from stockwatch 2022-04-04 16:30 ET - Market Summary
by Will Purcell
The diamond and specialty minerals stocks box score on Monday was a positive 113-89-108 as the TSX Venture Exchange rose seven points to 905 while polished diamond prices fell 0.3 per cent. Dermot Desmond and Mark Wall's Mountain Province Diamonds Inc. (MPVD) rose two cents to 88 cents on 206,000 shares. The company and its majority co-venturer, De Beers Canada, have a new operating plan for Gahcho Kue, their diamond mine 250 kilometres northeast of Yellowknife. The plan incorporates new carats and an increased processing rate, and the geologists have managed to calculate -- or at least arm wave -- their way to an improved and workable grade in the large Tuzo pipe.
Mr. Wall, Mountain Province's president and chief executive officer, cheers the new plan as having "strong economics," which, despite the favourable supply and demand dynamics in the market, he waffles as offering "strong signals of the significant value opportunity the company represents at current levels." While the new plan shows Gahcho Kue is generating carats almost as fast as it can mine them, there is a damper on the enthusiasm, as a closer look suggests that another lean year lies not too far ahead.
Gahcho Kue held a reserve of 28.3 million tonnes of kimberlite grading 151 carats per hundred tonnes, about 42.6 million carats. Nearly half the diamonds reside within the Tuzo pipe and most of the rest sit within the AK-5034 pipe. Over 23 million carats more are deemed a resource at over 170 carats per hundred tonnes, again, most of those found deep within the Tuzo pipe. Indeed, 37.2 million of the 62.9 million carats left at Gahcho Kue are at Tuzo -- and therein lies the crux of the problem.
The short-term news is good: De Beers and Mountain Province expect to mine 4.5 million tonnes of kimberlite this year and plan to process 3.6 million of those tonnes, enough to generate 6.6 million carats. This will be the last year of mining at the Hearne pit, and once depleted, Tuzo will begin to kick in increasing amounts of kimberlite. Next year, the partners expect to recover 6.1 million carats, a drop of 500,000, as the grade from the 5034 pipe declines and the higher-grade upper part of Tuzo only partially compensates for that drop.
The big hit comes in 2024, when the bulk of mining shifts to Tuzo -- and to deeper within the pipe where grades are lower. The plan calls for the Gahcho Kue plant to handle its usual 3.6 million tonnes of kimberlite, aided by rock previously stockpiled, but the grade of Tuzo drops to less than 80 carats per hundred tonnes, leaving a projected annual crop of just 3.3 million carats. With that big drop, Mountain Province is girding for a near breakeven year for cash flow -- a big loss, in other words, once its administrative and other costs are factored in.
Fortunately, the gloom should be short-lived. The mine plan calls for 5034 to kick in a last hurrah in 2025, and Mountain Province expects Gahcho Kue to deliver 7.1 million carats, its best year ever, with nearly all the gems coming from high-grade rock at 5034. Unfortunately, production tails off from there, with the mine expected to average about five million carats annually from 2026 through 2029, ahead of closure in 2030. The last of the 5034 diamonds will be recovered in 2026, leaving Gahcho Kue to make do in the following three years with diamonds from lower-grade -- and probably lower value -- Tuzo for the last three years.
The bottom line of the economic analysis shows a discounted net present value of nearly $760-million (U.S.) after taxes, although Mountain Province is building in a 2-per-cent price escalator above inflation into its expected prices. Perhaps chastened by how badly prices underperformed the giddy assumptions and escalations built into its feasibility study in the early 2010s, Mountain Province does note that "a 50-per-cent decrease in diamond price results in a break-even net present value" for the company -- and that could spell disaster.
Mountain Province is still looking to convince De Beers to include about 21 million carats residing within its wholly-owned Kelvin and Faraday kimberlites, about 10 kilometres northeast of the mine. Those bodies arguably have comparable grades and diamond values as the Gahcho Kue pipes, but De Beers would first have to acquire a 51-per-cent interest in the kimberlites -- something that has been jawed about for the past four years. With parts of Tuzo looking just marginally economic, the discussions are likely to continue -- if for no other reason than to add more years to the life of the mine and therefore delay the costs of closure.