Rockwell Diamonds goes big

SITE VISIT

KIMBERLEY, SOUTH AFRICA–In the heat of the South African sun, a massive earth-moving exercise is in progress. A PC3000, one of the largest and most powerful excavators available, bashes through a hard layer of calcrete to expose the gravel below. Diggers with 80-tonne buckets scoop the gravel into haulers that carry it to a processing plant.

Every month these massive machines, at work on three properties, move some 550,000 tonnes of gravel, not including stripping work. And what is it these giant labourers seek? Diamonds. Small, sparkly gems mixed into the rock matrix. Production from this month of work, from that 550,000 tonnes of gravel, fits into the palm of your hand.

But each carat is worth something like US$2,000.

And so it goes in the world of alluvial diamond mining. It’s a sifting-and- sorting exercise that has been going on for years in South Africa but Rockwell Diamonds (RDI-T, RDIAF-O) is taking it to the next step, using scale to make it profitable to search for a needle in a haystack.

The Vancouver-based company runs three alluvial diamond operations and is working hard to increase that number. The three currently in action are all in western South Africa, near the historical diamond mining town of Kimberley. Wouterspan is on the banks of the Middle Orange River, 145 km southwest of Kimberley, and the adjacent Holpan and Klipdam operations sit just 50 km northwest of the town, in the district of Barkley West.

At Wouterspan, Rockwell has outlined 77 million tonnes of prospective gravel with an average grade of 0.3 carat per 100 tonnes. Wouterspan produces more large diamonds than the other two operations — the average price for Wouterspan diamonds over 2007 was US$2,146 per carat.

Holpan and Klipdam host 20 million tonnes of gravel grading 0.45 carat per 100 tonnes, though Rockwell is currently drilling to expand that. The average Holpan-Klipdam diamond garnered US$1,217 per carat.

And Rockwell has almost completed the acquisition process for the Middle Orange River properties, a group of properties just across the river from Wouterspan that the company is purchasing from the Johannesburg- listed company Trans Hex (TSX-J). At Middle Orange, 86 million tonnes of gravel sits in the ground, averaging 0.43 carat per 100 tonnes. The site was last in operation in 2005; at that time its diamonds brought in an average of US$1,400 per carat.

People have been digging for alluvial diamonds along the Middle Orange River and in Barkley West since the 1870s. A boy playing on the banks of the Orange River found an interesting pebble and kept it as a favourite plaything, until a visitor realized the boy was playing with a 21-carat diamond. A few years later, an 84-carat stone was found on a hill near the river and the South African diamond rush began.

Miners arrived by the thousands, the hill became a hole, and the town of New Rush was born. Five massive holes were dug around Kimberley, as New Rush was renamed, the biggest of them reaching a depth of 240 metres. The Big Hole produced almost 3 tonnes or 13.6 million carats of diamonds. It was during this diamond rush that Cecil Rhodes founded De Beers.

The diamond rush around Kimberley focused on diamonds contained in kimberlite pipes. Today, those pipes are exhausted and the remaining diamond deposits in the area are alluvial, meaning the diamonds were transported by water from eroded kimberlite pipes. The kimberlite source is thought to be pipes in Lesotho, some 1,000 km away. Travelling such a long distance is hard on a diamond; poorquality stones, perhaps stones with fractures or inclusions, get shattered along the way and simply don’t make it. That explains why Rockwell has such success finding large, high-quality stones.

“That’s where we have an advantage,” says John Bristow, Rockwell’s president and CEO. “This area is known for large, quality gemstones, and our ability to recover those large stones on a regular basis is where we will find success.”

The current dynamics of the diamond market suggest Bristow is right. According to diamond expert Chiam Even-Zohar, principal of Tacy Diamond Industry Consultants and author of a recent book on the industry called From Mine to Mistress, prices for small goods will remain difficult to predict for some time because of a supply stockpile. That is not true, however, for highvalue stones.

“We’re seeing tremendous price increases for larger-carat goods,” he says.

A price analysis and forecast by Ken Gassman, an analyst with the International Diamond Exchange, confirms Even-Zohar’s predictions for large stones. In February 2008, compared with the previous year, all keydiamond sizes showed a price increase. The price increase for smaller stones — 2 carats and below — was modest, ranging from 1.3-5.8%. For 3-carat stones, prices rose 30.2%, for 4-carat diamonds, prices increased by 51.6%, and for 5-carat stones, prices gained 57.9%.

Since the diamond market follows the U. S. economy fairly closely, Gassman concluded it is unlikely that diamond prices will increase in 2008 as much as in 2007, but he still foresees price increases. And the limited supply of larger-carat goods, compared with those in the smaller categories, means price increases will continue to be greater for larger stones.

You need look no further than Rockwell’s monthly diamond tender to see proof of the value in large stones. Rockwell produces 2,000 to 2,500 carats per month from its combined operations. The company sells a month’s production at a time, which gives a good picture of production numbers and values. For example, in its November diamond tender, the company offered 2,483.3 carats for sale. The package included 27 stones that were more than 10 carats in size: 21 stones between 10 and 20 carats, four stones between 20 and 30 carats, one stone between 30 and 40 carats, and one 49.7-carat sparkler.

Rockwell pulled in US$4.99 million for the bunch, which averages out to US$2,011 per carat. Special to that tender was a rare 7.28-carat flawless pink diamond recovered from Holpan. That diamond alone brought in US$1.05 million, or a mind-boggling US$145,000 per carat.

But added income from a large stone is not uncommon for Rockwell — every tender seems to include one or two big, valuable stones. That is why Rockwell averaged US$1,656 per carat in 2007, one of the highest per-carat averages in the world for a diamond miner, if not the highest. Prices in 2008 have, so far, been better.

To pull a little more value from those large stones, Rockwell recently entered into an agreement with the cutting and polishing giant Steinmetz Diamond. Rockwell sells certain large, high-quality stones to Steinmetz. Steinmetz cuts, polishes, and sells the stones and, aside from a marketing fee on the order of 3%, Rockwell and Steinmetz spilt the net profit.

Processing

To find diamondiferous gravels, you have to follow the movement of water. That either means searching in the vicinity of a current river or figuring out where a river used to run and looking there. In either case, as a river slowly erodes its way deeper into the terrain it leaves behind terraces — level areas that, like rings on a tree, show where the banks of the river used to be.

The higher the terrace, the older the deposit and therefore the better the diamond grade — heavy stones like diamonds like to settle down and stay in one spot, so the longer a deposit has been left untouched by water, the more diamonds it will contain. That explains why Rockwell’s operations aren’t as close to the river as one might expect.

To locate those higher terraces or figure out where a river used to run requires a combination of geology expertise and terrain knowledge. For Rockwell, Hennie van Wyk helps considerably on that front. Several generations of van Wyks have made their fortunes digging for diamonds in the Kimberley area; to continue the tradition, but on a s
lightly larger scale, Hennie founded H C Van Wyk Diamonds and Klipdam Diamond Mining in the mid-1990s.

Van Wyk, an engineer by training, scaled up operations on his claims to the best of his ability but realized he needed a partner with better access to capital to fully realize his dream. That was when a friendship with Bristow turned serious, and in 2006, Rockwell acquired a 74% interest in van Wyk’s businesses. The remaining 26% is being acquired by Rockwell’s black economic empowerment partner, Africa Vanguard Resources.

Van Wyk essentially grew up digging gravels in the Holpan-Klipdam area and knows the projects inside and out. He also knows the plants inside and out because he designed large sections of them and directs their care and maintenance. Also a helicopter pilot, van Wyk sometimes takes a chopper high into the sky to try and determine where rivers used to run.

Small-scale miners, who lack that big-picture direction, usually work gravels close to a river. Moreover, they only work the top layer of gravel, known as the Rooikoppie gravel, which is usually 50 cm to 1 metre thick. In fact, over much of Rockwell’s claims, the Rooikoppie gravels have already been worked through at least once.

The catch is that below that initial gravel layer lies a thick, hard layer of calcrete. The calcrete layer is impenetrable to shovels but Rockwell, using its machining power to its advantage, can get past what hand-powered diggers could not. Breaking through the layer requires drilling and blasting, but below sits a gravel package much thicker than the Rooikoppie layer on top.

In fact there are two gravel layers in the package, known as the upper gravels and the basal gravels. The package rests on bedrock.

Compared with the complicated metallurgical processes needed to extract metals from ore, sorting diamonds from gravel is simple. Massive machines dig up the diamondbearing gravels right down to the bedrock and transport them to a bin. The bin dumps loads onto a trommel screen that only allows through rocks that are 70 mm or smaller. Larger-diameter rocks are sent to the backfill pile.

At Wouterspan, the gravels contain significant amounts of banded iron, which is a problem because iron-laden rocks and diamonds have similar densities. The solution is simple: the gravel is passed underneath a magnetic belt that pulls ironrich rocks out of the mix.

The iron-free rocks are scrubbed in a rolling cylinder then screened again. This time only rocks ranging from 2-30 mm are allowed through. This smaller feed is sent to the rotary pan plant; the larger rocks are stockpiled. Rockwell is planning to build a processing facility for the larger stones; as Rockwell’s manager of metallurgy Deon Vermuelen put it, for now the biggest diamonds on the property are being “thrown away.”

A rotary pan plant sorts diamonds from other, less-dense rocks based on gravity. At Wouterspan, there are 12 round tubs, each containing a rotating paddle anchored in the middle of the tub. The tub is filled with water mixed with sizesorted gravel feed. In sweeping around and around the tub, the paddle creates a standing wave; within that wave, centifugal force pushes heavier items to the outside while lighter rocks stay in the middle.

Thus the diamond concentrate falls off the outside of the tub while the gravel waste falls through a hole in the middle. The concentrate is then fed into an X-ray sorter. Diamonds fluoresce when hit with Xrays; when an X-ray sorter detects fluorescence a trap door opens and the fluorescing item, plus some surrounding gravel, falls into a bin.

Since X-ray sorting fails to catch 100% of the diamonds in gravel feed, the X-ray waste is run over a grease table. Diamonds are hydrophobic, which means they hate water and love grease. Gravel, on the other hand, is hydrophilic, or water-loving. As such, when a diamond-gravel mixture is poured over a table covered in grease, the diamonds stick and the gravel doesn’t.

As for the concentrate from the X-ray tables, the next stage is hand sorting. At Holpan and Klipdam the final sort is “hands free,” meaning the sorting table is encased and the sorter puts his hands into gloves attached to the table walls, picking out diamonds without ever touching them. Rockwell is currently building a similar room for its Wouterspan operation.

Each diamond is weighed and tagged, after which point it is insured. Diamonds are picked up on a weekly basis but helicopters come in and out of the operations several times a week so no one knows when the diamonds will be moved.

In terms of ease and cost, alluvial diamond mining is always going to win out over kimberlite operations. To extract diamonds from a kimberlite pipe requires a fixed mill with large-scale crushers and grinders to break the hard rocks down into gravel. To develop such an operation takes 18 to 24 months and usually costs in the range of $150 million. And to operate the mine is expensive as well, usually costing US$10-15 per tonne.

The processing plant needed for an alluvial operation, on the other hand, is relatively small, mobile, and inexpensive: the capital cost to get an alluvial operation up and running sits around $25 million and it can be accomplished in six months. Once the plant is running, processing a tonne of ore costs around US$3.

As for the complication of working in a country unable to provide a secure supply of power, Rockwell has taken steps to ameliorate that impact. The company has installed back-up diesel generator-sets at the front ends of all of its screening plants. The screening plants’ capacity, in turn, have been doubled so as to maintain large stockpiles; if a power outage forces the screening plants to shut down, the company can continue to run its treatment plants with stockpile feed.

To silver-line a negative turn of events, Rockwell used its forced downtime at Wouterspan to perform maintenance on all parts of the operation. And four large backup generators are on their way; when installed, each will be able to run an operation in the event of a power outage. The generators are expected to arrive in May, at a cost of $1.5 million.

Rockwell’s processing costs increased to US$4.21 per tonne during the second quarter of the 2008 financial year from US$2.97 in the first quarter. The company attributes the increase to losses from putting the trial-stage Makoenskloof project on care and maintenance and to costs stemming from the power shortages. Costs are expected to fall back closer to US$3 per tonne, with roughly half of that cost driven by fuel and maintenance.

What lies ahead

Bristow and his team are focused on growth. The soon-to-be-completed Middle Orange River project acquisition includes the Saxendrift and Niewejaarskraal mines, now on care and maintenance. The plan at Trans Hex is to have five to six mining operations under way by the end of 2011, with projected production from 1.95 million tonnes of gravel per month. The low cost and small scale of each alluvial operation means that developing that many mines in three years is a real possibility.

The property doubles Rockwell’s resource base and, even with the conservative grade estimate of 0.45 carat per hundred tonnes, holds an in situ value of over US$1 billion. Those are two strong incentives to get going as soon as possible. The final step in the acquisition is approval from the minister of mines, which is still pending.

Rockwell is also busy assessing the Kwango River alluvial diamond project in the Democratic Republic of the Congo. That property extends along 60 km of river frontage that, like the Kimberley area, is already home to small-scale alluvial miners.

And in South Africa, Rockwell was recently awarded six new prospecting permits. Work there has not yet begun.