Star DIAM Mentioned (Mon, 10 Jan) - Summary by Will PurcellStar Diamond is soaring, which could aid its quest for cash, but the rally could be pricing the company out of buyout territory. Star Diamond Corp. (DIAM), soared 9.5 cents to 46.5 cents on 5.19 million shares, hitting a new 52-week intraday high of 49 cents amid expectations that the company's joint-venture partner, Rio Tinto Exploration Canada Inc. (RTEC), will again open its wallet to explore their shared FalCon diamond project in Saskatchewan after two years of blustery lawyering over who owned what.
Star's long-faithful retail shareholders are champing at the bit, anticipating that RTEC will soon acquire their company, presumably at a handsome premium. Unfortunately, Star's escalating price is driving the price -- and therefore the prospect -- of a cash buyout beyond a workable threshold. Any offer, from RTEC or elsewhere, would require a worthwhile internal rate of return (IRR), and the added cost of an offer is an immediate up-front capital cost that the buyer must bear.
Star Diamond's 2018 preliminary economic assessment projected FalCon with an IRR of just 18 per cent and a discounted net present value of $2.0-billion after taxes, aided by a series of optimistic assumptions. (The market shared but a sliver of that optimism: Star's stock carried a market value of about $80-million in the months that followed, just one-10th of the company's then presumed 40-per-cent share of that calculated net present value.)
Even with the dream sheet accepted as is, making Star a 50-cent-per-share offer would decrease the IRR for that one-quarter share of FalCon below 11 per cent. Indeed, even if FalCon's rough diamond prices do a Karowe, doubling their already juiced values, an 80-cent-per-share offer would pull the IRR for Star's interest below the commonly used 15-per-cent threshold. Those numbers highlight the growing risks and diminishing returns that buyout offers entail, especially when most bidders offer premiums to the market's perceived project value.
And yet, project acquisitions are common -- and some go for eyepopping sums. Kinross Gold Corp. (K: $7.04) recently offered $1.8-billion in cash and stock for Great Bear Resources Ltd. (GBR: $28.02) and its Dixie gold project near Red Lake. The (blue) sky is the limit at Dixie, since Great Bear does not yet have a resource estimate, but both parties have pondered the possibility of over 8.5 million ounces being delineated.
Kinross took a $1-per-share hit, from which it has not yet recovered, following that offer. Still, it was nothing like the thumping that befell Osisko Gold Royalties Ltd. (OR: $14.68) when it offered $338-million in stock for Barkerville Gold Mines Ltd. in 2019. Barkerville's Cariboo gold project came with a dream sheet showing a 28 per cent IRR, but with the purchase cost included, it dropped to just 8 per cent. That acquisition was for stock, not cash, but investors carved their displeasure out of Osisko's hide, cutting what had been a $16 stock before the offer to less than $12 within days, as dilution disgruntlement reigned supreme. (Barkerville's shareholders got less than 9 per cent of Osisko's shares.)
As Osisko learned, generating enough blue sky to escape the crimson tide that befalls an overoptimistic acquisition of an advanced project has its challenges. Further work at Cariboo has expanded the ounce count to 5.9 million from 4.6 million, but the grades dropped and costs increased. Osisko subsequently spun the project off as Osisko Development Corp. (ODV: $4.20), and while that company has since raised over $250-million atop the $338-million it paid for Cariboo, its current market value is just $558-million.
If RTEC declines to make an offer for Star Diamond -- so the hope goes -- a white knight will come trotting up to win the fair maiden. Naming a worthy jouster still galloping among the walking wounded of the diamond sector these days is a challenge, but Star's faithful often point to Newmont Corp. (NGT: $76.69).
Unfortunately, they forget that Newmont once invested nearly $200-million for a substantial interest in the project in 2006, then chose to throw nearly a quarter of it away for nothing, having deemed the results of Star's 2008 program a disappointment. In mid-2017, Newmont finally traded its remnant interest for 53.8 million Star Diamond shares, caring not that they carried a deemed value double what RTEC paid for 5.56 million shares in a concurrent placement. Since then, not a peep has been heard from Newmont about its investment -- the shares at least metaphorically sitting stuffed and forgotten in some dusty cabinet.
While the odds of a buyout bid shrink with Star Diamond's rising share price, a soaring stock will be great news when the company goes hunting for the mountain of cash needed to cover its share of construction costs -- once, that is, RTEC determines the FalCon project is economic to pursue. Of course, the mechanics of financing the mine raise some new challenges. Stay tuned.