A clear standout among mining juniors, Diamond Fields benefits from strong management, mineral exploration projects with excellent potential and a burgeoning, cash-flow-generating diamond mining business.

 

Located off the shores of the politically stable southwest African nation of Namibia, the company’s newly revitalized diamond mining operation warrants special attention. In particular, our interest stems from a recent joint venture agreement between the company and Samicor Mining Services Ltd., the mining arm of Israeli diamond magnate, Lev Leviev.  As well, Diamond Fields is an active explorer for diamonds elsewhere, as well as nickel, with several promising projects currently being evaluated.

 

With Samicor as a partner, Diamond Fields expects to resume diamond production as early as June from its Marshall Fork concession off the coast of the Namibian city of Luderitz. Operations are currently suspended, which we will discuss further on. This time around, the partnership will be utilizing a state-of-the-art  seabed crawler mining system (imagine a giant aquatic vacuum cleaner) that promises to significantly boost the company’s revenues.  According to the terms of the agreement, the two companies will equally divide the diamond revenues. However, Diamond Fields will pay less than half of the project operating costs, which will be capped at US $400,000 a month for Diamond Fields.  The initial joint venture agreement has a six-month term with Diamond Fields retaining the right to extend the contract for a further six months.

 

Moreover, there will be no such cap on the company’s diamond income which could be as much as US $9 million a year. Indeed, the new equipment has a proven track record that could see revenues grow by about 3 to 4 times what had been achieved in the past. Furthermore, expenses should increase by a more modest amount of about 1.5 to 2 times.

 

Marine diamonds remain a largely untapped resource, although the coastline of Namibia has long been recognized as a source of some of the highest quality gems in the world. For instance, the previous operator of the airlift seabed mining technology produced more than 200,000 carats in 1999 at an impressive average value of US $150 per carat. All told, a total of 400,000 carats at a gross value of over US $60 million were recovered with this technology from extensions to the Marshall Fork deposits in the neighbouring concession. These offshore diamonds are believed to have originated from land-based kimberlite pipes that have long since been eroded away, with the diamonds gradually being transported to the shallow waters of the Atlantic Ocean by ancient rivers.

 

Needless to say, the erosion and transportation of the diamonds were long, gruelling processes that took their toll on many of the stones. Heavily flawed, poorer-quality diamonds are typically weaker than the most desirable gems. That resulted in the bulk of the industrial stones being destroyed, leaving behind an unusually high proportion (approximately 95%) of gem-quality diamonds lying in the upper layers of sand and gravels along the shoreline and in shallow waters. Although no one knows for certain, scientific estimates calculate that up to 1.5 billion carats of gem quality diamonds may have been transported to the ocean by the African river systems from highly eroded onshore kimberlite pipes. 

 

Indeed, prior to commencing production in 2001, Diamond Fields successfully completed feasibility studies on its Namibian marine projects in the two previous years. A conservative resource base of 1.1 million carats was calculated for the company’s 71,600 hectares (176,900 acres) marine diamond project.

 

Notably, the western leg of the offshore Marshall Fork diamond “fields” have consistently delivered much better grades than those projected by the feasibility study.  In fact, the recorded diamond recoveries to date have been nearly 2.5 times higher than the feasibility study estimate. The study indicated a diamond content of 1.01 carats per square metre but the concession has averaged 2.45 carats per square metre over the past three years.

 

In addition, the Namibian project also offers considerable “blue sky” potential in that better-than-expected diamond recovery rates likely extend to other parts of the company’s licences that have similar geology. Consequently, these nearby reef areas, where highly prospective deposits have already been identified, offer enough untapped potential to build upon the company’s resource base and make Diamond Fields a significant marine diamond producer for many years to come.  

 

With more diamonds than had been previously expected, Diamond Fields expects to be profitable on its seabed diamond operations in the near-term. In the past, the overall potential of the project was far from fully exploited and operating costs consumed much of the US $9 million in diamond revenues to date. This is particularly the case since the company was formerly relying on less efficient technology than it now has at its disposal.

 

In this regard, the joint venture deal between Diamond Fields and Samicor should improve Diamond Fields’ bottom line significantly. The two companies have initially agreed to carry out marine mining operations on the ML111 licence (which hosts the Marshall Fork deposits) using Samicor’s chartered vessel, the MV Kovambo. The 3,300-ton ship is effectively a fully equipped diamond plant, equipped with an upgraded seabed diamond scouring system, known as the SeaBed Crawler, and fully integrated and secured diamond processing and final recovery plant, which was developed at a cost of about US $30 million. 

 

The SeaBed Crawler is a third-generation system that has already been proven in action on  the concession immediately adjacent to ML111 and other offshore licences. The system was used by Namibian Minerals Corporation starting in 1998, and it produced over 400,000 carats of diamonds, worth an estimated US $60-million in the subsequent years. Namibian Minerals’ annual production peaked in 1999 in excess of 200,000 carats. That haul included a record-setting day when the system produced 16,271 carats, with an estimated value of about US $2.5 million.

 

Over the longer term, the SeaBed Crawler has proven its ability to produce diamonds at a rate of up to 15,000 to 25,000 carats per month. By comparison, Diamond Fields’ older system was only managing to extract about 3,000 to 3,500 carats per month from the offshore concession.

 

SmallCapMedia therefore expects Diamond Fields to realize far greater profits through its joint venture with Samicor. The company’s 50% share of the diamonds should be between 7,000 and 10,000 carats a month. Again, this figure should be approximately triple what the company’s older system had delivered. Furthermore, these monthly diamond recoveries are expected to generate revenues of between US $1.0 million and $1.5 million while Diamond Fields’ offshore operating costs should be between one-third and one-half of that sum regardless of any unforeseen cost overruns or adverse currency fluctuations.

 

That cost protection removes much of the risk that has plagued African diamond producers of late, as the surging South African rand has inflated operating costs and damaged the bottom line of many African operators over the past few years. Diamond Fields was among those experiencing difficulties. Early this year, the company suspended its marine mining operation, which had been using older equipment installed on the much smaller vessel, the MV Anya. Significantly, the high-quality system aboard the MV Kovambo should now keep the project profitable in the current environment.

 

A shrewdly managed company, Diamond Fields also believes in being at the frontier of mineral exploration in areas that are geologically attractive and that have recently become more politically stable. This led the company to obtaining several prospective exploration properties on the island of Madagascar off the south east coast of Africa. Here, the company staked a massive land position totalling approximately 6 million acres in the south of the country. The Horombre Property was obtained after alluvial sapphire miners found a huge 23-carat diamond and another similarly impressively sized 8-carat diamond. The property was staked as a key property in the company’s search for the source of these two diamonds. Generative exploration is ongoing for kimberlite pipes in this area that is geologically similar to Southern Africa which contains some of the best diamond resources in the world. 

 

Diamond Fields also understands the value of diversification.  Another of the Madagascar prospects involves the option to acquire a 100% interest in the Valozoro laterite nickel project, situated in the south central part of Madagascar. The world’s fourth largest island is geologically fertile but has historically seen very little exploration due to the 30-year rule of a previously Marxist government which has since been replaced by a democratically elected capitalist government. Hence, Madagascar and deposits like the Valozoro Deposit have been largely overlooked since the 1950s. That was when Madagascar was subjected to an extensive prospecting program, which resulted in the identification of an estimated resource at Valozoro of 3.7 million tonnes of historical resource, having a grade of 1.75% nickel, or about 65,000 tonnes of contained nickel.

 

The agreement gave Diamond Fields a three-month period to conduct its due diligence investigation, with an option that would extend that period by a further five months. Diamond Fields is using the time to assess the nature and extent of the lateritic nickel deposit, including further exploration in and around the immediate vicinity of the existing deposit.

 

Diamond Fields completed reconnaissance sampling earlier this year, collecting chip and channel samples at 18 of the nearly 500 pits that had been excavated during the work program of the 1950s. As well, the mineralization was sampled in road cuts, and another 170 of the old pits were located and logged for depth.

 

The work proved very encouraging. Sampling of the upper portions in ten of the pits returned grades of between 0.61% and 1.77% nickel over thicknesses of four to six metres, while testing of the lower part of the deposit produced intervals with a nickel content that varied between 3.5% and 5.9% in three of the pits. As well, the road cut exposures produced values as high as 8.56% nickel in the lower horizon.

 

The hunt for significant nickel discovery will extend beyond the bounds of the currently defined deposit as the company also has a number of other nickel exploration licenses in Madagascar. Readers should note that Diamond Fields’ founders already have one of the world’s largest nickel discoveries to their credit (as we will discuss further on.)

 

Like Madagascar, another early-stage diamond project is being advanced in the diamond-rich West African nation of Sierra Leone (which is no longer a political “hot spot”, thanks to the actions of the United Nations.) The company is active in a geologically very fertile part of Africa, as illustrated by the celebrated discovery there in 1972 of one of the world’s largest and most awe-inspiring diamonds (known as the “Star of Sierra Leone,” it totals 970 carats in size.) Diamond Fields also benefits from being one of the earlier North American exploration companies to select what it believes to be highly-regarded diamond concessions after the end of the nation’s recent civil war.

 

Most recently, Diamond Fields has again carried on its tradition of being an early mover in geologically rich countries that are coming out of difficult political times by moving into the recently stabilized neighbour of Sierra Leone, namely Liberia.  Here, the company has selected large diamond and gold concessions which show promise by way of the presence of significant numbers of artisanal workings in the area.

 

Diamond Fields also has another very promising high-grade nickel project, off the south-eastern coast of Greenland on Ammassalik Island, through an agreement that was signed last summer. The option agreement will entitle the company to earn an 80% interest in what is primarily an expansive nickel prospect in an area covering 137,500 acres that bears some geological similarity to Inco Ltd.'s famous Thompson Nickel belt in Manitoba, Canada.  

 

The company’s exploration team in Greenland is being led by Anders Lie, who was responsible for the initial discovery of nickel and other metals on the property. To date, a systematic chip sampling program of weathered outcrop yielded an average of 1.0% nickel and 0.3% copper. Additionally, the samples contained a combined total of 0.4 grams per tonne of gold, platinum and palladium values, as well as 2.4 grams per tonne of silver, and 553 grams per tonne of cobalt.

 

That mineralization was traced for over 90 metres along strike, and over widths that varied between one and eight metres, covering a total of 440 square metres. Furthermore, the company’s initial fieldwork has traced nickel-bearing boulders for a distance of over nine kilometres along the strike length with an additional boulder found four kilometres across strike. This would indicate that a second parallel mineralized horizon is present.

 

The strike length of the most prospective horizon has now been extended to about 40 kilometres after the final results of the 2003 field program. Therefore, Diamond Fields plans a busy year on the project, starting in May. The company is expected to begin by conducting a geophysical survey over the property, looking for concentrations of massive sulphides. Those areas will then be checked in further detail, and a drill program could follow at the end of the summer season.

 

Diamond Fields has added a new nickel project to its portfolio, this time in Norway. The Ogna project consists of two concessions near the Homse Deposit, with grades of 1.06% nickel and 1.20% copper. Past drill holes in the Bjorndalsnipa Project showed significant grades and mineralization. A subsequent geophysical survey undertaken in 1998 showed that the drill holes just grazed the edge of the anomaly and were drilled down dip. Diamond Fields’ drill program, scheduled to commence in late May 2004, is expected to determine the extent of the mineralization by drilling directly into the interpreted anomaly.

 

The company will also be working on the nearby Gulldragsvatn Property, which hosts a target representing a potentially major accumulation of nickel and copper and titanium sulphides. The anomaly extends for about 800 metres along strike corresponding with a goethite gossan that extends 1,800 metres. Drilling by Diamond Fields will attempt to identify a mineralized source for the target.

 

All of the key Diamond Fields deals have occurred over the past year since Gregg Sedun took over as president and chief executive officer of the company.  Mr. Sedun has been on the board of the company since 2002 but his experience with Namibia and nickel goes back much further as he was also a founding director of Diamond Fields Resources (which prior to its Voisey’s Bay discovery was active in Namibia.) A corporate finance and mining lawyer by profession, Mr. Sedun has also been a principal of Pacific Source Capital Ltd., a venture capital firm, since 1997.

 

Indeed, strong management is nearly always the key to success in the mineral exploration and development business. And, Diamond Fields has an impeccable pedigree. Its management and leading shareholders include the principals of the company’s predecessor, Diamond Fields Resources. This former mining junior made global headlines in the mid 1990s with its discovery of one of the world’s greatest mineral finds. Located in the Voisey’s Bay area of Labrador in Newfoundland, this epic nickel find was subsequently sold in 1996 to the nickel mining giant, Inco Ltd., for CDN $4.3 billion.

 

The takeover by Inco provided a tremendous windfall to investors of the original Diamond Fields. SmallCapMedia believes that the new incarnation of this celebrated mining company also offers investors considerable upside potential, particularly in the form of its exceptional management and exploration team.

 

Jean Boulle was the principal founder of the original Diamond Fields after a career in the diamond industry with the likes of the diamond mining and marketing giant, De Beers. He is also the largest shareholder (with a controlling position) in the current incarnation of Diamond Fields. In addition, Mr. Ed. Mercaldo, the former C.F.O. and Director of Diamond Fields Resources, played a major role in the sale to Inco, and now has returned to the company as a Senior Advisor to the Board of Directors.

 

 In addition, Diamond Fields International has a highly respected name in the global mining industry on its Board of Directors. Formerly a chief executive of the venerable Gold and Minerals Group of Rio Tinto PLC (one of the world’s largest mining companies), as well as Rio Tinto’s worldwide head of exploration, John Collier, brings his extensive background and knowledge base to Diamond Fields’ Board. His highly successful career has produced a number of world-class mines, including the prolific Argyle Diamond Mine in Australia.

 

It should also be mentioned that Mr. Ken Hecker, MBA, M.Sc. (Geol.), has recently joined the company as C.O.O. and C.F.O. after a very successful 25-year career in senior business development positions with major mining companies.

 

All told, the company’s management team boasts an impressive roster of talent that can be viewed in detail at the company’s web site: http://www.diamondfields.com/. For the sake of brevity, SmallCapMedia will just note the fact that they have close to 200 combined years of experience in various areas of mining related businesses.

 

The combination of highly accomplished and talented management and top-calibre projects has made it possible for Diamond Fields to raise a significant amount of exploration funds. The company completed a CDN $8.1-million private placement late last year at CDN. $0.60 per unit -- a more than adequate sum to fund all of its exploration and developmental projects during 2004. Notably, senior management has also participated in this financing.

 

On a technical note, the company has approximately 67 million shares outstanding (85 million fully diluted.) The company’s shares have drifted in a CDN $0.75-$0.50 price band for much of this year, mainly due to the several-month-long interruption in the company’s diamond production. However, the near-term revitalization of diamond production, at a projected rate of between 15,000 and 20,000 carats a month (translating into a return of between 7,500 and 10,000 carats for Diamond Fields, versus about 3,000 carats a month previously) should precipitate higher share price valuations in the coming months. Additionally, the advent of nickel trading near 15-year highs means that the company’s progress on several exploration fronts will be watched with keen interest by the investment community.

 

In summation, SmallCapMedia believes that Diamond Fields International represents an excellent balance between risk and reward. This is particularly the case since the company should be able to finance much of its exploration activity with meaningful cash flow from its diamond production. Accordingly, SmallCapMedia is of the opinion that the improvements in Diamond Fields’ fundamental picture will soon fuel the upward trajectory of its share price through 2004 and well beyond.