Tuesday 14 Sept 99 Street Wire - SNAP LAKE ADVANCES TO PREFEASIBILITY
by Will Purcell
Winspear Resources Ltd. has released the results of the updated scoping
study for the Snap Lake project, completed by Mineral Resource
Development Inc. (MRDI), a division of H.A. Simons Ltd. The original
scoping study was released last fall, and had envisioned a
1,000-tonne-per-day open pit mine, progressing to a similar sized
underground operation after two years. The projected 10 year total cash
flow of that operation, based on an assumed rock value of $400 per
tonne, was forecast to be $572-million. This report had caught the eye of
investors with its projected after tax discounted tax flow rate of return of
54 per cent.
The update of this report continues to project an initial
1,000-tonne-per-day open pit mine, but now suggests a larger,
3,000-tonne-per-day underground operation commencing after two
years of mining. The scoping study assumes a diluted kimberlite value of
$251 per tonne, based on the results of the recently completed
6,000-tonne bulk sample, and just over 10 per cent dilution. The capital
cost for this expanded mine plan is now projected at $241-million,
compared to $103.8-million for the earlier, more modest mine plan. The
tripling of the production rate offers an efficiency in operating costs, with
the cost of mining, processing, general and administrative expenses
forecast at $71.52 per tonne, compared to the earlier $87 projection.
The projected 10-year total cash flow for the new plan is now forecast at
$737-million, a 29-per-cent improvement over the earlier plan. The after
tax discounted cash flow rate of return remains a very robust 44 per cent
under the new plan.
The MRDI report allowed Winspear and its shareholders to breathe a
huge sigh of relief. The report followed on the heels of an unhappy
announcement from Aber Resources that the feasibility report for its
Diavik project had projected a significant increase in capital and
operating costs, therefore the revised scoping study should provide
increased confidence in the Snap Lake project. MRDI is a highly
respected company, has been an active participant in the Northwest
Territories diamond play, and has considerable experience with arctic
mines in general. The company was responsible for the engineering,
procurement, and construction management for the Ekati mine, which
was constructed on time and within budget. MRDI also prepared some
of the preliminary capital and operating cost estimates for two
development scenarios at the proposed Diavik diamond mine.
The Snap Lake project now proceeds to the prefeasibility stage, with a
major underground bulk sampling program planned for next year. This
extraction process will involve establishing a 1,200-metre access drive
from the surface, well under the northwest dyke, and out under the lake.
From this access, a ramp would then be driven into the kimberlite dyke,
with about 600 metres of mining taking place. The operation will yield
about 20,000 tonnes of kimberlite, along the 600-metre stretch. Three
separate 2,000-tonne samples will be taken along this ramp, one at the
beginning, one at the end, and one presumably in the middle. As a result,
the samples will be separated by approximately 300 metres. The
purpose of this large sample will be to gain additional information as to
the grade and the value of the kimberlite underground, some distance
from the previous bulk sample sites. The remaining 14,000 tonnes of
kimberlite would be then processed, and would provide additional
information, but will also generate revenue to partially offset the cost of
the bulk sample. A 20,000-tonne bulk sample might be expected to
produce diamonds valued at almost $6-million.
The extraction of large bulk samples by constructing kilometre-long
access ramps have previously cost in the neighbourhood of $15-million
or more. A budget for the proposed Winspear bulk sample has not been
released yet, but $20-million to $40-million might be a reasonable target.
Much of the expense incurred will be of benefit at a future date,
however. Mr. Turner confirmed that much of the underground workings
required for the bulk sample would also be used for the future
underground mine.
Winspear will apparently be procuring and setting up a pilot processing
plant at Snap Lake, confirming what had been the subject of much
speculation over the past months. Mr. Turner stated that the decision had
not yet been made as to what size that plant would be, and added that
the decision would be based on what was the most cost effective overall.
He confirmed that the 100-tonne-per-day processing rate was the
maximum permitted under the terms of the water license that the
company has applied for, but he added that there was no limitation as to
what size of plant could be constructed. It may prove more efficient to
construct a 1,000-tonne-per-day plant now, if it could be expanded
later.
Expandability is now a key part of the Snap Lake plan. Winspear
watchers had been hoping the MRDI report would incorporate a mining
rate in excess of 1,000 tonnes per day. This hope was generated late last
winter when Deutsche Bank analyst, George Albino, first suggested that
a larger mine was likely. The updated scoping study met those
expectations, but also left the door open for a potentially larger operation
in later years. Mr. Turner stated that "a critical line in the report, which
people may not pick up on, mentioned the possibility that a second
underground operation could be set up in later years." He added that the
north shore portion of the dyke, or perhaps the southeast dykes could
see such an operation.
Further expansion of a future Snap Lake mine would necessarily be
conditional on proving additional tonnage of kimberlite. This expansion of
tonnage appears likely. The scoping study projects a total of 8.2 million
tonnes of kimberlite will be mined throughout the 10-year period. The
project has currently outlined a global estimate of nearly 20 million
tonnes. Conceivably, a Snap Lake mine could be processing 6,000
tonnes daily, or more, late in the next decade. Mr. Turner stated that
there was "more than a possibility" of a second access being constructed
in future years.
With potential further expansion in mind, Winspear will be conducting
another drill program over the next year. Mr. Turner stated that this
additional drilling would continue the process of proving tonnage by
drilling on a grid, as well as step out holes to expand the global tonnage,
and to continue probing for the source. Previous drilling on a grid has
identified, to feasibility standards, a total of eight million tonnes of
kimberlite with a thickness greater than two metres, which is sufficient for
the proposed mine plan. An additional 10 million tonnes are suggested
through step out holes outside the grid area, and the continued grid
drilling will prove much of this kimberlite to feasibility standards as well.
The dyke remains open to the north and east, and the southeast dyke
system has yet to be extensively drilled. The global tonnage should also
be expanded significantly through the step out drill program. The
continued expansion of available tonnage will also have an impact on
mine life, as well as expandability. For example, the mine plan as outlined
by MRDI requires eight million tonnes of ore. An expansion to 6,000
tonnes per day, commencing in year eight, and running until year 18
would only require about 25 million tonnes of kimberlite.
Winspear is continuing the resource estimate analysis, and Mr. Turner
said that the results should be available within two to three weeks,
approximately. He added that a project update would also be issued
over the coming weeks. The resource estimate analysis is expected to
classify the global tonnage as a resource, in accordance with industry
accepted standards. The process will involve assigning a grade to other
portions of the dyke that have not yet been bulk sampled, using a
statistical analysis comparing the microdiamond counts from these areas
with those from the bulk sample pits. Mr. Turner said that the process
would determine the probable grade only, adding that there was no
similar process to estimate the value of the diamonds. The planned large
bulk sample will provide a clearer picture of the value of the diamonds
beneath Snap Lake, although the results to date suggest a very consistent
quality exists on the northwest peninsula.
The prefeasibility stage will also see the construction of camp facilities
and a 900-metre airstrip, as well as an expanded environmental program.
The baseline environmental work has been in progress for some time, but
the process will be stepped up in order to file an environmental impact
assessment with the authorities, possibly as soon as early next year.
Winspear also plans to submit the formal project description to the
regulatory authorities late this year. The filing of these reports would
initiate the environmental assessment process for the Snap Lake mine.
The environmental assessment for the Ekati mine, the first of its kind in
Canada, consisted of a complete independent panel review, however the
more complex Diavik project was subjected to the less stringent
comprehensive study process. Current expectations are that the
environmental review process will be complex, but not onerous, as the
plan does not involve draining or damming lakes.
Snap Lake has been viewed as a potential diamond mine since June of
1998, when the company first released the minibulk sample results. With
the release of the MRDI report, it appears that Snap Lake has suddenly
emerged as a strong contender to develop Canada's second diamond
mine. At an underground mining rate of 3,000 tonnes per day, Snap
Lake could generate gross annual revenues of $300-million. At current
rates of production, grade, and value, the Ekati mine is likely to generate
gross annual revenues of $450-million over the next several years. The
proposed Diavik mine is expected to generate gross annual revenues of
up to $600-million over the first 10 years of operation. If a second
access is indeed constructed, a Snap Lake mine, expanded beyond
3,000 tonnes per day, could rival Ekati and Diavik as Canada's largest
diamond producer.
Mr. Turner stated that Winspear is pleased with the progress to date,
and he suggested it was now "time to start looking at the numbers." He
said that "every news release over the past six months has added more
value to the project." He felt that the two bulk sample results had proved
the economic viability and the consistency of the kimberlite, and the
global tonnage estimate further enhanced the project. He said that after
the release of the scoping study update, "it is going to be hard for anyone
to criticize this deposit."
While the deposit certainly appears attractive, some questions do remain
to be answered about the Snap Lake project. The ownership of the
property is currently the subject of a legal dispute between Winspear and
its joint venture partner, Aber Resources Ltd. Winspear claims that Aber
failed to provide written notice of its intention to participate in the 1999
winter and spring budget, and accordingly will suffer dilution to
approximately 16 per cent ownership. Aber disputes this, and has
commenced legal action to restore its ownership to the previous 32 per
cent level. The issue arose over six months ago, and has dragged since
then. A recent boardroom shakeup at Aber had Robert Gannicott and
John Lamacraft replacing Kenneth Hanna and John Parker as the head
officers. With new blood at the helm of Aber, some hope has arisen that
an early resolution of the dispute may be possible.
Clearly, the matter of financing the prefeasibility work, and the capital
cost of developing the mine is the other major concern. The project will
require a considerable cash outlay to advance the project to production,
and Winspear will be responsible for the majority of the cash cost. With
the project advancing rapidly on other fronts, it is reasonable to assume
that work to arrange for the financing is well under way. While there are
an increasing number of attractive alternatives emerging within the
industry, it is likely that further equity financing will be required. Winspear
spokesmen have previously stated, perhaps optimistically, that it should
be possible to raise up to 70 per cent of the capital costs through debt
financing.
It is unlikely that the entire capital cost will be required initially, however.
The open pit operation, slated to last for up to two years, might be
expected to process 700,000 tonnes of kimberlite, and could generate
$105-million in before-tax cash flow. Much of this amount would be
used to finance the additional cash outlay required to develop the
underground portion of the mine, and to expand the facilities to support
the tripling of the mining rate. The original scoping study had forecast a
capital cost of only $61-million for a two-year open pit operation, so the
total financing required in advance of production may well be less than
$200-million.
The approximate $50-million required for the prefeasibility work is a
more immediate concern, although Aber will ultimately be responsible for
between $8-million and $16-million of this amount, plus a retroactive
payment for the disputed work, which might amount to $3-million.
Winspear will have little cash on hand, but the exercise of outstanding
warrants and options should raise approximately $13-million. Even if
Aber prevails in the dispute, Winspear would still need an additional
$17-million to finance the program, although the sale of the recovered
diamonds would likely account for nearly half the amount. Whatever the
source of the cash is to be, the issue of financing is likely to become a
mounting concern as the project advances.
Winspear continues to provide its shareholders with a wild ride. The
stock reached its all time high of $5.30 at the end of May, as investors
anticipated great results from the spring bulk sample program. The
company shares steadily declined in the weeks after the news, reaching a
low of $2.35 in mid-August. Winspear closed Friday at $3.07, up 35
cents on the week. It seems likely that the ride will continue, as Snap
Lake will continue to be a steady news maker over the coming months,
as the prefeasibility program progresses and some pressing questions
begin to find answers.
(c) Copyright 1999 Canjex Publishing Ltd.
Author: GeoffB -- Date:1999-09-14 11:44:39
Subject: Best yet, Will!
Your comprehensive and detailed analysis covered a lot of
ground! Very impressive. Lays it all out, as the pieces of the
puzzle come together.
Good quotes from RT, as well.
I think the scoping study will be helpful, but I think the most
important NR over the next few months will be the work next year
(which you spelled out clearly) and how that work will be paid for.
Thanks!
Geoff
Author: WillP -- Date:1999-09-14 11:09:16
Subject: Dungeons & Dragons
OK...time for some background information on the bulk sample
program...
The purpose of the program is to get representative bulk samples
in different areas of the NW dyke. Samples of 2,000 tonnes are
deemed sufficient.
First, you have to get to the remote locations. How? Well, dig.
You theoretically could just dig your way down the dyke, starting
at the outcrop...but that would be a colossal waste. Plus...you
would have over 40,000 tonnes before you got to where you want
to be. Not good.
So. Start work on the future underground mine. Construct the
access in such a way that it can be used for the underground
mine....hence the winding 1.2 kilometre access...under the dyke, in
bedrock.
The actual 'bulk sample mining' starts with the 600 metre (from
beginning of kimberlite) tunnel that will connect to the access.
All 600 metres will be in kimberlite. All 1,200 metres of the
access will not be. Hopefully not be. [grin] That's a good thing.
Hit the kimberlite...take 2,000 tonnes in an area...burrow along
another 300 metres...mine another 2,000 tonnes in another
bulge...another 300 metres of tunnel...and a final 2,000 tonne
bulge.
Now...the first kimberlite hit will be one of the samples...so it
makes sense to start processing that right away.
They will probably be at the second bulge, by the time the first
sample is processed. So the second sample would then be
processed. Ditto for the third.
Now, the tunnel (600 metres of it) was all in kimberlite...hopefully.
That's where the additional 14,000 tonnes comes from. It can be
processed later, after the 3 2,000 tonne samples are processed.
Follow?
So....at the end...there are results for 3 2,000 tonne samples well
under the dyke, and separated by 600 metres. There's also an
additional 14,000 tonnes to be processed...to provide revenue.
There's also an access built....and should become part of the
underground mine.
There's a plan here...buried in all the news releases.
Any more questions?
Regards,
WillP
Author: WillP -- Date:1999-09-14 11:26:43
Subject: I Am Curious (Yellow)
To all you concerned Investors: Take a look at Winspear's
home page, www.winspear.com and take a close look at
WSP's share structure. It will show you exactly who is
making the money. I don't think the company (INSIDERS)
is especially concerned about the small shareholder
complains. They usually do what is best for them.
Well, go figure. Actually....I have another perspective, since I have
been one of those poor downtrodden shareholders since the early
90s.
Let's look at the year 1998.
There were 31.8 million shares outstanding to start the
year...worth about 60 cents a pop for much of the first half.
An additional 7.2 million shares were issued during the year, at an
average price of just under $2 per share. Much of that was the big
private placement in December...which was done at market
prices.
There were 39.0 million shares at the end of the year...worth
about $3 (higher actually).
Now...clearly, the biggest winners are the existing shareholders.
Options are usually struck at the market price. Directors and key
employees only make money if the stock goes up.
And up it did go. Why? Most junior resource companies gradually
go to zero. Because of Snap Lake. Who scooped up the
property...and why. Who hired Pokhilenko...who found all of the
kimberlites that have been found on the Camsell block?
Who turned the area into Swiss cheese with a drill, when all they
were hitting was a stupid dyke?
Who, in their folly, insisted on doing a minibulk sample...when
even their JV partner, Hanna Res...err, Aber Resources thought it
was folly?
I have said all of this before...I don't mind options. So they issue
1-million options this coming year, at market prices. All those
directors, and key employees will only make a collective
$1-million if the share price goes up a buck over the strike price.
And, if it does that...I will be happy.
Regards,
WillP
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