KIM Report

Dancing the Foxtrot: A diamond mine in Quebec?

Posted by David

Last Tuesday, Stornoway Diamond Corporation was halted late in the trading session due to release of the highlights from their long-anticipated pre-feasibility study regarding their Foxtrot diamond project in central Quebec (50% JV with SOQUEM Inc.). The Foxtrot project contains the Renard (R) kimberlite pipes as well as the Lynx and Hibou dykes. This is a NI 43-101 compliant report that outlines the Renard resource with 7 Mc indicated (11.6 Mt x 0.6 c/t) at R-2, -3, and -4, and 4.5 Mc inferred (7.2 Mt x 0.63 c/t) at R-2, -3, -4, -9, and the neighbouring Lynx dyke. R-3 appears to be the highest-grade body at 1.16 c/t, but has the lowest tonnage. An additional 9-21 Mc (14-32 Mt at 0.31-1.64 c/t) is classified as potential mineral deposit, but this requires further evaluation.

The projected cost to construct a mine on the site is C$308 million including contingency funds. Operating costs are assumed around C$50.39/t using the combined open pit + underground method, similar to that seen at Diavik’s A154 South kimberlite pipe. Plans for infrastructure to the mine (road, electricity) are in talks with local communities, government, and other mining companies with projects in the region. This has been covered in more detail by an earlier KIM Report article. The operating cost assumes that an all-season road will be built, but that the mine will be powered by diesel generators.

Diamond valuations for the R-2, -3, and -4 bodies were reported last fall as US$109/c (R-2 and R-3) and US$69/c (R-4). Doing some quick math, this means the value of the indicated resource is C$760.78 million (using the exchange rate given in the report of C$1.146/US$1). After subtracting the processing costs of the ore (C$585.53 million), this leaves the net value of the diamonds to be C$175.25 million. This is for the indicated resource alone, and does not take into account the inferred resource of 4.5 Mc or the additional 9-21 Mc of potential deposit that is still being evaluated. It would appear that the indicated resource pays for over 56% of the capital cost of the mine. However, given the expected processing capacity of the mine to be 1.3 Mt/y, this ore would take nine years to process. SWY would focus on the richer pipes on the mine (R-2 and R3) and leave the lower grade ones (R-4) for later processing in order to pay off the capital. The company will have to look at other bodies on the Foxtrot property for higher grade ore. R-65, Hibou, and Lynx are all possible candidates.

Should the Canadian dollar remain at current levels, the net profit for the indicated resource will be higher. As the Canadian dollar appears more likely to stay a dime below, rather than above, the American dollar, and world diamond prices continue to rise, SWY should be able to get a mine into the black relatively quickly after construction.

SWY has made an attempt to be as conservative as possible in calculating the costs of constructing and operating a mine as well as the amount of resource present. A prudent decision considering the fate of the last junior in Canada that went into diamond production. C$50 million of the C$308 million capital cost is budgeted for contingency. SWY investor relations has indicated that the report was calculated using spot prices from this summer when oil at well over US$100/bbl, giving a strong buffer in the budget against any rise in fuel costs.

There are two main goals for SWY in the immediate future: (1) expand the resource and put more viable carats under the “indicated” and even “measured” categories. Getting more solid diamond valuations is also a priority. (2) obtain the funds to build a mine. SWY is free of long-term debt thanks to some large backers. However, it has to come up with its C$154 million share of the capital costs, and there is only $6.9 million currently in the bank. Viable options for this have been discussed in the aforementioned earlier article. Permitting, environmental evaluations, and the like will also have to be conducted in order for construction to proceed.

The next day following this news, SWY closed up 40% to C$0.15/share on 1.1 million shares. By Friday that share price was back down around C$0.12/share, the level it was before the release of the report. This is a long way from the ~$0.80/share this time last year. However, should the mine get underway, a much higher share price is a very strong possibility.

Disclaimer: The author holds 4000 shares of SWY. This article is based on the opinions and experience of the author. Please do your own due diligence when investing.

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