Star DIAM Mentioned (Wed, 15 Dec) - Summary by Will PurcellThe market zeroes in on a new valuation for Star Diamond and its FalCon project in Saskatchewan. Ken MacNeill's Star Diamond Corp. (DIAM), a perennial 20-center, closed unchanged at 25.5 cents on 852,000 shares. Star's stock surged to 36 cents early last Friday then drifted to a 25-cent close in gyrations following word that the company and Rio Tinto Exploration Canada Inc. (RTEC) have agreed to a revised joint venture deal covering the Fort a la Corne (FalCon) project in central Saskatchewan. The wanderlust has abated -- Star's shares got as high as 30.5 cents on Monday and as low as 24 cents Tuesday but stayed close to home today as the market seeks to revalue the company in the wake of the new deal.
The revised arrangement gives RTEC a 75-per-cent interest, up from the 60 per cent that it had been claiming and Star had been disputing, but in return RTEC agrees to forgive roughly $31-million in expenses that Star had been required to pay under the original version. Further, RTEC has agreed to defer collection of payments for exploration expenses incurred from the end 2022 to the announcement of a positive production decision.
The new deal aside, many of Star Diamond's long-term retail shareholders believe the arrangement is but a prelude for a grand finale -- what they expect will be a buyout by RTEC on generous terms. The bottom line of the hoped-for offer is a topic for discussion by the faithful across various chatrooms, but much of the cheerleading begins with Star Diamond's 2018 dream sheet, a document that projected a discounted net present value after taxes of $2-billion and an internal rate of return of 19 per cent.
That would credit Star's 25-per-cent interest with a current value of $500-million, roughly $1.10 per share -- the mere mention of which stirs stiff headwinds from those demanding an offer at or above $3 per share. Unfortunately, the only investors who put stock in dream sheet valuations are those who already own stock in a company touting one of those rosy valuations. In the market, those looking to invest are willing to pay just a fraction of a typical dream sheet valuation and -- not coincidentally -- there is no shortage of sellers.
There are other numbers that offer baseline calculations to assess the value of the FalCon project. The least reliable can be a market valuation -- the market is not always right unless one can explain how the FalCon project was worth $1.6-billion in the giddy days of early 2007, when the faithful talked of $20 buyouts, but late the following year, in the depths of the Great Recession, the market value was just $40 million.
The first tangible valuation placed on FalCon came in spring of 2017, when Newmont Corp. (NGT: $69.63) traded its remnant interest in the project for 53.8 million shares, a transaction that Star Diamond's accountants used to value the full project at $66.3-million. The arrival of RTEC as an optionee in mid-2017 offered a new, higher valuation perspective when it agreed to spend $70.5-million to earn a 60-per-cent interest. That pegged the value of FalCon at nearly $120-million, and Star's then expected 40-per-cent share at $48-million.
RTEC did complete $106-million of work by late 2019, including a 10-hole Bauer trench-cutter bulk sample on the big Star kimberlite, a key part of the project. That successful program may have allowed for an improved valuation, and the latest amendments to the agreement do suggest an increased value. With RTEC covering the $31-million in now forgiven cash calls in exchange for an additional 15-per-cent interest in the project, the numbers imply a value of over $205-million for FalCon as a whole, valuing Star's now 25-per-cent share at just over $50-million. There are other intangibles in the new arrangement -- Star's share of the exploration bills from 2022 onward will not come due until a mine is in production -- and that could arguably nudge Star's value higher.
All told, RTEC now has spent a total of $181-million for an agreed 75-per-cent interest, which values Star's 25-per-cent sliver at about $60-million. Meanwhile, at today's close, the market credits Star Diamond with a value of $115-million, double what the recent deals suggest but less than one-quarter of the optimistic net present value laid out in the three-year-old dream sheet. Of course, as previously shown, market valuations can vary much over time.