Brokers say this share is worth three times its current price

Brokers say this share is worth three times its current price. There are two London-listed diamond companies. Find out why you should invest in this one.

Firestone Diamonds has a share price of 54.5p - a buying price of 57p and a selling price of 52p. The net asset value per share is a robust 22p and there are three market makers in the share so you can deal easily enough in stock market opening hours.

Firestone is a diamond producer in South Africa which, from an investment viewpoint, is safer than Zimbabwe or Angola. It is one of two diamond companies listed in the UK. Interim results were excellent and gave the first concrete demonstration that the company's Avontuur mine looks promising.

But it has a potentially even more valuable mine at Oena. In fact the future is so rosy, broker Charles Stanley says: "In our view the fair or appraised value of these two mines, ignoring exploration potential is almost three times the current share price." (At that time the share price was 38p.) "There are good prospects for further alluvial mines to be established and the possibility for kimberlite mines, which could further multiply the company's share price."

Avontuur is an open pit mine on South Africa's west coast at Namaqualand and covers an area of 2,600 acres. The company has a rich pay off coming to it from sifting through the alluvial gravel beds. The mine has yielded 1,583 carats of diamonds in the last year with 85% gem quality with an average size of 0.2 carats and an average selling price of $103. It is expected to have a ten-year life.

There's more

Another rich pay off comes from Firestone's joint venture in Botswana, with Firestone owning three quarters of the operation totalling 2,000 acres. This exploration area is around 35 miles to the west of the De Beer's extremely profitable Orapa diamond mine. The preliminary results to date are encouraging, including unusually one diamond in a soil sample. Firestone believes it is on the trail of a new kimberlite field. I hear that satellite imaging technology, soil sampling and aerial photography have all identified a number of diamond bearing hard rock kimberlite targets in the Firestone sites.

Cash plus more cash

You may think diamonds should be at the heart of Firestone Diamonds' operations but it's cash instead. Because not only does Avontuur provide the cash to meet Firestone's day-to-day needs, but allows Firestone to undertake exploration work elsewhere. Charles Stanley projects £9m operating profit within three years. Another growth point is provided by an open pit mine at Groen River valley - there are 74,000 acres around this site to the south of Avontuur.

No less than 300 experimental drill holes have been sunk at Groen River Valley down to a depth of 10 metres, all of which have struck diamond bearing gravel so this could provide a huge pay back.

I hear from my City sources that Firestone will take the decision to mine on the Groen River pit this year. All in all the Firestone Diamonds share price should hit 90p inside the next six months

The company is debt free and, as I have already discovered, has started to generate cash from its mining operations and there are encouraging exploration results.

Oena - even more potential

An 87.5% majority interest was acquired in the Oena Mine in February 2000 for $1m and a further $1.1m in shares. It is near the company's other operating areas but, significantly, on the Orange River - well-known as a quality gem diamond producing area. The largest diamond so far found was a staggering 48 carats and one 10 carat flawless diamond sold for $10,000. The Oena Mine will be up and running later this month and it is estimated it could be generating $9m of operating profits within three years. Unlike Petra Diamonds which invested a great deal in Angolan diamonds and may not get much back, Firestone is in politically safer South Africa.

Key Facts: Firestone Diamonds

Financial Times listing: Aim.
Sharecall: 0906-812 1210 (3981).
Share price: 54.5p.
Ticker symbol: FDI.
Stop loss at 20%: 43p.
Market cap: £16.5m
Trading range: 37.5p to 50p.
Nav per share: 22p.
Website: www.firestonediamonds.com
There are three market makers in the share
There is net cash of £411,000.

SMC verdict: Even discounting exploration success these shares are substantially undervalued but the potential of new mines brings massive potential upside. A diamond opportunity for a six month profit.