Star DIAM Mentioned (Tue, 07 Sep) - Summary by Will PurcellStar Diamond's retail backers await a buyout from Rio Tinto; other investors appear skeptical. Ken MacNeill's Star Diamond Corp. (DIAM) closed unchanged at 21 cents on 86,000 shares. Star's stock remains stuck within a cent of the 20-cent mark, a perch to which it has clung like a parrot with acrophobia since 2012, save for some energetic forays when it looked like its Fort a la Corne project (FalCon) might move ahead. Indeed, Star got to 53 cents in early 2020, seemingly free of its shackles, in the wake of word that Rio Tinto Exploration Canada Inc. (RTEC) had exercised its options and declared a FalCon joint venture formed.
Not so fast, said Star Diamond, huffing lawyerly at RTEC and then filing suit against the company, stalling and then reversing the flight of its own stock in the process. Now, with the litigation unlikely to be heard in court until some time next year -- if all goes well -- FalCon looks to be essentially stalled for months to come. The only way the situation might be resolved early is if there is a settlement. One possibility is unlikely -- that one litigant turns to the other and says: "Oops, we goofed!" -- leaving a buyout as the only other option.
Indeed, it is that possibility that is keeping Star Diamond's long-time and mostly loyal shareholders around. Paramount in their minds is the bottom line of a 2018 preliminary economic assessment that showed the FalCon project with a $2-billion discounted net present value after taxes. The huge value aside, investors cheer that the discount rate, 7 per cent, is significantly higher than the 5 per cent used on many other mining projects.
Of course, those projects are typically gold plays, a sector where a 5-per-cent-discount rate is more tradition than good sense. In 2014, when Mountain Province Diamonds Inc. (MPVD) rolled out a feasibility study for its 49-per-cent-owned Gahcho Kue mine, it derived a $1-billion bottom line using a 10-per-cent discount rate, after taxes. That works out to about $2.50 per share with today's share count. (Mountain Province lost one cent to 45 cents on 123,000 shares today.)
Stornoway Diamond Corp. revised -- optimized, it cheered -- a two-year-old feasibility study in 2013, deriving a net present value of $391-million after taxes using a discount rate of 7 per cent. There is no per-share comparison available, as Stornoway mined itself into bankruptcy in 2019, racking up losses approaching that calculated value in barely one year.
Another set of studies for a Canadian diamond mine highlight the disconnect between valuations and the value put on a company by the market. In 2000, Winspear Diamonds Inc. delivered a prefeasibility study of its Snap Lake project, pegging the value at about $600-million after taxes based on an 8-per-cent discount rate, about $17.60 per share for Winspear's two-thirds interest in the project. Just a few months later, De Beers Canada had to be cajoled into offering $5 per share -- up from $4.25 per share -- for the company.
Of course, there is a good reason De Beers was reluctant to shell out a big wad of cash, as the outlay slams the bottom line. De Beers, when it built its Snap Lake mine, had to rake in enough revenue to cover the $500-million it paid to acquire the project and the $1-billion it spent building the mine. (Winspear had put the cost at just $270-million.) As a result, Snap Lake spent its 10-year run hovering near -- and often below -- the breakeven point, thanks to the extra outlays.
Therefore, RTEC would have to consider the costs of acquisition as well as the construction costs, should it choose to acquire the FalCon project through a buyout. Even at 50 cents per Star Diamond share, the cost would be over $225-million, which comes off the top of Star's 40-per-cent share of an $800-million discounted net present value after taxes. Worse, once the rosy rough diamond price escalation factor -- 2 per cent above inflation -- is stripped away, the after-tax value of Star's share of FalCon drops to about $350-million. Further, adjusting the grade and value averages even slightly to account for the greater proportion of tiny diamonds identified by RTEC's latest testing quickly sends the valuation negative.
Those numbers suggest that there may not be any incentive for RTEC to make any buyout offer, much less one that the company and its shareholders would accept. Therefore, the battle between RTEC and Star Diamond may yet see its (distant) day in court.