Effort Paying Off For Rockwell Diamonds

VANCOUVER — After a rocky 2009 marred by a hostile takeover bid and plummeting diamond demand that slashed rough diamond prices by 50%, Rockwell Diamonds (RDI-T) is back on track, turning a profit and raising funds to support its upgraded, high-quality alluvial operations in South Africa.

Rockwell owns and operates three alluvial diamond mines in central South Africa, near the historic diamond-mining town of Kimberley. A fourth operation in the area remains on care and maintenance, though the company is currently developing a plan to bring Wouterspan back online before the middle of the year.

The company mines diamonds from alluvial gravels left behind by old rivers that have since moved or dried up. In contrast to a hard-rock diamond mine, where miners typically blast solid kimberlite pipes or dykes apart and then crush the rock to loosen the diamonds, at an alluvial mine earth-moving machines scoop up gravels and transport them to a processing centre, where the gravels are washed and sorted by size and density to produce a diamond-gravel concentrate. Alluvial operations are much less expensive to build and run, though alluvial reserves are more difficult to pin down and diamond grades are lower than in economic hard rock deposits.

In recent years Rockwell has focused on making its operations more efficient, to take advantage of the potential to become a low-cost diamond producer. And the effort appears to be paying off.

In the three months leading up to December, Rockwell’s three operations — Holpan, Klipdam and Saxendrift — turned a profit for the first time in over a year. The turnaround stemmed both from recovering diamond prices and increased mining and processing plant efficiencies, which reduced Rockwell’s operating costs.

Rockwell realized an average sale price of US$1,269 per carat during the quarter. The price represents a 48% increase over the previous quarter, when the average sale price was only US$855 per carat. And in its November diamond tender, the company’s stones attracted an average price of US$1,434 per carat, another small improvement.

In the September to November quarter, Rockwell produced 7,963 carats from the three operations. Rockwell sold 9,410 carats during the quarter, for sales revenues of $12.9 million. Factoring in the costs of sales, amortization, and general and administrative expenses, the company was able to realize a profit of $500,000 or 0.2¢ per share.

However, the six months prior, were not so positive. Sale prices in the March to May quarter were below the cost of production; from June to August, sale prices covered the cost of production but were insufficient to cover fixed overhead costs and lease payments. Facing the need for liquidity, Rockwell could not hold onto its diamonds and wait for prices to improve; instead it was forced to sell at low prices.

Improved diamond prices clearly impacted Rockwell’s recent quarter: income generated from September to November covered all quarterly costs and significant arrear creditors, and still produced the $500,000 profit.

Of course, the global recession hasn’t impacted the quality of stones recovered at Rockwell’s mines. Of late, exceptional stones produced from the alluvial operations include: three stones greater than 100 carats, including a 122-carat rounded light yellow diamond; three high-quality coloured diamonds, specifically a 30.5-carat salmon pink stone and two intense fancy yellow stones tipping the scales at 35.6 and 36.3 carats; and three stones greater than 50 carats.

To better realize the value from its quality stone, Rockwell has been trying to improve efficiencies and lower operating costs at its mines over the last few years. The results are now showing: from June to September Rockwell’s three mines beat the monthly production target of 2,500 carats every month. In 2008 and earlier, the company was achieving similar production rates from four mines rather than three. And in spite of a very strong South African rand relative to the U.S. dollar, cash operating costs remained below the target range of US$3 to US$3.50 per tonne.

Rockwell recently closed a private placement selling 132.8 million shares at 6.5¢ apiece to raise $8.6 million. In addition, the company is currently working to close a rights offering that will add another $4.6 million to $8 million to Rockwell’s coffers.

Proceeds from the private placement and rights offering will be used to settle short-term debt, strengthen the company’s balance sheet, and undertake further production improvements and cost-saving measures. In addition, Rockwell will use a portion of the funds to upgrade and re-commission the Wouterspan plant.

Rockwell shares are currently trading around 7¢. The company has a 52-week trading range of 2.5¢-11.5¢ and 371 million shares outstanding.