From today's Financial Post:
Blow to Diavik as diamond mine costs rise 46%
Aber share price hit
Keith Damsell
Financial Post
The development of Canada's second diamond mine has suffered a major
setback with news the Diavik project will cost 46% more than
expected and begin production a year later than forecast.
The final price tag for Diavik will be an estimated 1.28-billion,
$405-million more than forecast in the firm's 1998 pre-feasibility study. Commercial production at the Northwest Territories mine has been pushed back nine to 12 months to the first half of 2003.
To make matters worse, Diavik will mine fewer stones than expected at a higher cost. About 1.5 million tonnes will be mined annually over the estimated 22-year lifespan of the mine. Many analysts were optimistic Diavik would process 1.9 million tonnes each year. It will cost $85 to process each tonne of ore during the first 10 years of production, 44% more than the forecast $59 per tonne to process ore for years three through nine.
The details are found in the Diavik feasibility study received on Aug.
18 by the project's partners, Aber Resources Ltd. of Vancouver and British mining giant Rio Tinto PLC. Mine manager Diavik Diamond Mines Inc. and Aber released the news late on Friday.
The cost increases and production delay surprised many industry
watchers and led to an exodus of Aber investors. The stock fell
28%, down $4.40 to $11.10 on the Toronto Stock Exchange yesterday. About 1.3 million shares were traded, about 15 times the stock's average daily volume of about 90,000 shares.
"This is a blow to people's enthusiasm," said David Davidson of
Newcrest Capital Inc. of Toronto. Newcrest, along with Yorkton
Securities Inc., cut Aber from a "buy" to a "hold." Diavik "has been
pushed far enough out now that its beyond many people's investment horizon. For the short term the stock's going to tread water," Mr. Davidson said.
"These numbers were totally unexpected," added a second analyst
who asked not to be identified. "What do they know now that they
didn't know a year ago?"
The $30-million confidential feasibility study found cost increases
"across the board," said Alan Bayless, an Aber spokesman. The
complex mining project about 300 kilometres northeast of
Yellowknife proposes the construction of earthen dikes around four
kimberlite pipes that lie in the shallow water of Lac de Gras. The
federal government is widely expected to give Diavik environmental
approval in September. Aber must finance its 40% of the project, a
figure that has ballooned to $512-million from $350-million.
"We're still very keen to go ahead and put the project into
construction," said Mr. Bayless. The company has $213-million in
working capital and expects to raise additional funds through debt
financing.
The new forecast added fuel to environmental concerns. "This raises
a lot of uncertainty," " said Kevin O'Reilly, research director of the
Canadian Arctic Resources Committee. The Yellowknife-based group is demanding a more detailed review of the diamond project. "You expect companies to get their financials right. If they can't get that right, what does it say about their environmental processes?"
Diavik's higher costs and delay failed to shake the resolve of Aber's
major shareholders.
"We think very long term," said Mark Aaron, spokesman for Tiffany
& Co. The New York diamond retailer signed a $104-million equity and marketing deal with Aber last month. As part of the agreement, Tiffany acquired eight million shares at $13 each.
The message was much the same from Franco-Nevada Mining Corp. Ltd. The Toronto mining royalty company controls about 8.6% of Aber's 53.8 million shares. "We're supportive shareholders," said David Harquail, its senior vice-president.
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