Gem Diamonds (GEMD) is undertaking due diligence to potentially buy a project that was the downfall of former AIM-quoted Paragon Diamonds. It is among a group of miners looking at the Mothae prospect in Lesotho, four kilometres from Gem’s flagship mine Letseng.

Paragon Diamonds failed to get the necessary funding to buy the mine from Lucara Diamond (LUC:TSE). The small cap lost its nominated adviser and broker and was kicked off the stock market at the end of 2015.

The asset sale is now being decided by the Lesotho government as Lucara gave up the licence three months ago.

Gem Diamonds’ chief executive Clifford Elphick confirms to Shares that his company is among the parties in the running for the asset.

He says Gem Diamonds probably wouldn’t have got involved in the bidding had it not already got infrastructure, people and power close to the project. ‘Our theory is that whatever is required, we can do it cheaper (than others).’

Gem Diamonds doesn’t have spare processing capacity at Letseng, however Elphick says there is the potential to add a small plant on the Letseng licence area and access the existing slime dams and management.

The business hasn’t done any greenfield evaluation work since 2008 as its time has been spent improving the efficiency of Letseng and developing the Ghaghoo project in Botswana.

Ghaghoo is now in production but its ramp-up has been scaled back amid diamond price weakness. ‘Prices were $210 per carat when we started recovering our first diamonds at Ghaghoo in January 2015. By December 2015 they had fallen to $150 per carat,’ says Elphick.

‘This was a significant decline for us. As a result, we felt it was right to slow down operations but not go as far as putting the mine on care and maintenance. At $150 per carat we can break even. We will ramp up if and when diamond prices recover to $175 per carat.’

The boss says diamond prices are showing signs of strengthening, having sold material from Ghaghoo two weeks ago at $160 per carat.

We explained how diamond prices had stabilised earlier this year in our recent Play of the Week article on Petra Diamonds (PDL).

The Mothae news coincides with Gem Diamonds’ half year results which beat expectations. Its shares jump 9.9% to 108.75p, helped by a 3.5c per share special dividend. This is money relating to a tax issue from selling assets in Australia.

Gem Diamonds won a dispute over the tax payment, hence why it is now returning this money to shareholders, adding that payment also reflects the lack of any big capital expenditure requirements in 2016.

Issue Date: 15 Mar 2016