A Diamond is forever; So is an alluvial diamond mine
I visited South Africa last month. The country is rich with potential but not without problems.
A couple of months ago the lovely Susie Bell contacted me about visiting Rockwell Diamonds (RDI-V). The company mines a number of alluvial diamond projects on the Middle Orange River, near Kimberley, South Africa, home to South Africa's diamond industry. [pic. here of Susie when Bob met her in 2004.]
I flew into Johannesburg where I joined with Rockwell President and CEO Dr John Bristow in a flight to Kimberley and a two-day visit to his existing diamond projects.
Rockwell currently mines from three existing diamond mines producing up to 2,500 carats a month. That doesn't sound like much and in a way, it's not, the grade is a tiny .0009 grams per tonne. The quality of the diamonds more than makes up for the low grade. Sales in 2008 have averaged $2400 per carat. There are five carats to a gram so it's easy to see how much earth has to be moved to find even a single 1-carat diamond.
Rockwell doesn't much fool around with 1-carat diamonds, that's the key to making over $2400 per carat on the stones they market. Large diamonds are a lot more rare than smaller stones. Due to the alluvial nature of their diamonds, 85-90% of diamonds are gem quality and 70% measure over 2 carats in size.
Let's go back for a moment in time and let me tell you what I learned about diamonds in general and South Africa in particular.
Until about 1870, India and Brazil were the home of the tiny diamond industry with all stones being found and mined out of ancient river beds; alluvial diamonds. Young Erasmus Jacobs found the first known diamond in South Africa on the banks of the Orange River in 1866. He collected it as a pretty little pebble. Ultimately this 21.25-carat stone was identified as a diamond worth 500 pounds.
By 1870, the rush was on. By 1871 two well-defined areas were recognized as the source for the diamonds. Four pipes altogether were discovered at the town now known as Kimberley. In 1872 these pipes were worked as giant open pit quarries by 2500 miners and 10,000 hired laborers.
Originally the mines were operated as open pit mines but eventually the near surface was mined out and the miners reached bedrock, a hard blue mineral. It was believed the boom was over until someone tried working some weathered blue rock soon to be called kimberlite after the town of Kimberley. The blue rock proved to be far richer than the gravel and the industry boomed.
The diamond pipes were originally owned and mined as 31-foot square claims but as the pipes were mined it became obvious that there had to be consolidation in the industry. After a giant financial struggle on the stock market the major diamond mines were joined into a single powerful company, the De Beers Consolidated Mines Limited in 1889.
De Beers held a monopoly on the industry and used that power to chop production leading to higher prices for diamonds. De Beers and the Central Selling Organization, their marketing arm, held a monopoly on the sales of diamonds until only recently.
The diamond industry formed the financial backbone of South Africa and financed the gold mines of the giant Witswaterrand, producer of 60% of all the gold ever produced. Still today, South Africa produces half the GNP of the entire continent.
Dr Bristow and I flew out to Kimberley to visit some of the Rockwell projects. I had the very great pleasure of staying at the Kimberley Club, founded by Cecil Rhodes in 1881.
Dr John Bristow has 30 years experience in the diamond mining business and over 10 years experience with the alluvial diamond fields of the Middle Orange River, home to the 5 major diamond projects of Rockwell and the highest value diamonds in the world. Rockwell Diamonds is one of the Hunter Dickenson group of companies and is dedicated to the mining of diamonds.
As diamonds travel downstream, the flawed stones disintegrate. Where a rich kimberlite pipe might produce 30% gem quality diamonds, as the diamonds migrate to the sea, the quality goes up. Where Rockwell is mining the alluvial gravels from ancient riverbeds, the occurance of gem quality diamonds is as high as 85-90%. That's important to remember because diamond grades in alluvial working are far lower than in hard rock kimberlite pipes but the revenue can be much higher due to both the quality and size of the robust gemstones that survive the grinding process of South Africa's large drainages like the Vaal and the Orange River.
Rockwell has three mines at present producing 2000-2500 carats per month. They have just concluded a deal to purchase two additional mines (Saxendrift and Niewejaarskraal) on the Middle Orange River that have been on care and maintenance. The Saxendrift mine was recommissioned at the end of April and has started producing diamonds for Rockwell. From those two mines they hope to produce an additional 2000 carats per month by the end of their current financial year.
Mining alluvial diamonds is nothing more and nothing less than a giant earthmoving project. According to John Bristow and company figures, it costs about $3.00 to $3.50 a ton to mine and mill, revenues are between $6 to $7 a ton. Rockwell uses four different methods for recovering diamonds including grease tables, rotary pans and dense media separation and X-ray flowsort machines. Diamonds have a specific gravity of about 3.5; ordinary minerals have a SG of 2.5 to 2.7. So diamonds are concentrated with the densest of the rock and then visually sorted.
The value of the diamonds is concentrated in the very largest stones. In 2006, four large stones varying between 39 and 156 carats and priced between $12,200 a carat and $37,000 a carat represented 60% of the total revenue. Security is paramount and diamonds don't touch human hands until in the hands of management.
We have all heard stories about gold mines in South Africa having to stop operations due to power cuts; South Africa is in the midst of a major power crisis. I asked Dr Bristow what the power problem was and how it affected them.
His answer was simple and short. South Africa's power company charges $.03 a KW hour. This compares to perhaps $.05 an hour in power rich Quebec, $.06-$.08 in the US and $.32 in Grand Cayman. There is a shortage of electricity in South Africa because they are selling it below the cost of producing it. As a result they don't have the money to invest in infrastructure to generate more power.
I believe the solution is simple but will never happen. They could cure the problem in a month but it would be unpopular. Double the price and let the cost ration the available power. Meanwhile the many productive assets of the country struggle to get consistent power delivery while the excess electricity is consumed because it is so cheap.
Unscheduled power outages cause problems for the entire mining industry. If the power goes off without notice, it takes hours of unproductive work just to get back to where they were. For Rockwell, the loss of a single diamond in the tailings can cost millions of dollars. By explaining to the power company just how important it was to at least be able to shut down gracefully, Rockwell has mitigated much of the cost that they had been incurring. But lost power was lost revenue while labor costs continue.
So Rockwell has ordered diesel powered gensets. These backup power generators will be installed in May. Power from the grid currently costs $.03 a KW hour, power from the diesel genset will cost about $.32 a KW hour. It sounds worse than it really is, at present, electricity is about 3% of their overall costs but having to generate their own power 20% of the time would add 12% to operating costs. In fact, it's pretty much a case of choosing the least damaging course of action. When the power goes off, the revenue goes off as well so an increase in costs means less profit but at least there will be profit.
I was exceptionally impressed with Dr Bristow and his multiple operations. He and his team have spent many years becoming the experts in mining alluvial diamonds. As a result, they have a franchise; they are the best in the industry. They will have the lowest costs and highest production. When financial houses actually understand alluvial diamond production is very profitable Rockwell will be a must own stock for the funds similar to the mid-tier gold companies.
I expect monthly production of 4000 carats and higher to be achieved by the end of 2008. I think the figure of $2400 and higher per carat to be a perfectly reasonable figure. Readers can figure out for themselves cash flow and profit.
There are no major diamond mines coming on line in the next five years and as America's baby boomers move into the time of their lives where they have the most surplus funds for items such as diamonds and the savings from Chinese start hitting the market, we can expect to see the price of diamonds continue to increase regardless of what happens to the economic system. Dr Bristow has positioned Rockwell perfectly to match existing economic conditions.
Diamond and gold are the backbone of the wealth of South Africa. There is an excellent book on Amazon that pretty much explains the story behind the resources of South Africa from a historical point of view. It's called Diamonds, Gold, and War: The British, the Boers, and the Making of South Africa.
I picked it up at the airport in Johannesburg and read it on the way home. It's an excellent book and no matter what your attitude toward the issue of blacks and whites in South Africa, if you read the book, you will change your mind. It presents all points of view.
The level of crime in the country terrified me and I spent two years in combat. In 1998, the last year I could find numbers for, there were 6 murders per 100,000 in the US, no bastion of safety, and 59 per 100,000 in South Africa. It is far worse now. They had a murder rate ten times that of the United States ten years ago and the tension is much higher today.
As far as Rockwell is concerned, it's a good news, bad news story. The security industry is the biggest in the world; it's that dangerous. Rockwell has security issues but that would be true of any high value mining concern anywhere due to the high value of the product. But there is a very good side to the story and Rockwell understands it.
The assets owned by those leaving South Africa are being sold for pennies on the dollar. Homes and farms that would be $2 million in the US go for a tiny fraction. There are more alluvial projects available and Rockwell continues to assess projects with the view to aggressively grow its production profile. Once you have earned your spurs and learned how to mine alluvial diamonds, you can do it anywhere you find alluvial deposits, and there are many of these across Africa courtesy of the continents unusually large endowment in diamond and other minerals.
Rockwell is going to survive and thrive. They have a franchise and $50 million dollars worth of portable equipment. They can mine anywhere in Africa that offers opportunity. South Africa should be one of the richest countries in the world but when the diamonds run out there, other nearby countries can be mined as well.
Black Economic Empowerment or as is commonly referred to as BEE is the process by which companies are required to give sell at "Fair Market Value" 26% of their business to "Historically Disadvantaged Persons." (HDPs) It's a program not without controversy. Rockwell has a very strong partner who brings a lot to the table including cash to attain their 26% ownership in Rockwell.
Rockwell is not yet an advertiser but they may be. We don't own any shares in the company. It's a company with a large number of shares outstanding so I don't see it going down much or up much; it's more of a bond than a racehorse. I do expect the price to move up over time to perhaps a double or triple, it will assume charactics of a mid-tier gold project as the financial system gets more comfortable with the concept of mining alluvial diamonds.
Management is brilliant. They have a franchise and can expand to whatever number of projects management is comfortable with. They are looking at and picking up projects outside South Africa but will also continue to invest in the country as long as prices are as depressed as they are today. I really like the company and if you like the future of diamonds, I believe RDI is the top diamond company I can think of. Their numbers are solid and they work.
Rockwell Diamonds Inc
May 12, 2008