KIM Report

The long and winding road to a Quebec diamond mine

Posted by David

Stornoway Diamond Corp. (TSX-SWY) saw a 24.14% jump in stock price today, up seven cents to $0.36/share. The rise followed the resumption of trading following a halt this morning due to a financing-related news release. SWY reported that they have received $22 million from a private placement of 24,444,444 common shares at ninety cents a share. This is a premium of 195% on top of the opening price of $0.305 today. The participants in the private placement are Agnico-Eagle Mines Ltd. (TSX-AEM) and Lorito Holdings Ltd. This $22 million will go to pay off debt in the form of debentures held by AEM and Lorito. AEM is already a significant shareholder of SWY, and with this transaction they will hold 17.6% of the outstanding shares. After the completion of this transaction, SWY will be debt-free.

 

This transaction is something of a coup in the current market. Juniors have been struggling to obtain funds to develop their projects and pay off debts. The credit market has been mostly deaf and blind to the woes of these companies as many lenders are themselves finding it a struggle to remain solvent. For a mining and exploration junior to pull off a private placement at a pre-subprime crisis share price is something of a shock (albeit a pleasant one) to investors and analysts who have become used to seeing the market cap of companies such as SWY slide by fifty to eighty percent. By offering equity to pay off its debts, SWY has managed to find a creative alternative to solving its cash problems in a bear market. The main upside here is that the dilution of the stock is one third of that if SWY were to issue stock at market price.

 

Now with balanced books, SWY faces only one major and immediate hurdle – to finance the construction of a diamond mine on their Foxtrot property in Quebec. This project, focusing mainly on the Renard kimberlite pipes, but also the Lynx and Hibou kimberlite dykes nearby, is joint owned 50/50 with SOQUEM and is fully described in an earlier article. SWY’s share of the mine construction costs will likely be over $100 million. The actual numbers are due out in September with the pre-feasibility study. The report was initially due this summer, but similar projects submitted earlier by Peregrine and Shore Gold tied up AMEC, the company contracted to conduct the study, until recently. Should the report be positive, as the geology and current diamond prices suggest, a significant amount of capital investment must be made to bring in the needed infrastructure for a mine. SWY will have to carry at least 50% of these costs.

 

Immediate of these costs is road access. Renard will not be an arctic diamond mine, dependent on airlifts and unpredictable ice roads for supply, but rather a site accessible by land year round. SWY is in talks with Western Troy Capital Resources Inc. (TSX.V-WRY), Strateco Resources Inc. (TSX-RSC), and Eastmain Resources Inc. (TSX-ER) – other mineral/metal exploration companies with projects in the Otish Mountains, local communities, and the Quebec government to build the “Route Monts Otish”. This partnership would provide strong benefits for all parties involved by sharing the cost of construction. SWY will need to bring September’s report to the table when the parties decide who pays what share of the road costs. It is also possible that the construction will bring in electricity service as well, further reducing the large bill SWY faces.

 

After September, SWY will have to come to a decision on how to fund the mine. Even if the Quebec government pays its full 50% share and the aforementioned road plan comes through, the cost to SWY will be well into the tens of millions of dollars. The company has a number of options to consider in obtaining the cash necessary to build the mine:

 

(1) They can go the traditional route and get financing from credit institutions. If the credit market simmers down by the winter this may be a possibility. Factors that would attract a lender are that the company has settled its accounts, the Foxtrot property has high and fairly well established diamond potential, and the company has many other promising secondary properties such as Aviat and Churchill (the latter a JV with Shear Minerals).

 

(2) Future private placements can be made. This will dilute the stock, but by how much is dependent on how the share price is doing at the time of issue. If today’s rise in share price is any indication, a positive report in September may be the catalyst investors need to return the company to the ~$1.00 level. In addition, management has established that they possess some expertise in brokering strong deals with large investment players (Rio Tinto is another major shareholder, with ~11% of the company).

 

(3) The company may bring in a third party to purchase a portion of their share in exchange for funding most of SWY’s costs a la the Franco-Nevada strategy.

 

(4) Interested parties could be sold secondary assets in exchange for cash to fund the mine. In addition to the aforementioned Aviat and Churchill projects, SWY holds promising advanced and reconnaissance stage projects in Nunavut, Ontario, the Northwest Territories, Alberta, and Saskatchewan.

 

It is likely the company will use a mix involving one, some, or even all of the above options to in order to proceed with construction.

 

Given that Quebec is regularly acclaimed as one of the top mining-friendly provinces in Canada, and that the province has a direct stake in the project, there seems to be fewer speedbumps on the road to Renard. Management with have to use every means at their disposal in order to navigate markets wracked with investor apathy towards diamond players.

 

Disclaimer: The author holds 2000 shares of SWY. This article is based on the personal opinion and experience of the author. Please do your own due diligence when investing.

 

 

More potash for Marifil Mines Ltd.

Posted by David

Yesterday, Marifil Mines Ltd. (TSX-MFM) announced that it had expanded upon its Potash discovery on its K-2 project in Argentina. The K-2 project is 100% owned by MFM and covers 100,000 hectares in the Neuquen basin. As mentioned in a previous article, MFM first announced that it had discovered two potash horizons during petrophysical logging of an abandoned oil well drill hole on their property close to Rio Tinto’s Rio Colorado potash mine. The data from the logs from the two drill holes suggests that the two horizons extend along strike for at least 13 km. The grade of the newer hole varies between 11% and 20% K2O. The intecepts of potash recorded by the most recent logging activity were 5.8 m and 5.4 m thick. MFM expects a NI 43-101 complaint report on the deposit within the next couple of weeks.

Large carats at Gahcho Kue, worth the wait?

Posted by David

Earlier this month, Mountain Province Diamonds (TSX-MPV, AMEX-MDM) dropped a big rock in the otherwise stagnant waters of diamond exploration and investment. The company announced that they had recovered a 25.13 c colourless octahedral diamond of exceptional clarity from the Tuzo kimberlite in the Gahcho Kue cluster, Northwest Territories. This diamond was valued at approximately (USD) $17,500/c, or $439,775 total. This is the largest diamond recovered in Canada during an exploration project. 

 

MPV discovered the Gahcho Kue cluster, which lies in the AK property in the Kennady Lake region. It owns 49% of the project, with De Beers Canada as the operator and majority stake holder. The geologic environment of the project is in the southeast Slave craton. The cluster was discovered in 1997 and DeBeers Canada (then Monopros) was quickly brought in as a JV partner where is could earn up to 51% of the project by shouldering a large portion of the costs. DeBeers has since exercised this option. Four main kimberlite bodies comprise the cluster (see map): Tuzo, 5034, Hearne, and Tesla. Tesla is not currently considered to be a resource as its small surface area, 0.4 hectares, is less than one third that of the next largest body: Tuzo at 1.4 hectares.

 

The geology of the three currently economic pipes is varied. 5034 is an irregular body of hypabyssal kimberlite, Hearne is a mix of hypabyssal and diatreme facies kimberlite, and Tuzo is believed to be the deeper part of a diatreme with no root zone found as of yet. These bodies together create a large reserve of ore that has been thoroughly drilled and modeled over the past decade. In a general way the geology could be seen as an intermediate between the Churchill (Stornoway Diamonds & Shear Minerals) and Snap Lake (De Beers Canada) projects that are entirely hypabyssal kimberlite and the Fort a la Corne (Shore Gold & Newmont) project where all of the kimberlite found is pyroclastic or resedimented pyroclastic.

 

The diamond was recovered from LDDH sampling in March of this year. After the sampling was completed the kimberlite was made into a concentrate at De Beers’ Grand Prairie, Alberta facility and then shipped to the GEMDL laboratory in South Africa (also run by De Beers) to recover the remaining diamonds. When this in completed, the diamonds will be sent to the DTC facility in London, U.K., for cleaning and valuation.

 

Of the three main kimberlites, Tuzo is the least developed in terms of sampling. The recent bulk sample was in part an effort to rectify this. 5034 has 8.7 Mt of indicated ore at 1.6 c/t and 4.9 Mt of inferred ore at 1.7 c/t. Hearne has 5.7 Mt of indicated ore at 1.7 c/t and 1.5 Mt of inferred ore at 1.53 c/t. Tuzo, meanwhile only has 10.6 Mt of inferred ore at 1.15 c/t.  MPV and De Beers are trying to remove the uncertainty with this body. For comparative purposes Diavik a few hundred km to the north has about 29.8 Mt of reserves in total at 3.2 c/t (measured+indicated), or 95.36 Mc. Thus far, Gahcho Kue has about 46 Mc (indicated+inferred). Keep in mind that the Diavik mine has unusually high grade. MPV estimates a mine life of about 24 years.

 

In terms of diamond valuation, an independent 2006 report by WWW International Diamond Consultants Ltd. gave (in USD) $101/c for 5034, $54/c for Hearne, and $43/c for Tuzo. The average for all three pipes was $75/c and it was noted that proper cleaning (usually in a hot acid bath) would raise the value of many of the diamonds by up to 10%.

 

It has been over ten years since the discovery at Gahcho Kue. Mining is expected to begin in full by 2012, giving about a fourteen year lag between discovery and mine. Diavik took only ten years in total to begin full capacity mining and Ekati took even less. Following statements for interviews with MPV management, it would seem that they would prefer a faster to-mine plan, but De Beers has preferred a more methodical approach. In light of what happened at Jericho with Tahera, perhaps this might be a more prudent option. Though perhaps De Beers has been focusing the bulk of its attention on their 100% owned Snap Lake and Victor projects in the Northwest Territories and Ontario, respectively.

 

Regardless of the slow timetable set for developing the project, the discovery of this diamond, along with other ones >5 c found in the past few years, has established the potential for large, high quality stones. As diamond price goes up exponentially with carat size, the profit margins for the future mine are looking larger. Now that above average grades, decent diamond values, and large, high quality, high value diamonds have been established at Gahcho Kue the main hurdle is to finance the project to completion as it will be about four years until commercial production. MPV needs about $370 million to fund its 49% share. The current market cap of the company is $280 million. The company has about $1.5 million net in cash and medium-term deposits, and has invested about $65 million in the project overall. While the sale of the diamond announced last week should pay for a few drill holes, in order to keep the full 49% share of the project MPV will undoubtedly require financing. This strategy may run into some resistance as diamonds are not a hot item in the current market and lenders in general are skittish after their collective failure to recognize the risks of sub prime mortgages and ABCP. Also, the fate of the aforementioned last diamond mine to open in the Arctic may be scaring way any potential suitors. Raising more capital by dilution is only a partial solution at this moment considering the vast funds involved. Although the company is not poorly positioned to issuing private placements effectively as its stock price has not suffered anywhere near to the degree that many of its peers have (mainly $4 to $5 over the past year). Another option is to default on their share of the costs and let De Beers’ deep pockets take care of things in return for letting their share slide to 40%. A third option that is being signaled by a strategic review of the company as alluded to in a National Post article last week is that the company may be putting itself up for sale.

 

Regardless of what option the company pursues, the nature of the deposit is likely to reap large rewards for shareholders when interest in the diamond market returns. What remains to be seen is that whether MPV chooses the option that gives the best gain to the shareholders.

 

Disclaimer: The author holds no shares of MPV. This article is based on the author’s personal research and experience. Please perform your own due diligence when investing.