Will P from Stockwatch Sept 16 Sean Roosen's Osisko Gold Royalties Ltd. (OR) is about to become the reluctant co-owner of a struggling diamond mine in Quebec. The company and its fellow secured investors -- mainly the Quebec government -- will acquire the Renard mine through a credit bid transaction from bankrupt Stornoway Diamond Corp. (SWY). (Stornoway's shares last traded at two cents on Sept. 6, but the company admits they are now worthless. Osisko's shares, $17.47 early this month, gained 39 cents to $15.70 on 806,000 shares.)
Mr. Roosen, Osisko Gold Royalties' chairman and chief executive officer, says that the company and its fellow secured creditors intend to form an entity that will acquire all the assets and properties held by Stornoway. It will also assume all the debts and liabilities owed to the secured creditors. Further, the entity will also assume responsibility for continuing obligations relating to the operation of the Renard mine -- stiffing the many suppliers of goods and services not being a good idea, if one plans to continue mining.
Osisko Gold Royalties clearly wants to see Renard continue producing diamonds, as it holds a 9.6-per-cent diamond stream, which it acquired several years ago when Stornoway was putting together its $900-million financing for Renard. While Osisko will continue to receive payment from the royalty, it has also agreed to reinvest the cash into the mine for a full year from the date the credit bid transaction (fore)closes. Further, Osisko and its fellow secured creditors will provide the mine a $20-million working capital facility, of which its share will be $7-million.
Osisko wrote down the value of its Renard royalty by nearly $39-million earlier this year, setting its value at $122.4-million. That value is based on the expected rough diamond prices over the projected life of the mine and a discount rate of 4.7 per cent. Osisko noted that if its rough diamond price prediction was 10 per cent too high, the writedown would have been $6-million higher. Of course, in that scenario, the future of Renard would be in peril, and that is now a big worry for Osisko and its fellow creditors.
There is no indication of how Osisko's rough diamond forecast is panning out in the short term, but Stornoway's recent estimates have been overly optimistic. That company said at the start of the year that it expected to average between $80 (U.S.) and $105 (U.S.) per carat this year at Renard, but in mid-August, it pared back its estimate to between $70 (U.S.) and $80 (U.S.) per carat. Rough diamond prices continue to be the bane of Renard's existence: Stornoway's feasibility study had put the projected price at a hefty $155 (U.S.) per carat.
The rest of the Renard guidance is encouraging -- and unchanged from the start of the year. Stornoway expected the mine would process between 2.4 million and 2.55 million tonnes of kimberlite, recovering between 1.8 million and 2.1 million carats this year. (At the midpoints, the company projected a grade of just under 0.8 carat per tonne.)
Stornoway also had good news on the cost side, with operating costs now projected to be about $45 per tonne, down from the start-of-year forecast of about $50 per tonne. Stornoway also pared back its capital spending by about $15-million, to no more than $65-million, although that may have been more a reflection on its financial situation than on good news from Renard. Either way, Osisko and its new Renard co-venturers will face plenty of challenges to keep Renard running. Fortunately, they could be free of a significant amount of interest charges.