Latin carats in one basket

Vancouver — Subscribing to the philosophy “bigger is better,” emerging diamond producer Vaaldiam Resources (VAA-T, VAAFF-O) has announced plans to merge with Australian company Elkedra Diamonds (EDN-L, Edn-A), also a producer in Brazil, and Great Western Diamonds (GWD-V, GWSDF-O) in an all-stock transaction.

The proposed deal — a bid to consolidate three smaller-to-mid-tier companies to become South America’s top diamond producer — sees Vaaldiam offering 0.52 and 0.45 of a share, respectively, for each Elkedra and Great Western Diamond share.

Vaaldiam’s bid for Elkedra represents the issuance of 60.3 million Vaaldiam shares.

Under Australian regulations, Vaaldiam was only allowed to lock up one-fifth of Elkedra shareholders. President and CEO Ken Johnson says that 19% of shareholders are locked up, but that the bid is supported by half of Elkedra shareholders.

In its offer for Great Western Diamond, Vaaldiam would issue a total of 43.6 million shares and reports it has locked up 49% of Great Western shares.

Johnson says the combined company would aim to produce 50,000 carats of high-quality diamonds in 2007, increasing to a projected 200,000 carats in 2009 from Chapada, Elkedra’s operating mine, and Vaaldiam’s Duas Barras operation and Brauna kimberlite project. Pending a positive feasibility study, Brauna would be South America’s first kimberlite deposit to be brought into production.

Vaaldiam recently commissioned the Duas Barras diamond mine in Brazil’s Minas Gerais state and has recovered its first batch of stones from the alluvial operation. The mine is forecast to produce about 25,000 carats for the remainder of 2007 and then about 50,000 carats annually for several years.

Elkedra’s Chapada alluvial diamond operation is located in Mato Grosso state, about 80 km northeast of Cuiaba. Brought into production in mid-2006, the mine hit its design capacity early this year and has produced more than 20,000 carats of diamonds in its first year at an average sale value of US$393 per carat. Production is forecast at 25,000 carats this year and 36,000 carats in 2008.

Vaaldiam is planning a 5,000-tonne kimberlite bulk sample from its Brauna project, in Bahia state. Four diamondiferous kimberlite pipes on the project are associated with a kimberlite dyke system traced for over 15 km.

Vaaldiam also holds the Pimenta Bueno property, located in Rondonia, in western Brazil. Exploration has identified 38 kimberlite pipes with a mini-bulk sampling program planned this year on four diamondiferous kimberlites. Rio Tinto (rtp-n, rio-l) holds back-in rights for up to 60% on any kimberlite in the southern block of the project.

Located northwest of Vaaldiam’s 2,480-sq.-km Pimenta Bueno holdings is Great Western’s Rondonia diamond project. Of the eight identified kimberlites on the 8,300-sq.-km of diamond concessions, five are diamond bearing.

Additionally, Great Western Diamond has the Candle Lake project in Saskatchewan’s Fort la Corne region, where it is evaluating a pair of large kimberlite pipes known to host macrodiamonds.

If the merger goes through, Vaaldiam will own two producing mines outright that have a combined average value of production of US$300 per carat, well above the world average production of US$75 per carat, Johnson says.

“It also gives us a diversified project pipeline in terms of advanced-stage projects — we’ll have fifty-three kimberlite deposits, some of these at a very advanced stage of exploration,” he continues. “Our focus is going to remain in Brazil, where you have a very low-cost operating jurisdiction and a favourable operating climate where we can work twelve months out of the year.”

Assuming the deal goes through, current Vaaldiam shareholders will own 46% of the new Vaaldiam, Elkedra shareholders will have 31% and Great Western shareholders will hold about 23%.

The proposed new company will have significant production, a bolstered market capitalization (more than $160 million), a strong balance sheet (upon conversion of Elkedra’s debt to equity) with over $20 million in cash and a resource base of over 700,000 carats in the indicated and inferred class.

Vaaldiam shares notched up two pennies to close at 94 apiece following the announcement. Great Western Diamond remained even on the day at 41.5 per share, while Elkedra posted a 33% gain in Aussie-board trading to close up A11 at A44 per share.