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West Africa Remains Stellar Diamond Frontier

Q&A with Karl Smithson, CEO of Stellar Diamonds

Nov 23, 2014 1:48 AM   By Ronen Shnidman
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RAPAPORT... Stellar Diamonds is a company operating in West Africa seeking to transition from exploration into commercial rough diamond production. The company expects to sell the first parcel of diamonds from one of its two development projects in the coming weeks. Karl Smithson, Stellar’s CEO, recently talked to Rapaport News about how his company has navigated the road to commercial production to date and the challenges that lie ahead.

Rapaport News: What is your background in the industry?

KS: Throughout my career, I have explored for diamonds in Africa, with the last 14 to 15 years focused on West Africa. I started working for De Beers in 1988 straight out of university. After a few years in South Africa, I became De Beers exploration manager in Zimbabwe, where I had to rejuvenate the company’s local operation that had come to a halt in 1976 due to political differences with the government.

After five years in Zimbabwe, I left De Beers and joined a mid-tier Canadian company called Southern Era and worked at its Marsfontein mine in South Africa while exploring elsewhere in Africa in places like Gabon and Angola.

After a few of years with Southern Era, I joined Mano River Resources, which was exploring for diamonds in West Africa, initially in Liberia. However, around 2000 civil war came to Liberia and peace arrived in Sierra Leone, so we hopped across the border and started work in Sierra Leone and gradually spread into Guinea.

Rapaport News: Has West Africa’s history of political instability impacted diamond exploration?

KS: It's a lot better now than when we started in the region. Sierra Leone has been peaceful since 2002 and has had three consecutive free and fair elections. The civil war in Liberia ended in 2005 when Ellen Johnston Sirleaf was elected the first woman president in Africa. Guinea has been democratically run for the past four years after a number of years of military dictatorship.

It’s worth noting that there are a number of big resource players focused on other minerals that are equally comfortable with the political risk as it stands now.

Operating in West Africa is really about doing what you say you will do. You have to prove that you have the capacity to execute a project and you must abide by the existing regulatory framework. In that respect, these countries’ mining codes are relatively modern and competitive.

Rapaport News: How did Stellar Diamonds settle on its current projects in Sierra Leone and Guinea?

KS: When I was with Mano River, we did broad-based high-risk exploration, where you find some prospective rock and check for diamond content. I have been with teams that have prospected 25,000 to 30,000 square kilometers of this region, including parts of Liberia, Sierra Leone and Guinea. After that early stage, high-risk work, we established the existence of high-grade, high-value deposits in Sierra Leone. We are now moving one of them, Tongo, through the development pipeline, feasibility study and hopefully into commercial-scale production.

In contrast, Stellar’s main asset in Guinea is called Baoulé and is owned by a joint venture with a local group that held the license to the site.

Rapaport News: For the sake of comparison, which diamond mines currently in operation are the most similar to Baoulé and Tongo?

KS: Baoulé is a modest-size kimberlite. It’s not like Jwaneng or any of the large Russian or Canadian mines. I think the nearest comparable mine in terms of surface area and ore grade is Lucara’s Karowe mine in Botswana, although Baoulé’s potential tonnage is about half that of Karowe, and we still need to establish if the deposit contains large and exceptional diamonds like those at Karowe.

Baoulé is located in an area of Guinea which historically produced many large diamonds from alluvial mining, but the kimberlites have never been tested. We are trial mining there for the next 12 months partly to establish if it has large stones and in what quantity.

The Tongo deposit in Sierra Leone is referred to as a kimberlite dyke or fissure. It is a narrow kimberlite but is extremely high-grade, somewhere between 100 and 200 carats per hundred tonnes. In addition, the diamond values there are over $250 per carat so the economic value of the deposit is very high in terms of dollars per tonne.

However, dyke deposits by nature are small and therefore not something that De Beers or other large companies would be interested in. But such a deposit certainly makes a big difference for us because the high margins are at a production volume suited to our business model as a small-cap miner.

Tongo is probably most similar to Petra Diamonds’ Helam mine in South Africa. The main difference being that Helam is 700 meters below surface, while Tongo is still at surface level.

Rapaport News: The value for Tongo that you mentioned seems very high. Why is that?

KS: Sierra Leone’s rough diamonds are renowned for their high color grades and good clarity. They are also usually found in nice crystal shapes that provide high polished yields for manufacturers, so they often command a market premium.

The diamonds from Guinea tend to have lower valuations because the colors might be a grade or two lower on average and some may have a bit of fluorescence. They’re also typically a bit more rounded than in Sierra Leone and not as high-yield for polishers. Nevertheless, our Baoulé operation has had some interesting finds and the diamonds there could reach $200 per carat as well, even when excluding the possibility of finding large stones.

Rapaport News: When will Stellar Diamonds be holding a sale of the first diamonds recovered from Baoulé and how will they be sold?

KS: We will export and hold our first sale of stones from Baoulé by the end of the year. It will be a small sale, but we are going to test the market for Baoulé goods.

The stones will go directly to Antwerp to be sold. We have no intention of selling our diamonds in Gaborone, Dubai or anywhere else at this stage. Antwerp is not only the easiest option for us, but also the best option.

It’s too early to say how the diamonds will be sold in future sales, but I will take recommendations from our marketing group regarding the best way to sell our diamonds.

Rapaport News: How do you intend to fund bringing Baoulé to commercial production?

KS: This is always the challenge for companies of our size that are trying to move from exploration to mine development. We intend to raise cash flow from Baoulé itself by selling its trial mine production. But we would still need to raise between $50 million and $100 million to move to commercial-scale mining, which requires a track record of production and a definitive resource study.

We expect to recover approximately 40,000 carats before moving to the commercial mine stage. At that point we will have a definitive feasibility study for strategic lenders or banks to consider funding part of the project, since mining projects are typically financed partly with debt, not just equity.

Rapaport News: If Tongo has higher-value diamonds and is a smaller project, why are you pursuing Baoulé first?

KS: We got the Baoulé asset in December 2013 in a deal with our local partners that also presented a substantial database of historical work done at the site. As a result, we felt confident that we could accelerate the asset into trial mining because we had a reasonable expectation of grade and value, as well as a lot of preliminary drill data.

We have always taken a steadier approach at Tongo, working through the gradual resource definition and now through feasibility study and into production. That course is not being altered because you can only go so fast with these dyke deposits.

Rapaport News: How did the outbreak of Ebola affect your operations?

KS: Like most companies in the region, we’ve had to adjust our operations to address the threat of Ebola with testing, sanitation and travel issues.

Guinea has been the least affected of the West African countries hit by Ebola, and it has the lowest reinfection rate for Ebola cases. There have been cases of Ebola reported elsewhere in the country, but that has not impacted our plans for Baoulé.

We experienced a lockdown at Tongo because it is located in one of the worst affected areas in Sierra Leone. The lockdown made it a lot more difficult to move people and equipment so Tongo is temporarily on hiatus at the ground level.

At the same time, we are close to finishing an updated resource statement for Tongo that should be published in a few weeks. Right now, we are focused on the desktop work based on the groundwork we have already done.

Rapaport News: What are the projected development timelines for the two mining projects?

KS: We assume that we are going to finish the feasibility study at Tongo in mid-year 2015, after which we will decide whether or not to develop the mine and we could have the funding by the end of next year to start building the mine.

At Baoulé, we are doing trial mine until the end of 2015, from which we will have enough data, along with a feasibility study and resource estimate, to make a decision regarding commercial production. At that point we will determine how much money we need to raise to build a commercial mine at the site.

Rapaport News: How do you see Stellar Diamonds developing in the next 5-10 years?

KS: That is a long way ahead for a sector in which the market changes so quickly. But over the next three years, we want to be mining at Tongo and Baoulé.

Longer term, at Tongo we can currently project a life of mine of more than 17 years and at Baoulé I can see 10 years of production at least.

We might also grow by acquiring and developing new assets or finding synergies with other miners. I'm keen to rejuvenate work in Liberia at some point in time. Consolidation may also be something to consider, since it would make funding a bit easier. We would certainly examine those kinds of options if we could find something that fits strategically. Either way, we like West Africa and see ourselves there for quite some time.
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Tags: Baoule, Ebola, exploration, Karl Smithson, Mano River, Ronen Shnidman, Southern Era, tongo, West Africa
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