Gope mine unlikely to take off

Staff Writer | Thursday March 5, 2009 00:00

 

The company said this last week as it downgraded its buying recommendation for Gem Diamonds following an interim management statement earlier this month and meetings with management.

'Capital market conditions make it unlikely the group will be able to raise the +/- $500 million needed to build a mine,' RBC said. The company had originally planned to have Gope in production by 2010.

Gem Diamonds bought a political hot potato in the form of the Gope Exploration in 2007 in a $34 million deal from De Beers.

Survival International has linked the Botswana government's forced relocation of hundreds of BaSarwa or indigenous Bushmen from the reserve to the discovery of diamonds, something the Botswana High Court found in December 2006 to be inaccurate.

Gope's kimberlite deposit is a 'significant ore body' with an indicated resource of 79 million tonnes down to 400m below surface at a grade of 19 carats per hundred tonnes.

RBC said it has reduced its forecasts for Gem and downgraded its recommendation from 'Outperform' to 'Sector Perform' with a reduced target price of 2.25/share (3.80/share).

It increased its forecast for the full year of 2008 to a loss of $0.95 per share from $0.35 per share, reflecting lower sales and lower diamond prices in 2008, as well as losses at its Ellendale mine in Australia and Cempaka in Indonesia.

RBC said it only sees a return to positive earnings in the full year of 2010.

It also expects to see an impairment charge in excess of 150 million when the group reports full year 2008 results on 1 April 'as management creates charges against capitalised spending in the DRC and CAR, as well as against the prices paid for Ellendale and Cempaka'.

'While Gem's major asset, a 70-percent holding in the Letseng diamond mine, continues to generate cash and the Ellendale mine is benefiting from an off-take agreement with a major US jewellery retailer, the balance of the group's portfolio has effectively been suspended.

This will make the group more sensitive to a relatively high group overhead which was created to build Gem into a large diamond producer,' it said.

RBC has modelled lower diamond prices in 2009 with an increase in 2010.

Last week Gem, which is listed on the London Stock Exchange (LSE), placed the lower value E4 pipe at its wholly-owned subsidiary Kimberley Diamond's Elledale mine in Western Australia on care-and-maintenance.

'Mining at the pipe would be suspended immediately in light of recent market conditions and as part of an on-going review of its operations,' the company said last week in a statement.