Mid-tier Diamond Producer Emerges from Africa

Through a series of timely acquisitions, Petra Diamonds finds value in a difficult market

By Antonio Ruffini, Africa-based editor

It is notoriously difficult to make the transition from a junior exploration company to a mid-tier producer in the diamond sector. Only a handful of companies have ever achieved that. The mining industry is littered with the corpses of promising juniors that seemingly did all the right things; got good expertise and searched in the right places, such as in diamond elephant country, i.e., Angola, the Democratic Republic of Congo, Botswana, South Africa.

A few years ago Petra Diamonds was just another junior diamond exploration company. It was focused on a promising looking project in Angola, Alto Cuilo. True, this project stood out because some believed this might be that once in a decade major diamond find which results in a significant new kimberlite pipe diamond producer. It was so promising that after a while BHP Billiton took a controlling interest in the project and undertook to fund all further exploration.

However, further investigation showed that the geology was less compelling for a major large mine than was originally anticipated. BHP Billiton withdrew and Petra was left to soldier on alone.

It changed its focus from trying to delineate economically viable large-tonnage kimberlite vents to searching the crater rims for deposits of economic diamond-bearing material. This was done successfully at other diamond mines with similar mineralization, such as Catoca in Angola and Williamson in Tanzania.

But then the economic downturn came and the company lost its stomach for spending $20 million a year in a country with a poor track record on good governance. It withdrew completely from the Alto Cuilo project. It also pulled back from the Kono kimberlite project in Sierra Leone, where it had been looking to apply its recently acquired fissure diamond mining expertise. Its joint venture partner Stellar Diamonds took over management control of Kono and put the project on care and maintenance to wait for the market to change.

Thus far, Petra’s story was no different from all the other promising juniors that emerged in the diamond sector only to wither away. However, while Petra was undertaking its large exploration program in Angola, in 2005 it also purchased/merged with a small producer; fissure mining outfit Crown Diamonds that was operating three small mines in South Africa. Petra said at the time that it wanted to give itself somewhat of a production base.

Fissure mining is tricky, as mining narrow vein fissure orebodies only allows for low tonnage operations. On the plus side fissure mines can produce some exceptional diamonds. “The average value per carat for Petra’s three fissure mines runs at $211/ct, which is high compared to the world average of $90/ct for a hard rock mine,” said Johan Dippenaar, CEO, Petra Diamonds.

Then Petra Diamonds went on a buying spree that has seen it become one of the world’s largest groups outside the established majors in terms of diamond resources. The company now plans to produce 2 million ct/y within five years.

“We are on track to produce 1 million ct by next year,” Dippenaar said. “This compares with total production of just over 200,000 ct in our 2008 financial year.” Today Petra has a resource base of 265 million ct, worth $27.3 billion, whereas the resource base about three years ago stood at a mere 11 million ct.

After its fissure mine purchase from Crown Diamonds, it bought the shut down Koffiefontein mine from De Beers in July 2007 for some $11 million. It was able to bring this underground mine located to the south-east of Kimberly in South Africa back on stream immediately. Koffiefontein has been shut down and reopened on a number of occasions over its history as determined by economic factors.

“Life of mine for Koffiefontein is calculated at 14 years, but we hope to come up with a mix of increased production and longer life,” Dippenaar said.

In July 2008 Petra Diamonds bought from De Beers for some $140 million, the famous Cullinan mine located just 40 km east of Pretoria in South Africa. Cullinan diamond mine earned its place in history with the discovery of the Cullinan diamond in 1905, the largest gem diamond ever found at 3,106 ct rough. Cullinan remains, after Kimberley, probably the most famous diamond mine in the world. A quarter of all stones more than 400 ct ever produced have originated from it.

Cullinan also has a 165 million metric ton (mt) tailings resource, containing around 16 to 18 million ct. “We plan to bring that operation into production as well, and we would be aiming at fairly steady production about two years from now,” Dippenaar said.

“We are aiming at up to 1 million ct/y from Cullinan from 2010 onwards for 20 years. In years gone by Cullinan on occasion produced 2.5 to 3 million ct/y for years at a time,” Dippenaar said. “We are not making any promises that this will happen again, though.”

Petra also bought Kimberley Underground Mines from De Beers. Kimberley Underground comprises Wesselton, Dutoitspan and Bultfontein, three historic mines which were at the heart of South Africa’s diamond rush in the late 1800s.

“In the light of these acquisitions, the fissure mines have become a much smaller part of our business,” Dippenaar said. “But they have a life of at least 15 years and there’s no doubt that they will continue; it’s just a case of how will they fit into our overall portfolio of assets.”

And most recently Petra Diamonds acquired a 75% interest in Tanzania’s Williamson diamond mine for $10 million, once again from De Beers. The other 25% is held by the Tanzanian government. At 146 hectares, Williamson is the largest kimberlite pipe ever to be mined, having been operated continuously as an open pit mine for almost 70 years. During this time it has produced over 20 million ct, and a resource of some 40 million ct remains.

“Production over the last year or two has been 135,000 to 160,000 ct/y,” Dippenaar said. “We are thinking of taking Williamson well above the current 1.6 to 2.0 million mt/y operation. It is a huge open orebody that one can mine on surface, and our belief is that this is typically a project one would want to operate at 7.5 to 10 million mt/y. That would typically produce in excess of 500,000 ct/y, more than three times current production with a 30 to 40 year life of mine.

“Once we put such a plan into place it would then take up to three years to install the required infrastructure to run the operation at that level,” Dippenaar said. “It would require a new mill and plant.”

Thus Petra has emerged as that rare company, a mid-tier diamond producer, but it was not achieved through exploration. It was done through acquisitions, predominantly of operations De Beers saw as peripheral to its interests.

“Diamond exploration has again proven to be extremely tough, though we still believe that the Angola and the DRC regions have great potential,” Dippenaar said. “However, if you think of the hundreds of millions of dollars that have been spent on diamond exploration, and the low level of success, together with the severe decline we had in prices, it is difficult to imagine that companies will shell out huge amounts of money on exploration in the near future.”

Spectacular 507-ct white diamond recovered at Cullinan

During late September, Petra Diamonds recovered a 507.55 ct white diamond at the Cullinan mine in South Africa. Initial examinations indicate that it is of exceptional color and clarity, and most likely to be a Type II diamond. “The Cullinan mine has again given the world a spectacularly beautiful and important diamond,” said Johan Dippenaar, Petra’s CEO. “Initial indications are that it is of exceptional colour and clarity, which suggest extraordinary potential for its polished yield. We now eagerly await the findings of the expert analysis.”

The diamond was recovered alongside three other special white stones of similar color and clarity in the same production run: another very large stone of 168.00 carats and two other stones of 58.50 and 53.30 carats.

At 507 carats (just over 100 grams) the diamond, which has yet to be named, is considered to be amongst the top 20 largest high quality rough diamonds ever found worldwide and ranks alongside other illustrious diamonds recovered at the celebrated Cullinan mine.

Cullinan has a special place in the history of diamonds as the source of the world’s largest gem diamond ever recovered, the ‘Cullinan’, at 3,106 carats rough. It has also produced a further two of the world’s largest diamonds, the Golden Jubilee at 755 carats rough and the Centenary at 599 carats rough, and many other famous gems including the Taylor-Burton (69 carats polished).