DiamondCorp has experienced development delays at its Lace mine, placing it in financial difficulties – leading it to issue new shares to raise cash. The company has also been granted approval to defer its loan repayment to alleviate its financial pressures.
The Industrial Development Corporation of South Africa (IDC) has granted approval to reschedule DiamondCorp’s existing loan which includes the capitalisation of interest previously due in 2016. This amounts to about R311 million at 31 January 2017.
This compares with the previous aggregate value of the loan principal and capitalised interest of R258 million. The loan will now be amortised in full by 1 November 2021, compared to 31 July 2020 as previously scheduled.
Rescheduling of the Group’s existing loan also includes the deferment of capital payments previously due in 2016 (approximately R82 million) and for interest and capital repayments to now be payable on a quarterly basis from 1 February 2017 (previously payable on a six monthly basis).
The dual-listed South Africa-focused diamond company is also seeing to raise up to £4 million through the placement of new ordinary shares of 0.1 pence each in the company.
Reasoning for delaying loan and cash raising
While many key operational challenges experienced in the last few months have been overcome, the overall development and production schedule of the mine has been delayed by approximately four months and at an increased operational cost.
This delay combined with management's preference for not selling sub-optimal diamond parcels (typically those containing less than 10 000 carats) in a weak diamond market has put pressure on the mine and DiamondCorp’s immediate cashflow, particularly as debt repayments from IDC had been scheduled to commence from January 2016.
With the formal IDC loan rescheduling, the directors have resolved to raise additional capital by way of the placing in order to fund the company through to becoming operationally cash flow positive from Q3, 2016 and with working capital contingencies.
Use of proceeds
The net proceeds of the placing will be used, together with the proceeds from diamond sales, to fund production ramp-up through to becoming operationally cash flow positive including the following:
- Development of the 475 m level tunnel (c. £2.00 million)
- Processing costs: (c. £0.65 million)
- G&A costs for Lace mine: (c. £0.65 million)
- UK bond coupons: (c. £0.33 million)
- Laurelton/Tiffany loan coupons: (c. £0.58 million)
- General corporate costs: (c. £0.40 million)
Conditional upon completion of the placing, the directors anticipate a ramp up in K4 kimberlite tonnage (estimated to be more competent and of higher grade than K6 kimberlite) to 30 000 t from July 2016.
The tonnage ramp-up will have a corresponding impact on the volumes of carats recovered, cash flow and project cash flow.
Based on a 1 mm bottom screen size, the Lace mine will mine and process approximately 1 Mt of K4 and K6 kimberlite, recover approximately 466 000 carats of diamonds and result in operational cashflow after tax and interest of approximately 362 million in 2018.
External debt repayments in the same year are estimated to be R81.5 million.
The directors are however considering changing the bottom screen size to 1.25 mm which would result in lower diamond recoveries and reduced processing costs, but an increase in the price received per carat. This decision will be taken following the completion of bulk testing activities currently underway.
The potential net impact on cashflow from increasing the bottom screen size is estimated by the directors to be relatively neutral.