They maybe brittle at times, but BlueRock Diamonds are made of tough stuff
“…in light of the company’s robust response in the face of difficult circumstances and the prospect of a stronger market this year, BlueRock is worth following as a possible recovery play…”
With a significant upgrade of its mine nearly complete and the prospect of an upturn in the global diamonds market, BlueRock Diamonds (AIM:BRD) may be one to watch after a tough 2020.
BlueRock, which joined AIM in 2013, operates the Kareevlei Diamond mine near Kimberley in the Northern Cape region of South Africa, the birthplace of diamond mining. The mine has five known kimberlite pipes – a type of potassic volcanic rock structure where diamonds are historically found – with three currently in operation and a fourth planned to come on stream this year. Kareevlei is among the top 10 kimberlite mines in the world, producing high quality diamonds with an average value of more than $300 per carat.
The cost of Covid
BlueRock began 2020 with high hopes, planning a significant upgrade to the mine to increase the scale and resilience of its production. But the pandemic forced the company to close the plant for nearly two months and put its expansion programme on hold. With production paused and demand for diamonds in freewill, BlueRock made an operating loss of £1,498,000 on a turnover of £1,292,000 during H1 2020, compared with a loss of £471,000 on turnover of £1,366,000 for H1 2019. It estimates the revenue impact at around £700,000 to £800,000.
The company used the enforced slowdown to consolidate, strengthening its marketing channels in anticipation of a return to production, and refining its plans for upgrading Kareevlei. It entered a sales agreement with diamond brokerage and consultancy firm Bonas, and an arrangement with Delgatto Diamond Finance to access working capital to give it greater flexibility as to when to bring its diamonds to market.
BlueRock has also concluded three fundraises, securing £1.9m last February, a further £1.25m in July and £1.5m this week, to support the company through the pandemic and allow it to further upgrades its expansion programme. Kareevlei will now be capable of processing one million tonnes per year rather than the 750,000 envisaged in the original plan, and producing 46,000 rather than 34,000 carats.
Just before Christmas BlueRock announced that the improved mine should be up and running by early Q2. The company raised a further £1.5m this month to support the transition to the new facility, the rollout of which has been delayed by heavy winter rains. The switch to the new plant will be smoothed by running it in parallel for a time with the older production line.
A January production update reported that the company had been able to maintain decent production figures through the pandemic. Processing increased by a quarter, up from 323,000 tonnes in 2019 to 402,000 tonnes, and carat production was up 10pc from 14,033 to 15,371. Carat sales also increased, up by 29pc from 12,675 to 16,290.
The main blemish was a decrease in value per carat, down 29pc to $295 from $415, which the company attributes to its having to partially divert operations from the most productive section of its mine in the course of expansion work. Carat quality is improving as the work concludes: the average grade later in the year was actually higher than the average for 2019.
An upgraded resource estimate
BlueRock entered 2021 with a set of strong announcements about Kareevlei’s long term future, announcing an upgrade of its estimate of the mine’s remaining resources, the company’s most recent drilling programme confirming the presence of kimberlite at a greater depth within the mine than previous estimates. It has increased its estimate for total remaining tonnes by 49pc to 10,368,300, up from 6,965,000, and for carats by 53pc, to 516,200 from 337,018. Nearly a fifth of the mine’s resources have been recategorised from Inferred to Indicated status (an estimate made with a higher degree of accuracy and confidence), and the carat grade of the remaining resources was also upgraded by 4pc.
BlueRock says the new resource estimate will allow it to press ahead with plans to increase annual production to one million tonnes, and for at least 10 years. It will undertake further drilling work this year to increase the estimate further, focusing on the potential of a kimberlite pipe which has only been partially explored. The company is aiming to process 130,000 tonnes this quarter a 75pc increase on the same period last year.
Prospects for the global diamond market
BlueRock will hope that there will be a similar upturn in the diamond market. Demand plummeted during the pandemic, rough diamond prices falling up to 27pc, and global production by more than 20pc, due to significant pandemic-related suspensions and curtailments across the industry. Diamond mining giant De Beers suffered its worst year of sales in almost a decade, and the planned take-over of leading gem retailer Tiffany & Co by Louis Vuitton Moët Hennessy nearly collapsed last autumn.
One bright spot during the darkest days of the pandemic was continued demand for high-quality diamonds from affluent investors, which actually rose by 12pc. BlueRock’s diamonds are well suited for this market, the company reporting the sale of three large stones together worth more than $200,000.
The wider industry is gradually recovering along with the rest of the global economy, with China once again serving as a critical ballast for a major international market. A McKinsey report published last year found that Chinese consumer spending accounted for a third of the world’s total spending on luxury goods in 2018, and forecast that proportion to rise to 40pc by 2025 with Chinese consumers accounting for two-thirds of luxury spending growth. The outlook for the market this year is unclear, but forecasts indicate a high single-digit percentage recovery.
A recovery play to watch
After weathering the storms of 2020 BlueRock nows seems positioned to benefit from the upturn, however strong it might be. The company’s share price took a hammering last year as the pandemic knocked it off its feet, plunging from more than 100p to around 40p where it remains today, with market cap just under £4m.
But in light of the company’s robust response in the face of difficult circumstances and the prospect of a stronger market this year, BlueRock is worth following as a possible recovery play.
BlueRock Diamonds PLC is also pleased to announce that its Chairman, Mike Houston, and Finance Director, David Facey, will provide a live investor presentation on Monday 8th March 2021 at 11:00am. Click here for further information, and registration details.