going working capital expenditure.
The company will continue to review, on an on-going basis, the quality of diamonds recovered and realised diamond values.
The directors believe that by adopting the shorter nine-year mine plan, with the benefit of the flexibility of reverting to the longer 14-year plan, the company will be best positioned to operate on a sustainable basis should the lower average diamond values persist with the optionality of taking advantage of the longer life of mine should the average diamond values received increase or should there be an improvement in market conditions.
"The 2017 financial year was successful. We achieved a number of milestones, including: the successful completion of the construction of the new mine at Liqhobong in Lesotho, the ramp up of our production and the continued exceptional safety performance of zero lost time injuries throughout the project over the past three years,” says CEO Stuart Brown.
“However, the weaker than expected diamond market together with our lower than anticipated recovery of higher value diamonds has put pressure on our cash reserves and meant that we have had to raise additional equity and restructure our debt in order to be able to adopt a revised mining plan which seeks to maximise cash flow in the shorter term while we address the issues affecting value recovered. “