7936567 Canada Inc SWYDF

RBC: Outperform rating & $1.10 target for Stornoway Diamond

[hockeyguy123]

According to RBC Capital Markets:

https://app.box.com/s/sgc2m904r2d2prgfghkx

May 26, 2014

Stornoway Diamond Corp.

All set to build Renard

Our view: Funding complete which is a significant positive; project delivery starts in H2 with first production expected from Renard in FY17E.

Key points:

Completing the funding: Stornoway has closed its C$923m funding package to complete the building of the Renard mine in northern Quebec. The complicated funding package comprised new equity, debt, convertibles, cost over-run and equipment facilities and a streaming deal. What's left now is the shareholder meeting to approve the programme which should, we believe, lead to first funds flowing in H2.

Renard should be in production in 2017: We model both reserves and resources being mined over a life of some 20 years. We have production ramping up from late 2016 with 2017 output of ~2m ct and remaining in that region for most of the next 12 years before slipping back a bit. We model total rough production of ~$5.1bn.

Funding changes RBC valuation: We have updated out model for the new funds, including the issue of 734m new ordinary shares and 188.6m half warrants (converting into one ordinary share per warrant) to take the total fully diluted shares in issue to ~842m. We have also updated our valuation of Renard by blending in ore from the inferred resources in R2, R3, R65, R4 and R9 to come to a project value before debt of C$967m. On a per share basis this equates to C$1.18. Our Price target is set at 0.95x NAV or C$1.10/share. We retain an Outperform recommendation.

Rerating ahead of project nears completion: Our diamond comps (see exhibit 14) show that companies in production and near to dividends trade at or above NAV, while those developing projects are accorded a ~0.7xNAV. Thus we see SWY starting to trade up to its increasing NAV as Renard nears production, offering significant potential upside over the next two years. Our NAV per share rises from C$1.18/share in FY16 to C$1.91/share in FY18.

Investment thesis intact: Stornoway is developing the Renard project in Canada and following its capital raising it is fully funded to completion. We continue to see rough prices underpinned by growing consumptions of diamond jewelery in the US and developing markets. Stornoway represents a new investment opportunity in a small investment universe.

Investment summary

In our view, the outlook for rough diamonds prices is good, as new production is not likely to compensate for falling output at older mines. On demand, China, India and the recovery in the US are expected to spur demand for diamonds in jewellery. Stornoway's production in 2017 should benefit from these strong market fundamentals. Stornoway is one of three or four companies listed in North America which offer exposure to production or near-to-production diamond projects. The company has announced that it has secured a ~C$1bn funding package to bring the Renard mine into production which significantly reduces risk associated with the project.