By Julie Crust

LONDON (Reuters) - UK-listed Kopane Diamond Developments Plc plans to develop with an unnamed mining company a project in Lesotho which has the potential to produce one million carats a year, as it seeks to become a major diamond producer.

The mining company, which will be named once binding agreements are reached, will fund and operate the restart of production at the Liqhobong project.

The mining company may exercise an option to acquire 51 percent of Kopane's interest in the Main Pipe in return for raising 80 percent of the cost of developing Liqhobong to production of in excess of one million carats each year.

"This values the deal at about 40 pence per share," a dealer said.

Kopane shares rose as much as 2.5 pence, or 20 percent to 15.25 pence on Tuesday 26 January, valuing the company at 47 million pounds. By 1104 GMT the shares had settled to trade 2 percent higher at 12.75 pence.

FinnCap said it will retain its 24 pence share valuation until the deal is binding.

"Nevertheless, we believe that this MOU (Memorandum of Understanding) sends important signals to the market as to Liqhobong's potential value should high value diamonds be discovered," said FinnCap analyst Joe Lunn.

The Liqhobong operations are operated by Liqhobong Mining Development Co, which is 75 percent owned by Kopane and 25 percent by the Government of Lesotho. The group has produced over 350,000 carats of diamonds since operations started at the end of 2005.

Kopane also reiterated that the outlook for 2010 is very positive.

"The market price for rough diamonds has substantially recovered from falls in late 2008 and early 2009 and progress is being made towards the funding and commencement of construction of a power line to connect Liqhobong to the Lesotho electricity grid by mid 2011," said Chairman Frank Scolaro.