It has been a one-way ride in BDI Mining Corp this year, with shares in the Aussie diamond and gold mining business falling from 37p in January to a recent 17.5p low. But there is good cause to believe the tide has turned. With market conditions for rough diamonds picking up again after a soft spell, an expansion in diamond production now underway and outgoings shrinking, the current valuation of under £20 million at 19.75p looks mean in the extreme.

The fall in BDI shares is partly down to the general slide in smaller resource stocks since May. But it also reflects the growing realisation among investors that the thriving diamond mine in Indonesia (picked up for a song from Rio Tinto in 2001) was not going to fund the development of the company’s other asset, a gold prospect on Woodlark Island in Papua New Guinea, where a one-million-ounce resource has already been established. That, in turn, has raised fears of a further fundraising, putting the shares
under pressure.

In the first half of the year, BDI reported a loss of $2.2 million, down from $3.3 million the previous year. The diamond mine – at Cempaka in the swamps of Kalimantan – washed its face on sales of $4.6 million. Most of the output is of gem quality, albeit very yellow in colour. More than 50,000 carats have been produced to date, all from one tributary of what used to a major river system. BDI has just started mining operations on the main channel.

This should result in a major expansion in diamond production, which is already rising quite sharply. In the third quarter of the year, BDI extracted 14,600 carats from Cempaka compared with 9,600 in the second quarter. With costs going down, grades and production rising, and indications that diamond prices are beginning to recover after a soft spell, the profitability of Cempaka is set to lift off. The target is to produce 100,000 carats a year. At the current prices BDI is achieving that and should be worth more than $22 million. There is also substantial gold and platinum emerging in the gravels. Given the extent of the area in BDI’s control, Cempaka looks to have a very
long life.

To date, all the revenues produced by Cempaka have been soaked up by the Woodlark Island gold project. But not any more. Exploration costs are now down to around $150,000 a month, compared with $700,000 a month in the first half of the year. Now BDI is organising funding for a $10 million feasibility study that will lead, hopefully, to a $50 million mine development. But that is not likely to involve a share placing at this stage.

BDI hopes to have its plans in place by the end of November. That should give the shares a boost. Either of its two projects looks attractive enough on a stand-alone basis to justify the current market capitalisation. With £1 million in cash and outgoings shrinking rapidly, BDI is well placed to hold out for the right deal. The shares have the potential to double if market sentiment towards junior miners improves. One to buy and lock away.