Elkedra dazzles with 33.44 carat

Australias Elkedra Diamonds (EDN-A, AIM-L) has recovered the largest diamond ever at its 100%-owned Chapada mine in Brazil a 33.44 carat stone that recently sold for US$100,320, or US$3,000 per carat.

Depending on the way you look at it, the discovery could be good or bad news for Canadas Vaaldiam Resources (VAA-T), which made an offer to acquire Elkedra and its Chapada mine in July. Elkedra shareholders will vote on the proposed merger on Oct. 29.

Vaaldiam said it would issue 0.52 of a Vaaldiam share for each Elkedra share.

At the time of the offer, the terms valued Elkedra at A50 per share, a 60% premium to the trading share price on the Australian Stock Exchange and the London Stock Exchange.

Bob Yeoman, Vaaldiams chief financial officer, told The Northern Miner that the discovery would have absolutely no impact on whether Elkedra shareholders will support the merger or not.

Yeoman said Elkedra shareholders feel very positive about the deal because the directors of Elkedra are supporting the merger and close to 20% of the shareholders have already committed to supporting it.

An independent expert retained by Elkedra to look over thescheme of arrangement felt that it was a fair offer that we were making so we dont see this discovery of the stone as affecting the proposed transaction in any way, Yeoman added.

If the merger is approved, Elkedra would become Vaaldiams wholly-owned subsidiary and would be de-listed from the Australian Stock Exchange and the London Stock Exchange on November 8.

By consolidating their resources, a merger of the two companies would make Vaaldiam a leading diamond producer in South America, the company said in a statement.

Indeed if the two miners combine forces, production from Chapada in Brazils Grosso state and Vaaldiams own Duas Barras mine in Brazils Minas Gerais state, would total about 50,000 carats this year. That number would jump to more than 80,000 carats of annual production starting in 2008, the company said in a press release.

In a Scheme Booklet distributed to shareholders last month, Elkedras directors claim the merger would be beneficial in a number of ways. Among other things it would enhance the new entitys ability to raise debt and equity capital, score cost savings through synergies, build a stronger management team, raise the companys market sentiment and profile, as well as acquire a broader geographic spread of investors.

Over the past two months, Vaaldiam and Elkedras management already have begun to try to find ways of cutting costs and improving efficiencies at Chapada.

The two companies are reviewing the mines diamond recovery plant to see whether they can boost production throughput and diamond recoveries.

Other tests are being undertaken to quantify the gold content of the diamond- bearing gravel at Chapada to see whether recovering fine free gold would be economic.

Vaaldiam says recovering fine free gold at its own Duas Barras mine is an important contributor to cash flow.

We have more than US$1 million in fine free gold on an annual basis, noted Yeoman. Theres very little incremental cost because you are recovering the ore anyway.

Since Chapada started production in July 2006, it has produced 27 diamonds with sizes of between 7 and 33 carats and sales values of more than US$2,500 per carat. Five of the 27 diamonds have been sold for more than US$4,000 per carat.

In total the mine has produced 25,697.98 carats of diamonds at an average sales value of US$391.07 per carat.

The 33.44-carat diamond announced today was part of a parcel of 2,534 diamonds weighing 1,530.70 carats. The parcel included three other large stones weighing 22.77, 16.41 and 14.39 carats.

The four stones were sold for a total of US$181,849 or US$2,091 per carat.

Chapada currently sells all of its diamonds to Leviev Diamond Group, a diamond cutter and polisher. Leviev is also a retailer of high-end diamond jewellery in New York and London.

In Toronto, shares of Vaaldiam fell 1 to 78 on a trading volume of 29,500. In Australia, Elkedra shares closed at A32 apiece on a trading volume of 202,157.