Post by
lovecarats on Mar 08, 2017 3:39pm
A History Lesson
I have been following this board for a while and fully appreciate the anxst that many have regarding winter program, financing and development of Chidliak.
The change in mid-stream just announced is a good one IMHO as both perceived and actual valuation of diamond deposits has gotten to be very time-consuming and expensive, especially if the intention is to avoid massive dilution.
I have often stated that in the mining industry "there is no collective learning".
That needs to change especially in light of where PGD is wrt Chiliak development.
To this end I have prepared a walk though history which will outline some of the realities of advancing a deposit from PA to Operation.
Financing and development of a diamond mine has proven to be a difficult and costly venture for a junior to proceed without a senior JV partner – as proven by Stornoway Diamonds.
Joint Ventures such as Rio/Aber for Diavik and most recently DeBeers/MPV for Gauhcho Kue have enabled juniors to share in significant portions (40% & 49% respectively) of their projects without attracting huge dilution.
SWY worked from zero percent ownership to 100% ownership in Renard through hostile acquisition of Ashton then the purchase of Soquem’s 50% share. The cost from a shareholder dilution perspective has been enormous as the following table indicates:
2006 Explorer only 20M (80M shares)
2007 Post Ashton take-over 50M (200M shares) 50% (Ashton) Cost = 30M shares
2009 Preliminary Assessment 64M (254M shares) PA Cost = 14M shares
2011 Pre-Consolidation 89M (355M shares)
2011 Post-Consolidation 89M shares
2011 Post Soquem 50% 119M shares 50% (Soquem) Cost = 24M shares
2012 Feasibility Study 139M shares FS Cost = 50M shares
2014 Pre-Financing 153M shares
2014 Post-Financing 732M shares Financing Cost = 579M shares
2016 Post-Warrants 828M shares Total Financing Cost = 675M shares
2021 Post-Opt, Wt & Deb 950M shares Ultimate Financing Cost = 800M shares
PGD has released a PA for Chidliak with after-tax NPV7.5 of $471M and has issued shares totalling 339M with a market cap today @ $0.19 of $64M. This M/C represents apprx. 14% of NPV which is considered reasonable for this early stage of development.
The estimated cost to complete a full Feasibility Study is perhaps $50M and likely take minimum 3 years. Even if these funds were raised @ $0.25/sh offering, that generates another 200M shares giving a total of say 540M shares.
Capital cost to develop Chidliak is estimated to be $435M in the 2016 PA. Given that costs and scope always increase with Feasibility Study, we assume 50% increase to a total Capex of $650M.
Even if we assume that 50% of required Financing can be achieved by Equity issued @ $1.00/share, or 4X what was assumed for FS financing, then this results in another 325M shares issued for a grand total of 865M shares issued plus Senior Debt of $325M.
So the end result is 865M shares @ $1.00/share or a M/C of $865M at the start of Construction, say five years from now (allow time for Feasibility Study & Permits & Financing), or 2022. After allowance for 2.5 years for Construction and ramp-up, PGD would have Commercial production in 2025 (8 yrs from now).
Assuming typical project value growth follows the Lassonde Curve, and maximum pre-Construction valuation is 0.25xNAV, this implies an improved/enhanced NPV of $3.5B and supports a share price in 2025 of $4.00/sh. That valuation will be tough to get without doubling or trebling Mineable Reserves!!
Looks to me that there are a lot of reasons why PGD is languishing around $0.20/share!
Don’t get me wrong folks, Chidliak appears to be a very good deposit, but is it good enough to support your expected valuations? There is a very long road ahead and going alone could be quite difficult. Definitely the switch in 2017 plans to further define C6 at depth should be rewarding from an NPV basis and could change the path of imminent massive dilution considerably.
The numbers do suggest a JV partner with deep pockets but remember, no one in the diamond business will pay good money for a deposit without major definition and de-risking. The sad tales of Jericho (TAH) and Snap Lake (DeBeers) and even Renard (SWY) are front and foremost in everyone's valuations today IMHO.
Cheers & GLTA
LC