7936567 Canada Inc SWYDF

RE:An Inconvenient Truth - Part 4

[GeorgeBasset]

lovecarats wrote: AN INCONVENIENT TRUTH – Part 4

After discovering what appears to be a compounded escalation problem in the Revenue spreadsheets it was decided to check further into reported numbers.
 
A detailed review of 2016 Technical Report Operating Cost numbers was conducted comparing Real (Constant) dollar costs to Nominal (Escalated) dollar costs. It clearly shows that Nominal dollar costs are also over-inflated as the variance between total operating costs in 2017 is 10.5%!  Assuming typical annual escalation of costs, the difference for 2017 (between Real and Nominal) should at best be 4% given 2% annual inflation rate assumption. The unexplained difference is roughly 6.5%!

Both Revenue and Operating Cost spreadsheets appear therefore to have suffered similar errors.
 
Checking to better understand the nature of the operating costs used in the 2016 Technical Report, the following was found that describes the cost estimating process:
 
21.3 Operating Costs Estimate
OPEX is defined as those costs occurring after the Commencement of Commercial Production (defined as sustained ore processing at 60% or more of plant nameplate capacity for 30 consecutive days). Based on the re-baselined project schedule and estimated production ramp-up schedule, commercial production is scheduled to be achieved by December 2016, as illustrated in Figure 21.1.
 
OPEX was estimated by Stornoway and is subdivided into four areas as follows:
Open Pit Operations;
Underground Mine Operations;
Process Plant and Auxiliaries;
General, Administrative and Infrastructure.
 
The open pit operations cost estimate is based on the updated open pit mine design and production schedule, and assumes standard open pit mine operating procedures.
 
The underground mine operations cost estimate is based on the updated underground mine design and production schedule and estimated from first principles.
 
The process plant and auxiliaries cost estimate is based on the quantity of kimberlite ore feed to the process plant. The operating costs were estimated using standard manufacturer’s cost data for power, fuel, equipment, consumables and hourly maintenance costs.
 
The general, administrative and infrastructure cost estimates were derived from budgetary quotes and project actuals established in the first year of mine operations. Labour costs are based on a salary scale and organizational chart developed by Stornoway.
 
The cost estimation process was summarized as:
 
The OPEX estimate was based on budgetary quotes and project actuals established in the first year of mine operations, and utlizes a Class III estimate methodology as defined by the type and quantity of engineering deliverables produced to support the estimate. The expected order of accuracy is in the range of -15% to +15%.
 
Clearly SWY has explained that it developed its forecast operating cost structure and details effective late 2015, early 2016 and definitely not much earlier. The maximum 4% escalation to 2017 dollars is realistic.
 
So now again we ask the question: how did this happen in a similar manner to Revenue as described earlier? And what is the impact?
 
Unfortunately the fact that costs appear to be similarly affected as revenue does not balance each other out. The Total Revenue stream is THREE TIMES GREATER than Total OPEX stream resulting in significantly greater cash flow and profitability projections.
 
NPV calculations would appear to be over-inflated by all indications, given that the figures contributing to cash flow are likely in error.
 
To further check, a test was performed by reverse-engineering the factors used to convert Real to Nominal dollars. The not-so-surprising result is that it takes roughly 5 years of de-escalating the Nominal 2017 operating cost numbers at 2% annually to achieve the Real number values!
 
The only plausible explanation IMO is that escalation factors from a spreadsheet used in an earlier Technical Report (2013?) were mistakenly applied to the 2016 Technical Report tables. This would be considered a major ‘engineering’ error.
 
So now not only do we have smoke-and-mirror variance explanation but we also have a potential significant error in spreadsheets and value calculations, that Stornoway, and Matt specifically, have used to publicly forecast Project profitability to investors.
 
This goes way beyond anything that may be ‘covered’ by Forward-Looking Statements IMO.
 
The constant flow of obfuscation; technical failures (diamond crushing by gneiss when it was known to comprise 40% of ore); self-congratulations and self-reward for assumed ‘over-achievement’; recent admission that the underground mine was 5 months ‘incomplete’ when Project construction was complete (and by inference - roughly $50 million not spent of the Project Budget, therefore NOT $32M below budget); invention of “incidentals” to create a higher average price; have all but destroyed any and all credibility…and value of this company.
 
Further to this we now suspect that base numbers used in 2016 Technical (NI 43-101) Report are apparently tainted with inaccuracies and errors resulting in potential over-valuation.
 
It is no wonder that share prices are at all-time historic lows.
Accountability must be demanded…and delivered.
 
While clearly the exposure and discussion of these issues is not necessarily to the benefit of the Company, the really only way to move forward is through admission, accountability and cleansing.

Improvements to the Renard operation and cash flow are ‘imminent’, we hope, but BoD cannot continue to reward Executives who have been less than forthright and accurate in communications and planning.

The ‘carrot’ was abused. It is time for the “stick”.
 
LC

Good work Carrr  :)