Peregrine Diamonds Ltd. PGDIF

RE:Hang on there Longs, lots of upside here and many variables

[justanormalguy]

Me, dreaming big.... my hope for PGD offer

The PGD negotiators are smart people and I would guess they are using their full arsenal in any third party take-over talks, not just that unreasonable NPV for 6/7 they published. And they clearly admitted how conservative their post-tax NPV and IRR was. I summarized these previously, so have others.

People on previous posts are correct. PGD does not care what the stock trades at; it's irrelevant to them, irrational, and a waste of resources to spend one penny on public relations to support a higher price. The current stock has absolutely no impact on a deal price. Why? Because PGD has their own “price”, plain and simple. You buyers meet the price (or equivalent discounted future price in a mining scenerio when generating cash), then we might have a deal.

Believe me, it's real nice to negotiate when you have the goods and bad things are happening to Canadian diamond producers and other exploration properties. Their hope has certainly faded big time.

• Debeers, Snap Lake dead

• Debeers, Victor closing 2018, Tango Extension not looking good

• KDI, bad diamonds, stand-alone and profits not to be used in same sentence

• GK, we'll see, production diamond parcels not very nice, but some hope

• Ekati, Jay is a dud and very marginal IRR, lots of risk with external non-controllable factors (exchange rate, diamond prices) and their optimistic input model parameters

• Diavik, running out of ore in 3 years

• Stornoway, bugger-all on expansion or exploration, hope with Renard

• CanAlaska, no hits, will turn out to be waste of time and money for Debeers (big mistake)

I think we all know what's left.

Now, what might that price be? What do I think the stock is worth? Today, I'll only speculate on one permutation, a partial Chidliak asset sale for diamonds only, 100% buy-out. PGD pays out substantial dividend to shareholders and keeps a little back for PGE (other Chidliak, Nunuvat assets – diamonds and other minerals, database, DO27, maybe Botswana).

Using some of Mike's calcs from his blog, PGD's Phase 1 PEA, and some back of napkin stuff that's close enough for my point. $2 per share is way too low to outright sale.

From Mike “With the knowledge that the valuation was obtained in early March, the reader can now go out to the market and see what the current conditions are. Looking at the various sources of information, one can find that the average rough diamond price since early March to end of August has changed roughly 10 to 11% to the upside.”

Here is a pre-tax cash flow analysis that shows the original PEA results, an 11% adjustment in revenue and a third section where the 15% contingency is taken out.

In this analysis, one can clearly see a significant improvement in pre-tax IRR (40 to 46%) and a change in pre-tax NPV (7.5%) of an additional CAD$160 million (to CAD$870 million).

Taking out the contingency just to see what the raw economics would be and you see the NPV goes up to CAD$922 million and the IRR hits 51%.”

So, just with an adjustment to global diamond prices and the removal of the 15% contingency, pre-tax NPV increases from $700 million to $922 million. That's just the start. (I'm going to use some base ratios for the rest, it will prove my point and my financial model needs an overhaul. +/- $200 million in post-tax NPV is close enough). This is $1.3 Billion dollars pre-tax cash flow (0% discounted) over 10 years or $130 million per year in the PEA.

START

Cash Flow Phase 1 CH6/7 PEA = $1.3 billion

NET CASH DERIVED FROM REVENUE

CARATS:

a) ADD: 3.8 million carats (6/7 – variance 15.6 million inferred less 11.8 million PEA, better design in FS and steeper slopes)

b) ADD: 11.3 million carats (Higher end of TFFE 6/7/44 respectively 7.5/1.8/2 million carats)

TOTAL: 26.9 million carats (11.8+3.8+11.3 @ 1.67 carats per tonne)

c) ADD: 1.6 million carats (add 30% to 1.15 carats per tonne bulk CH7, net increase due to CH7 broken diamonds less lower cpt of CH44)

TOTAL: 28.5 million carats (26.9 + 1.6)

$CAN per CARAT

a) USE: $260 CAN per carat (0.76 FX, $/carat premium: “Ice” diamond marketing premium, previous statements from NR from WWW, broken diamonds CH7, inflation, specials and colours, $200US/carat

TOTAL Revenue: $7.4 Billion (yup that sounds about right)

Now for some simple ratios to get to non-discounted cash flow and pre- and post-tax discounted NPV

Cash Flow = $3.85 Billion to $4.8 Billion CAN (0.52 to 0.65 Cash Flow to Revenue, as economies of scale build to the $7.4 million in-situ, this ratio will tend to increase incrementally). Let's use $4.3 Billion Cash Flow. That's $285 million per year for 15 years.

Pre-Tax NPV Ratios (5% discount – see justification below)

NPV = 0.686 to 0.768 x $4.3 Billion = 2.95 Billion to $3.3 Billion ($0.743 NPV/$1.3 Billion Cash Flow from PEA at 7.5%, using 5% discount $0.89 NPV/$1.3 Billion or 0.686) (or Mike's blog $0.922/$1.44 at 7.5%, using 5%, 0.768)

Post-Tax NPV (5% discount)

Use a ratio of post tax to pre tax NPV of PEA (471/743) = 0.63

NPV = 0.63 x $2.95 Billion to $3.3 Billion = $1.86 to $2.08 Billion (that's right, 4 times the very conservative PEA of Phase 1)

[My starting point was NPV 6/7/44 PEA Phase 1 Chidliak at 5% discount. (why 5%, it's the perfect storm – lack of other ready to go properties, high margin, not sensitive to external factors (FX, diamond prices), deep port, full community, Nunuvat, Federal support for road, superb community relations, crown land, no caribou, no water retention dykes, full season road, low interest rate environment, abundance of experienced designers/operators from Renard and GK at great fee rates, etc.) I might be able to argue a 3% discount rate, but not now.]

Now how does this relate to current share price. Bottom line, it doesn't. This is simply a simple analysis of what I hope PGD is using in negotiating a partner or a buy-out, but can't yell these numbers out loud because they are not allowed to.

My Conclusion:

There is no way that PGD should consider any offer less than $3 per share (present value) asset value, or appox half of my post-tax NPV of $2 Billion, for CH6/7/44.

Of course the price steepens for Chidliak CH1, 45, 46, 31 and Area B, DO27, and any of the other assets. Call me crazy, I might be. I hope my math is close enough.

If such an offer is to no avail, then PGD needs to find a way to debt finance it ($11 million US$) with a deferred payment plan. It takes one really nice diamond to pay for this. If not, go care and maintenance, and don't settle.

One must also consider De Beers very serious. They have all kinds of plants, equipment, fuel storage, camps, maintenance buildings, staff, experience, etc on one closed mine (Snap) near DO27 and a soon to be closed one at Victor. Gotta wonder how much their capital costs and operating costs are reduced by moving and reusing these facilities at DO27 and Chidliak (the only incremental cost to them is reassembling the plant and buildings; their reclamation, dismantling, and disposal costs are sunk costs). That might be the only way they can internally get to the $3 per share minimum I calculate or whatever PGD demands. One could probably guess a savings of $150 to $300 million in capital costs to De Beers with some road assistance.

When Goldcorp bought Kam, they paid 1.14 post-tax NPV PEA on an asset with significant upside like Chidliak.

Normal Guy

justanormalguy wrote:

I thought I'd provide a summary related to the basement, low ball NPV that PGD provided in the Phase 1 PEA to the Longs, Analysts, Newbies, and Management, and outline where we can see incremental increases in both NPV and IRR. I'm still a bit taken back as to why such conservatism....I really hope that is simply the nature of the team's personality to build the model as robust as possible for their own credibility, and not for any, any (yes, I said that twice) other reasons.

Are you telling me you could not reasonably justify another 0.2% to the IRR to bring it into the 30's. Hmmmm.......Aside from getting an explanation on what the plans/options are (as broad as they may be), the reason for this conservatism on NPV is the question I most want an answer to.

On a scale 1 to 10, 1 being very conservative and 10 being very aggressive, I rate PGD's PEA 1.5 out of 10.

Potential Upsides NPV/IRR in the Short to Medium Term PEA/PFS (my interpretation from numerous PGD public reports and press releases, Mike's Blog ( https://chidliak.blogspot.ca/), JK's comments, Will's comments, and ideas from this SH Blog). IMO

1. PEA slope angles used from 35 to 48 degrees. Expected that once geotechnical work is done, slope angle will increase. Right now, this results in a higher strip ratio and 13% and 35% left out of the PEA for CH6 and 7 respectively. Only 11.8 million carats for 6/7 are included in the PEA, versus 15.6 million carats currently inferred.

2. Diamonds below depth of 260 m for CH6 and 240 m for CH7 not in PEA. 2.2 mT to 3.5 mT TFFE in CH6 and 0.9 mT to 2.4 mT TFFE in CH7. To be better defined in 2017 Winter Program.

3. FX rate used in PEA 78 cents. Higher than recent other PEAs

4. Discount rate of 7.5% used. 4 out of 5 comparative PEAs used 5, 5, 7 and 7%

5. PEA assumes full cost to PGD for All Winter Road. Potential exists for sharing costs through Federal Infrastructure Program and/or Third Party (potential power line)

6. Operating costs could be reduced by switching to LNG or Battery-Powered (remember, mining starts 4 years from now, technology moves very fast), from Diesel

7. Diamond breakage in CH7 “all four geological units in the 2015 CH-7 bulk sample reveals that 75% to 90% of the diamonds were damaged, well over double what is typically found for large-diameter RC drill programs “ “that the breakage observed has resulted in a 10% to 40% loss of carat weight due to minus 1.13 mm diamond fragments reporting to the sump during screening of the bulk sample at Chidliak “ This will increase both the diamond value and diamond grade, thus the ore value per tonne at CH7.

8. The diamond valuator made some very clear comments in previous press releases. In the PEA, the diamond value used was considerablely less than the higher model average price valued by WWW.

9. The winter program will further define CH6 and CH7, and will likely result in a change in sequencing with the highest ore value per tonne at surface likely mine early on. My personal thoughts are that Domain 5 and Domain 2 will show improved cpt and higher carat values.

10. Diamond-bearing nodules have not been fully explained, understood, resolved, nor accounted for (I recall 3 of them being pulled from the analysis so as not to distort the numbers)

11. With more funds in the medium term, further exploration at CH1, 44, 45, 46, 31 and Area B will no doubt be added to the mine plan.

12. PEA uses 2000 tonnes/day for LOM of 10 years. As exploration continues, I can easily see a 3000 tonnes/day operation. Impact will be slight increase to capital cost, material increase to annual revenue, and material decrease to operating cost/tonne. Net impact = material change in profit margin.

Let's not forget about the other assests PGD has (see pdiam.com), which seem to be valued at zero in terms of the stock price.

Is this a $500 million NPV company? I think not. In terms of a PEA, in the medium term with some financing, NPV should range between $1 and $1.5 billion, IRR over 45%, just for CH6 and CH7. Then add everything else. Then pretend we're actually in a mining scenario where specials and coloured diamonds could come in to play. And perhaps there are some valuable metals also in place in-situ. Endless. Good luck. IMO

Normal Guy