De Beers warning that it will reduce its output came as music to the ears of Philip Kenny of Firestone.

Recent warnings from De Beers, the colossus of the world gem production industry, that it will reduce its output because the world’s supply of rough diamonds is set to run out, came as music to the ears of Philip Kenny, chief executive of Firestone Diamonds.

De Beers, which accounts for 40 per cent of world diamond supply, plans to extend the life of its own mines by establishing a production plateau of 40 million carats next year, down from 48 million in 2007, at the moment when gem prices are recovering from a recession-induced slump and AIM-quoted Firestone is poised to go into production next month at its BK11 kimberlite diamond pipe in Botswana.

Floated 12 years ago by second-generation Irish mining entrepreneur Kenny, Firestone has had a frustrating history of false starts and disappointments in looking for and developing diamond projects in southern Africa. Even after almost doubling in a year, its shares still trade at little more than a third of their 1998 float price of 114p.

But there is now a new mood about the company and the industry. The world supply and demand balance for rough diamonds is moving strongly in the producers’ favour, with major new discoveries virtually unheard of and new mine development a formidably expensive process.

Firestone raised £9.5 million recently at a discounted 31.5p to take BK11 into production in a placing handled by Evolution Securities that was three times oversubscribed and all finished ‘by lunchtime on the first day’. Kenny claims ‘we only needed £4.5 million’ and says the company can commit the surplus to accelerating other projects in the area.

He expects BK11 to reach full production capacity by the end of this year at an annual rate of 150,000 carats, with an anticipated value of $150 to $180 a carat. That implies annual revenues of $22.5 to $27 million (£17.5 million).

Kenny sees a ‘50 to 70 per cent margin on run-of-the-mill production’. Evolution’s mining guru Charles Kernot expects the company to turn a likely loss of nearly £1.2 million in the year to next month into pre-tax profits of £5.6 million for 2010-11.

Although extra last-minute infrastructure work has delayed the start of mining at BK11, which is near De Beers’s major Orapa gem mine, by three months, Kenny says he expects production to be fairly straightforward. He maintains that samples of 700 carats from BK11 so far indicate that 95 per cent of the stones are of gem quality, as against a usual kimberlite gem proportion of 50 to 70 per cent.

According to Kenny, most of the stones are ‘of good quality, colour and shape, though there are no signs of fancy colours’. Samples suggest the stones increase in size – and hence in value per carat – at depth, a feature of ‘sedimentary kimberlites’, such as BK11.

Firestone is concentrating on BK11 at present, but has other irons in the fire as well. Among them is Tsabong, also in Botswana and described by Kenny as ‘a very exciting big project for the long term’.

Work on Tsabong has so far uncovered 85 kimberlite pipes, and Firestone suggests there could be as many as 100 there. Fired by the potential for ‘discoveries of scale’ at Tsabong, Kenny and his colleagues are in discussions with major mining companies about agreeing a joint venture to exploit these deposits.

Firestone and Debswana, a company owned 50-50 by De Beers and the Botswana government, have a joint venture to treat diamond tailings around Jwaneng, another major mine. Kenny argues one tailings plant could generate revenue of some £6 million a year and suggests that the joint venture could eventually have five or six plants up and running.

Firestone Diamonds has had false dawns before, and there is inevitably some scepticism in the market about its projections. This time, however, its key project does seem to be coming right, while the industry background is brightening, and investors not averse to an element of risk could find the shares a rewarding punt.