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Stella Diamonds #STEL
Share Price: 3.15P
Market Capitalisation: £1.73M
What Do They Do?
Stellar is an AIM listed diamond development company focused on the 4.5 million carat high-grade and high value Tongo-Tonguma kimberlite diamond project in the world famous diamond fields of eastern Sierra Leone.
This project has the potential to be 2nd largest kimberlite diamond mine in West Africa, which is even more impressive when you consider that Stellar’s a market cap is sub £2m.
In October 2016 Stellar Diamonds had a pre-economic assessment carried out on their Tonga-Tonguma resource in Sierra Leone. After tax and after royalty payments (to the government and their partners) the net present value of the project is estimated to be of US$109 million. This is in excess of 40 times the current market capitalisation of Stellar Diamonds.
Here’s some of the PEA figures:
– 21 Year Mine Life (with potential to extend)
– $45m Average Revenue per Year
– $1.5bn of Revenues over Life of Mine (LoM)
– 50% Operating Margin
– Estimated 3.96 million carats recoverable from the initial 4.5 million carats resourc at a +1.18mm cut-off
Along with their partner Octea Mining Stella have spent $45m on developing the resource, which has included 6,600m of drilling and 10,000 carats of bulk sampling.
The initial two year capital requirement to bring the mine into production, is estimated to be $31.8 million.
Whilst securing this funding can be a big challenge, for a company the size of Stella Diamonds, it’s the strength of the investment case that will have the biggest influence on a debt lenders decision and this project has a strong case.
This project will have an 49% operating margin and an average revenue of $45m per annum. It’s also estimated that the life of mine net cash inflows, after capex, will be $580.3m or $27.6m of free cash flow per year. There’s also an exploration target of up to 8 million carats in addition to existing resource.
It may seem and odd choice to include Sierra Leone as one of the reasons to add Stellar Diamonds to your watchlist. After all it’s a country whose recent history has suffered due to the civil war (1991 – 2002), the Ebola crisis (2014 – present), high unemployment and currupt officials.
These issues aside, Sierra Leone is rich in minerals and has relied on mining, especially diamonds, for its economic base. The country is among the top ten diamond producing nations. Sierra Leone is a major producer of gem-quality diamonds, renouned for having a high colour range, high clarity and good crystal shapes giving high yield on polishing.
Annual production of Sierra Leone’s diamond estimates range between US$250 million–$300 million accounting for over 50% of the country’s exports.
In March 2017 a 709 carat diamond, which has been reported as the 13th largest diamond ever found, was discovered Kono district of Sierra Leone. It’s reported to be worth an estimated £40m – £50m.
It was discovered by a church minister who supplemented his salary by looking for minerals in the artisanal mines of eastern Sierra Leone.
Other famous large diamonds discovered in Sierra Leone include the 969 carat, “Star of Sierra Leone” and the 770 carat, “Woyie River”.
These discoveries reaffirm the fact that Sierra Leone ranks in the very top tier globally for the production of large and high quality diamonds.
If Stella Diamonds happen to unearth a biggy, not unkown in this country, it could truly transform an already compelling project.
So the big questions is, when will funding, for the mine, be secured?
The picture above is taken from Stella’s, “Tongo Tonguma Presentation September 2017“. As you can see they’ve marked Q3 and Q4 of this year for, “Licence funding and close transaction” and “Capex debt funding”.
CEO Karl Smithson mentioned on the podcast that they’re involved with a group on the debt funding side and that they’re making, “good steady progress”.
If I were to make an assumption here, it would be this: The company must be relatively confident on the progress of the funding in order to have published their presentation, in September, assuming discussions will be completed before the end of 2017.
On securing funding, production will happen within 12 months.
Two Other Pieces of News
1. In January 2017 Stella entered into a conditional binding agreement with BDG Capital for the proposed sale of their assets in the Republic of Guinea.
Subject to due diligence the price agreed was US$2m of which US$250,000 has been received by Stellar to ensure exclusivity.
This sale will have 3 positive effects:
– It will significantly reduce their overheads.
– It will allow the management for focus on their Tonga-Tonguma project.
– The proceeds of the sale, which are not far off Stellar’s market capitalisation, will be used as working capital for the Tonga-Tonguma project.
2. Part of the proceeds from a recent fundraise and the sale of their assets in Guinea will go towards the payment of the Tongo environmental licence and renewal of the Tonguma environmental licence (estimated $250,000 for both). On receipt the Tongo mining licence will be granted to Stellar via the Minerals Advisory Board in Sierra Leone.
This is high risk. Firstly Stella Diamonds is a micro-cap company looking to raise $31m (13 times their market cap) for a diamond mine in West Africa. There won’t be a queue of funders jumping over each other in order to lend Stellar the money.
Having said that, Stellar Diamonds do control a project, in mineral rich Sierra Leone, that seems to possess a compelling investment case: it’ll payback the debt within 5 years (or 3 years from commercial production), generate an average of $27.6m of free cash flow per year for 21 years and have a NPV of $109m or 45 times Stella Resources market cap.
Yes this is high risk but if Stella Diamonds secure that funding, then it is also very very high reward.
You can listen to my recent interview with CEO, Karl Smithson below:
The content of this blog (or content associated with it) is not intended as investment advice. The author holds an interest in the company mentioned. Please do your own research.
One Further reason to add Yolo Leisure & Technology to your watchlist
To read my blog post on Yolo Leisure and Technology #YOLO click here
To read my blog post on Yolo’s Electric Jukebox Investment click here
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