MPV Streetwire
Mountain Province rallies on great expectations
2005-04-13 13:03 ET - Street Wire
by Will Purcell
Mountain Province Diamonds Inc. and its partners are finishing off a prefeasibility study on the Gahcho Kue project, and speculators are expecting some good news. That could account for a recent rally that saw Mountain Province's shares nearly double over the past two months. The stock climbed from $1.60 in early February to a crest of $3.07 earlier this month. The engineering work could account for the surge, but there is an alternate explanation, as much of the gain came last week, just after the company obtained a listing on the increasingly popular American Stock Exchange. Whatever the reason for the renewed interest, there are some key signs suggesting that Gahcho Kue will become another important Canadian diamond mine -- one with a fine U.S. listing for our southern, stock-buying neighbours.
The road to feasibility
Early in 2000, Mountain Province and Camphor Ventures Inc. altered their agreement with De Beers. The revision came after the first big mini-bulk tests of the three key pipes at Gahcho Kue and those tests produced more disappointment than promise. Mountain Provinces shares traded above the $4 mark in mid-1999, but the stock sank to just $1.15 by the following March.
After the test of the Tuzo pipe produced a particularly disappointing result, it seemed unlikely that the desktop study would produce a sufficient rate of return. As a result, De Beers and its junior partners agreed to update the study yearly, until 2004. Once the desktop effort showed an internal rate of return of 15 per cent, De Beers would advance to a feasibility study.
De Beers completed the first desktop study in the summer of 2000, earning a 51-per-cent stake in the Gahcho Kue project. As expected, the rate of return fell well short of the needed target. The partners never formally revealed the bottom line, but the rate of return was apparently close to zero. As a result, De Beers updated the report as required over the next three years, drilling up some larger samples from the best two pipes in 2001 and again in 2002.
A big revision resulted after the 2002 tests. De Beers bases its revision on the Hearne and AK-5034 pipes, as well as a high-grade zone within Tuzo. The capital costs to build the hypothetical mine increased somewhat, swelling to about $600-million. The new plans used more efficient mining techniques and that allowed De Beers to slash the expected operating costs. The company pegged those costs at just $56 per tonne, down from the $81 per tonne calculated during the 2000 study. That big drop might have delivered the required rate of return had the projected diamond values not taken a big turn for the worse.
The diamond value at AK-5034 declined by nearly 10 per cent, while the estimate for the Hearne diamonds declined by almost 40 per cent. In all, the Gahcho Kue rock value took a 17-per-cent hit. That wiped out all the gains on the cost side of the equation.
As a result, the internal rate of return actually decreased, with a predictable result. Mountain Province's shares managed to climb above the $2 mark, cresting at $2.26 just before the new disappointment. The stock sank to a low of 63 cents when the revised desktop study pointed to another long wait for investors.
New signs of hope
That long wait could be coming to an end. Late in 2003, De Beers began work on a prefeasibility study on the Gahcho Kue project, and that work is now winding up. Some speculators expect a glowing report within days, but Mountain Province's president, Dr. Jan Vandersande, said that the report would be complete in June.
Much of the new enthusiasm for Gahcho Kue stems from encouraging comments from De Beers. Several months ago, the company's managing director, Gary Ralfe, began talking about De Beers having three diamond mines in Canada in the coming years. One of those mines seems certain, as the Snap Lake operation is due to start production late next year, or early in 2007.
Analysts also expect De Beers to make a profitable mine out of its Victor pipe in the Attawapiskat area of Northern Ontario. The company now says the Victor mine will be complete in 2007, and it should achieve full production by 2009, if all goes according to plan.
That still leaves room for one more mine to fulfill Mr. Ralfe's expectation. Mountain Province's weary shareholders have high hopes that the third mine will be their Gahcho Kue project, rather than some unexpected project such as the Fort a la Corne play in Saskatchewan.
A recent De Beers presentation leaves little doubt that it is Gahcho Kue that the company is banking on to become its largest source of Canadian diamonds. The company revealed its forecast of annual production for a 15-year stretch beginning in 2007, and it shows Gahcho Kue as the main source of carats from 2012 through 2022.
De Beers expects production at Victor to reach about 800,000 carats per year in 2009 and begin a gradual decline starting in 2013. The company has a rosier expectation for Snap Lake. The big dike should deliver close to 1.5 million carats by 2008 and run at roughly that level until 2017, when production is forecast to tail off gradually.
De Beers tentatively thinks Gahcho Kue could handily top those carat crops. From 2012 to 2022, the still theoretical mine is charted to deliver about 29 million carats. Production would run at close to three million carats per year from 2012 to 2015, then tail off to a low of two million carats by 2017. De Beers projects Gahcho Kue will catch a second wind after that, with production returning to more than three million carats a year for a few years around 2020.
Changing parameters
For Gahcho Kue to become a profitable diamond mine, De Beers will have to find a way to boost its rock value and decrease its costs. Increasing diamond values clearly will play a big role in the improving fortunes of the project, but the prefeasibility study will not bring any new increase in diamond values, according to Dr. Vandersande. He said that the study would use the latest valuations, based on prices determined last August.
Those values did deliver a significant jump over the estimates used in the 2002 revision of the desktop study. The Hearne diamonds currently carry a value of $65.00 (U.S.) per carat, up about 30 per cent from the earlier figure. Things were also encouraging with the AK-5034 diamonds. De Beers upped its estimate to $79.20 (U.S.) per carat, up from $62.70 (U.S.) per carat in the desktop study revision. That works out to an increase of about 26 per cent.
Those values alone would likely be more than enough to produce a sufficient rate of return to advance the project to full feasibility and beyond. The cost side of things must also be considered, and it seems likely that the capital and operating cost estimates will jump as well.
The sliding U.S. dollar and surging oil prices will have the greatest impact on the new calculations, but lesser increases in steel and labour costs will also have an impact on the bottom line. "Obviously everything will go up a little bit," said Mountain Province's president since 1996, although he added that diamond process were a far more sensitive parameter that would more than offset any cost increases.
Even if the internal rate of return again falls short of the needed mark, De Beers could well decide to proceed with a mine anyway. The diamond market remains buoyant and the current diamond values are undoubtedly higher than those of last summer. As well, further hefty jumps in the prices commanded by rough diamonds seem likely in the coming years. All that could prompt De Beers to forge ahead with its third mine, in anticipation of continued improvements in the bottom line.
Recent revisions to the Snap Lake project offer a few clues of what might be in store at Gahcho Kue. Earlier, De Beers projected its Snap Lake operating costs at $103 per tonne, but a recent revision boosted its estimate to $130 per tonne, an increase of just over 25 per cent.
The capital cost of the mine also took a jump, reaching $625-million. That was about 27 per cent above the earlier projection of $490-million. De Beers also has a much rosier diamond value for Snap Lake. The latest estimate pegs the diamonds at $109 (U.S.) per carat, up from $76 (U.S.) per carat. That works out to an increase of 43 per cent.
The shifting focus
With the prefeasibility work in full swing, continued testing and exploration is assuming a lower priority. There are many targets on the property available for testing, but most of the features are small. Dr. Vandersande said that the partners agreed it did not make sense to drill small targets at this stage. Rather, the partners are investigating some new techniques to prioritize the remaining features. As a result, De Beers may check out several features using soil gas hydrocarbon technology, as well as other methods.
Getting the environmental work completed to the feasibility stage and completing the prefeasibility study are clearly the top priorities, said Mountain Province's diamond man who previously was a professor at Cornell and Witwatersrand.
It could be an encouraging sign if exploration does have a lower priority. The hunt for new kimberlites tailed off during the permitting and construction stage at Diavik, as most of the effort went into getting the mine operating quickly. Once Diavik reached production, the partners resumed their hunt.