Stellar Diamonds and parent company Newfield Resources are on the verge of commencing development of their Tongo Diamond Project in Sierra Leone. When completed, it will be the second largest diamond operation in the country. The Diamond Loupe spoke with CEO of Stellar Diamonds and Executive Director at Newfield Resources Karl Smithson, first in Antwerp and again when he was on site in Tongo (“in the middle of the bush”) about the project, how it is progressing and what to expect going forward.
The Diamond Loupe: You are a veteran of the African resources sector and have been the CEO of Stellar, a small exploration company, for over a decade. You are now set to preside over the development of the second largest mine in Sierra Leone. Did you expect something like Tongo to come together, and what will it mean to see it through to completion?
Karl Smithson: I have been involved in diamond exploration and mining in Africa for 30 years and have worked in many countries in that time. But you could say that making a kimberlite diamond discovery and ultimately developing it into a mine is very rewarding as a diamond geologist.
Stellar has been an exploration company for 10 years, finding kimberlites, doing a bit of trial mining here and there, some alluvial mining in-between, and just making its way. But once we discovered Tongo, things changed. We realized the potential of Tongo, but what really tipped the scales for Stellar was being able to put the deal together with Octea.
The DL: Many exploration companies, after discovering a resource like Tongo, would simply sell it and move on. You decided to expand and develop a mine. How did you come to that decision?
Karl Smithson: The rationale in doing the deal with Octea was to bring the scale of economy to the Tongo project and turn two smaller mines - which together form an extensive resource - into one larger mine, which enhances the overall economics. That was the game-changer for Stellar. However, financing for junior resource companies has been difficult for a number of years. It was always difficult for Stellar to fund the operation because Stellar was such a small company. We had about a $3 million market cap. It was crazy, such a small market-cap company having these assets and this deal in place.
So, I approached Newfield Resources, which was actively exploring in Sierra Leone, and we agreed to merge Stellar with Newfield. That gave us the financial firepower to move this project forward. Newfield brought in A$40 million (US$29m) of fresh equity to fund the transaction and advance the development of Tongo. This was a good deal for all the stakeholders and has enabled us to fast track the Tongo project towards commercial development.
The DL: In late November, Newfield Resources revised the Tongo Diamond Project Inferred resource up to 7.4 million carats, about 25% of which - 1.9 million carats - is now an Indicated resource. Could you tell us what this means for the company and its investors?
Karl Smithson: The declaration of the 7.4 million carat JORC-compliant resource is a major milestone for Newfield. Furthermore, this resource is based on only four of 11 kimberlites on the Tongo project. The grades are high at an average of 2.5 carats per tonne (with individual kimberlites having grades as high as 3.2 carats per tonne) with average diamond values of just under US$200 per carat. That gives an average value of over US$500 per tonne of ore, which is one of the highest for kimberlites worldwide.
There is clear potential to increase the resource below the current 230m depth of the existing resource, and also by doing further evaluation work on the kimberlites yet to be declared in the resource. I see the resource at least doubling in the future but for now, the 7.4 million carats is what is going into the mine plan.
The DL: Where are you at now in the development process?
Karl Smithson: We are finishing off the FEED (Front End Engineering Design) studies, which are well advanced and are expected to be completed in the New Year. We have a very detailed underground mine plan and the final capital and operating budgets are being determined. Since we are going underground, there is a lead time to production, but we envisage this to be 12 months after commencing blasting of the underground decline before first diamonds are extracted. We expect to deliver a final announcement to tell the world what the mine will deliver, what it will cost and how long it will take during the current quarter.
The DL: It seems unconventional to move directly to underground mining. Why is this the route you are taking?
Karl Smithson: The Tongo kimberlites, although very rich, are narrow and surface mining is not optimal to extract them due to what would be excessive dilution. Underground kimberlite dike mines are common in South Africa but the big difference is that they are at 600-700m deep (after decades of mining) whereas we are starting at surface. Going underground will mean a small operational footprint and limited disturbance to the environment or nearby communities.
The DL: Does Stellar currently have the expertise and personnel to accomplish a project of this magnitude in the field?
Karl Smithson: The team is growing. We ended the year with about 120 employees on site, about 19 of those expats, but that will grow. We are probably looking at 35 expats, and about 700 nationals when the mine is in full production. We are good for now, but we need to bring in additional specialized skills in the mining department since we are going underground. This requires specialized mining staff, and these are not readily available in Sierra Leone. We have to search outside for them, but at the same time, we will be training the national workforce so they can have a growing influence and participation in the employment of the mine.
The TDL: This must be an exciting time for Stellar and Newfield.
Karl Smithson: Yes, there are not many new diamond mine developments out there. Certainly not in Sierra Leone, and not many in the rest of the world either. This will be something new for the market and exciting for us at the same time. But we have to do things correctly in terms of getting the reports finished, having the board make a decision and announcing that decision, and then pressing the button on that development. All the licenses are in place, everything is in position, we are just champing at the bit to get going.
The DL: You have called Tongo a “generational asset”. What can you tell us about the Tongo Project concerning the projected output, types of diamonds and expected prices from the resource?
Karl Smithson: In 2016, we established a mine plan as part of a Preliminary Economic Assessment for the Tongo project. This showed a 21-year life of mine on a resource of 4.5 million carats at the time, producing in the region of 200,000 carats per year when in optimum production levels. Clearly, we now have a larger resource and have the potential to increase that further, so we expect the mine to be around for a very long time.
As I said earlier, the grades are very high as far as kimberlites go, up to 3.2 carats per tonne. When you couple that with the diamond value, let’s say around 200 US dollars per carat, the economics are there for this mine. The product we have is ‘typical Sierra Leone’. It is high quality, white gems, nice shapes, D to G colors, a high percentage of collection goods … it’s a nice product. It has very little in terms of industrial or rejects. Almost purely gem. It’s not the largest mine in the world, but it is going to be a mine that has good volumes of production for a company of Newfield’s size, and with a good margin as well. It will be a nice mine.
The DL: This should be very pleasing to the new government, which is looking for new investment in the country and its human capital.
Karl Smithson: That’s exactly right. This is an impoverished area. The unemployment rate, I suspect, is near to 100% in terms of formal work. There is a lot of informal work going on. This is going to be major for the local community, and also for the government to see new development. It’s a new government, it came into power last year. They want to see development, and we are the next mining development in Sierra Leone, so I think we will get a lot of support.
The DL: That said, Sierra Leone and its local communities have had their share of disputes concerning taxes and licensing with some of its largest diamond mining companies, in particular, Octea Mining/Koidu Ltd. From the outside, it seems like this history could be a reputational risk hanging over any project associated with Octea. Are you confident about the efforts Stellar and Newfield have made to gain the confidence of local communities?
Karl Smithson: We have very good relations with the local communities in which we operate. Stellar and now Newfield has been operational in the Tongo district since 2007, and in that time, have forged strong ties with all local and government stakeholders. Octea spent millions in Tongo doing the earlier exploration work and in Koidu has built a world-class underground mine that is run by a first-class mining team. The large-scale mining licenses for both Tonguma and Koidu are published in full and available publicly online at the NMA portal. Anyone can access these to see what the terms and conditions of the mining licenses are, so it is all very transparent.
The DL: Stellar Diamonds has already stated its intention to market the Tongo Project stones in Antwerp. Why is Antwerp your preferred market?
Karl Smithson: We believe Antwerp to be the best place to market our goods based on the type of qualities that we see. We have yet to decide how we market and which group we will partner with, but this will be addressed in 2019 as we move closer to production. We have time to make this decision. The underground development is going to take 12 months, so we are not producing diamonds tomorrow or today. We will make a careful decision to ensure we get the right partner who can market the goods the way they should be, maximize our revenue as well as revenue to the government as well.
The DL: When do you think Antwerp can expect a steady flow of goods from your mine?
Karl Smithson: Probably starting 15 months after we commence the underground decline, and the reason I say that is that you are going to mine and get a reasonable parcel together before you export, and we look at two months’ production to get an export. So, we are probably looking at the end of the first quarter of next year. That is my expectation. Having said that, we do have some diamonds in Antwerp right now, a couple of thousand carats, from test work we have done. Those goods will be available for people to take a look at. We may tender them just to test the market. It is a small parcel, but enough to give the market an idea of the quality they can be expecting.
The DL: Last year, Meya Mining unearthed 476-carat Prosperity Diamond in Sierra Leone and sold to Laurence Graff for $16.5 million. An artisanal miner discovered the 709-carat "Peace Diamond", considered the 14th-largest rough diamond in history, just down the road from Tongo. Do you imagine a stone like this is in your future?
Karl Smithson: That would be nice to imagine of course! We have made no provision for large, investment stones in our diamond value models, so if they do come along then that would be an added bonus.
The DL: Finally, could you tell us what you have learned over your many years as a diamond executive, some of the specific challenges of running a diamond company in an area with such a difficult history (including the Ebola crisis), and your vision going forward?
Karl Smithson: During 30 years of exploring for and developing diamond deposits in Africa, I have seen and experienced a lot. The key to success in developing countries is to treat the people, government and laws with respect and operate at all times with transparency. In return, you will be welcomed as a respected stakeholder and given support at all levels.
We believe that investing in the people and the local community is essential, and as the Tongo mine grows we will be able to make an increasingly significant contribution to local development in an area that is severely impoverished despite the diamond wealth that has been extracted over decades. That is a legacy worth pursuing.