Firestone Diamonds, the newest diamond miner in the Kingdom of Lesotho, is holding its maiden tender of diamonds from their Liqhobong Mine (Firestone 75%, Lesotho 25%) in Antwerp this week. It was the perfect occasion to catch up with Firestone CEO Stuart Brown in the offices of First Element, the tender house hosting the sale. The former CEO and CFO of De Beers Group of Companies sat down with The Diamond Loupe to discuss the initial tender, the creation of a new mine in the mountains of Lesotho, Firestone’s expectations for its mine and the rough diamond market.
The Diamond Loupe: You joined Firestone Diamonds in 2013 after nearly 20 years at De Beers, and you left the mining giant as its acting CEO. What drove you to go all the way back and get new mine off the ground?
Stuart Brown: Well, first I spent two years ‘gardening’* after leaving De Beers and then joined Firestone in September 2013. It was a good two-year break to refresh the batteries and really affirm my passion and belief in diamonds. After I left De Beers, I did not envision going back into the diamond industry. I had left the top job and was basically semi-retired. But after two years away you realize how much you know, how much you like the product. The Firestone opportunity was like all things in life … good timing. I was not planning on it or seeking a new opportunity. It just seemed like too good of project to miss out on.
In a small company like ours, you go from start to finish: from raising the money, building the mine and bringing it into production, and then bringing the diamonds to market, which is what we are doing this week. It has been a fantastic journey. It also provides a huge sense of accomplishment, and of course it is a great challenge. The team and I are very excited, and I think we have been vindicated with our delivery of what we said we were going to do, on time and on budget.
DL: This week, you are having your first real tender here in Antwerp. What are your expectations, and why Antwerp?
SB: We are quite pleased with our good qualities, and our nice fancy yellow color goods. We hope there will be strong interest in them. We are bringing probably 70,000 carats to market, and for us that is the first step in our 15-year road. We are not banking on everything having to be a success in this sale, and will not consider a lesser result a failure. We have a long road ahead of us. We just hope to have a good tender. I have no expectations. I cannot give you dollar per carat estimate because we are still looking at the goods and I do not want to set expectations and then have people bid around that. But we have some really nice production, and I am not holding goods back in an attempt to second-guess the market.
Our plan has always been to bring the goods here and do the final assortment here, because Antwerp offers us the best access to the market. We are anticipating at least 60 businesses to look at our goods, and it will probably be well beyond that. Let’s just say that 60 opinions on what something is worth are much better than one opinion. So we are happy to follow the tender process. We will have made sure the diamonds are in their best possible condition to be looked at, and will try to show them to as many people as possible. We want to get the best possible price for us, our partners and for the government, to make sure we get the best value back.
When you talk about Antwerp it is really the critical mass that makes the difference. It is such a small area, and this is a most intensive period. Everyone will be here. We have had tremendous interest in our product and the diamond exchange here has helped us tremendously with that. We have a solid reputation for these goods. People have seen our production before and are keen to see what it is going to deliver now, when it will be in even better condition. So it comes down to the volume of goods and the knowledge that is centered here in Antwerp. The Lesotho government gives us complete flexibility to sell our goods anywhere in the world. It is not that we are restricted to Antwerp, but we think this is a good place to start, given our history here and our knowledge of it.
Building a diamond mine from scratch
DL: Taking a step back from this week’s event … Firestone acquired the Liqhobong Mine in 2010 and in 2014 you announced you were going to get it up and running in two years, and you did. That’s a narrow timeframe. Tell us how you went from ground zero to market on schedule.
SB: Well, we were a little bit late. It was a two-year construct and build. Then we had quite a lot of bad weather early on when we were moving all the earth. It was literally an earth-moving operation for the first 12 months. That set us back a bit, but like all things in life you just have to get on with it. We announced about a six-month delay, targeting the end of Q4 2016, and then we came in at the beginning of Q3. We are happy we brought it in ahead of time under the revised schedule, and we certainly brought it in well ahead of budget.
We acquired this project from Kopane Diamond Developments in a reverse takeover in 2010. In fact, this project has come along since the mid-1950s, from discovery to actual build, but it only started as a real diamond project in 2010. We had to do everything from scratch. This is a brand-new mine. We had an existing plant, accommodations, some little houses. But everything we have designed is brand new. It is state of the art, the best built for-purpose mine in the environment. It may not be a Rolls-Royce fit, but it is of very good quality, is built to last, fit for purpose and easy to use.
DL: Did the mountainous environment present any particular challenges?
SL: Yes, it did. We are up in the Lesotho highlands in the northeast of the country. We are in close proximity – when I say close, I mean in the same relative area – to Letšeng and KAO. If you are going to go and find diamonds in Lesotho, that’s the area where you are going to go looking. We are situated about 2,700 meters above sea level and it is very mountainous: lots of mountain passes to go over, come down, go over, and come down to get to us. We are in the valley, just beneath the top of the mountain.
We get quite contrasting weather. In summer we do not get extreme heat, but we get extreme variations of rain. You can get thunderstorms that dump 50mm on you in an hour, and that is a lot of water to deal with in one go. In winter you can have extreme -15 degrees with snow sitting on the ground. So you have to build your mine with all that in mind, and you have to build your mine through all that weather.
And like I said, we had to do everything. We had to bring the power line from the bottom of the valley to the top – we funded that. We had to build a whole new road. We have had to maintain the roads. They are dirt roads. The Infrastructure in the country is of very low value. We get good deal of support from government, but it is not a very large economy.
Large stone upside, Firestone’s raison d’ȇtre
DL: Building a mine under those conditions must give investors pause, but your neighbors – particularly Gem Diamonds – are famous for recovering high-quality large stones. Did that play a role in attracting funding?
SB: We never over-sold it. We simply stated what is available, why we believe it is there and why our team is capable of delivering it. That has been our mantra right through the project. We put the facts on the table and have spoken to the facts. We will tell investors about the fancy stones we have there and the large-stone potential, but the economics are all based on what we regard as run-of-mine, guaranteed production … as far as one can guarantee anything in the diamond industry in terms of mining. It is always somewhat mysterious as to exactly where these stones are hiding, but we have a fairly good idea.
DL: So you obtained financing through projections as a traditional mine, but there is upside for more.
SB: Exactly. Firestone completed the feasibility study in 2012. We revaluated the feasibility study once I joined, which means I had another look at it. We did not change anything radically because we had done so much work; it was more a pricing and a timing issue. We completed our financing by the end of March, ageing about 10 years in the process, and signed off on a $225 million funding package between bank debt, private equity and public debt from shareholders that had supported the company and new shareholders that were attracted. We did not select the timing. We just started and kept going until we finished. The fact that the market was open when we entered it happened to be in our favor.
Our mine consists of two ore bodies: the satellite ore body and the main ore body. Artisanal diggers and then two companies mined the satellite body for many years. It had much higher grade but much lower quality. It did not really make any money, and those companies ran out of funds, so it was not regarded as a very interesting asset. The real value and benefit to this whole project is the development of the main ore body, which is about 8.6 hectares. We drilled and sampled and did all the geological work to get an understanding of it. We know the grade, and we know the theoretical value based on the samples we have taken. We performed trial mining for a period of 20-odd months, put just over a million tons through and got out about 320,000 carats.
So we had a huge amount of knowledge of the diamonds: we had a range of low-quality, low-color stones to high-quality, high-color larger stones, including a high incidence of fancy yellow stones. The pilot plant had a primary crusher gap of 20mm, so initially we broke most of our large stone production. In fact we broke all of it. We estimate there were 10 stones that we did severe damage to and destroyed a good amount of value because we simply were not capable of recovering them at full size. (According to a 2015 company presentation, three of these stones were calculated to have been potentially 200 carats or larger - ed. DL).
This was all factored into the thought process of our feasibility study, along with the neighboring mines that were notorious for finding these big stones. You have to have some kind of raison d’etre for being there, and the promise of large diamond recovery defined that upside potential. So that was factored into our thinking, factored into our design, but was not factored into our value when we raised the money. We told people about it, but we put the price in excluding those potential stones because we simply had not yet recovered them. So that’s the upside. It is a word used often by the mining industry when you are promoting yourself: lots of upside, lots of potential and a great future. So we certainly told people about it, but we didn’t overstate it. I think the average dollar per carat we communicated when we were raising money was $107, and if you add the large stones in at that stage it takes it up to $156. The economics were all run on the lower price.
DL: Have you since adjusted your crusher gap to potentially recover your ‘upside’?
SB: Yes. We have a much bigger primary crusher gap at the new plant, at -140 mm. It then comes down to 40mm and then it goes down to 16mm and finally to -5 or 6mm, so we have a much larger front end. We had a debate online whether we would recover 400 to 600-carat stones. That’s a great debate to have esoterically, but you don’t build a plant specifically just to find one stone. You have to look at your population and look at the percentage. So you can put massive crusher gaps right up front, but your plant just gets exponentially bigger and more expensive. So you make all the trade-offs with that in mind. We will not say we are expecting to find huge stones above 400 carats. But if we do find something of 400 carats or larger, it will fit through everything it needs to fit through, without being broken.
We are not expecting to recover the really high quality stones in the first period of mining because we deliberately started in low-quality, low-grade areas. This is common practice when testing your plant. You are going through the process of setting it up, making sure it all works, discovering what does or does not work, what you have to adjust. You do not want to be putting your best ore through the plant when you are not fully certain it is ready to treat it properly. Building up to our highest quality gradually was a deliberate part of our plan.
DL: We recently read a quote about Liqhobong, calling it, “The world’s third largest undeveloped Kimberlite resource”. What does the future hold for Firestone Diamonds?
SB: It wasn’t my quote, thank goodness. There are a number of ways of looking at things: you measure by size, by value, by carat volume. Let’s just say it is a healthy deposit. The probable reserve is 11.4 million carats, and our resource for the 15-year mine plan is approximately 15 million carats. That is what we based the economics on - producing 1 million carats annually. We have a very solid amount of knowledge and data up until those 11.4m carats in the reserve and the balance in the resource, but we still have to convert that resource into reserve by doing further drilling.
We will not do that just yet, because we have to drill through a great deal of known material to get to it. We have only done all the work for the first mine phase to the first 393 meters below surface. But we will go deeper than that as well, because the kimberlite continues at depth. We have drilled 700 meters and are still in kimberlite. So there is a great unknown. It is all in reserve sitting down there, but we will have to go find it.
DL: So there is potential for life beyond 15 years?
SB: Yes, this is just Phase 1. In Phase 2 we will do some trade-off studies, and will only be able to do that when we have a really good understanding of our dollar-to-carat ratio. As the large stone population becomes more known, we will get a very accurate average dollar-per-carat reading, and that gives you the economics. Whether you want to build underground access to that mine at depth, or you want to do a further cut, the value I mentioned becomes very important when you go deeper. There is much more mountain to remove to get access to the ores. We might undertake a trade-off study considering the options between a further cut and going underground. But I cannot answer that question just yet. That’s for a few years down the road.
DL: Finally, what does diamond mining mean for Lesotho?
If you take the value of Letšeng, the value of KAO and our value, I believe Lesotho is currently the ninth biggest diamond producer in the world, because it is high value production: particularly at Letšeng, then KAO slightly less and then us even lower than that because we have a much higher-volume production. So you are looking at over $500 million a year in production for the country, which is not bad for a tiny little mountain kingdom.
There is a strong expectation that we are going to cure a lot of problems in the country, and one must have a realistic view in that regard. I think the government will try and manage those expectations, but it is very difficult to make sure everyone understands what a mine does, how many jobs it can actually create, the value it can create and what the country does to support the industry. Expectation management is a skill I have had to acquire.
When we finally get the mine up to speed I think we will have 450 to 500 permanent employees between our contractors and us. We outsource some things to the mining contractors, some things we keep in house. It is not up to us to tell the contractor how many people to employ. We have built enough accommodation for 450 beds. And not everyone is there all the time. We rotate in shifts, so we have room to expand. But that is the number of permanent jobs we have created at this point. It may not sound like a lot, but it is 450 more than without us. At its peak it was over a thousand people on shorter contracts, 4-6-12 months. I believe Firestone has already done well to contribute to the Lesotho economy, and will continue to do so for many years to come. We are excited to be at the start of a new phase in this great project. And we are looking forward to many years of high-level production and to continuing our strong relationship with Antwerp.
* Gardening leave is a period of time after an employee leaves a job when they continue to be paid but are not allowed to begin a new job in a specific industry. Typically this arrangement is to ensure a person does not start working for another employer (usually a competitor). As Stuart Brown explained, he was sent 'gardening' to prevent the competition from potentially gaining any inside information or insights into the workings of De Beers or the industry as such.