Winspear Diamonds Inc -
Winspear beats the tonnage tom-tom
Winspear Diamonds Inc WSP
Shares issued 51,634,088 2000-07-11 close $4.7
Wednesday Jul 12 2000
by Will Purcell
Winspear Diamonds Inc. and MRDI Canada Ltd revealed the fruits of their latest labours yesterday, with the release of the updated scoping study for the Snap Lake diamond project. As expected, the report was designed to maximize the current present value of the project, which it certainly accomplished, by adding to the global tonnage and increasing the ultimate mining throughput. Nevertheless, the magnitude of the tonnage increase caught most observers off guard. Although the updated study has already tripled the net present value of Snap Lake, Winspear is continuing with what it terms its "value recognition program," and there is a good chance that the value may see further increases in the coming weeks.
By far the biggest news was that MRDI has determined that Snap Lake contains about 39.5 million tonnes of kimberlite, in what it now terms a "minable tonnage," an aggressive term that most likely equates with the earlier "global tonnage," although it may refer to portions of the dike that are thicker than some minimum cutoff, probably close to one metre. The 24-hole drilling program conducted earlier this year had indicated the possibility of about 40 million tonnes of kimberlite being present at Snap Lake, and apparently the additional 11 most recently completed holes allowed MRDI to proclaim this fact with suitable confidence.
It should be noted that "minable tonnage" is not equivalent to a minable reserve, or even a resource, and further work is required to classify much of the added tonnage into these formal categories. The company continues to classify 12 million tonnes as an indicated resource, with an additional 9.3 million tonnes listed as an inferred resource. Although the company does not presently classify any of the kimberlite as a reserve, that upgrade is likely to follow the underground bulk sample results, expected late this year. Meanwhile, a sizable portion of the recently identified tonnage will likely be added to the resource column, following further analysis and perhaps some additional drilling, a process expected to take up to six weeks.
If Winspear's first official indication that Snap Lake is believed to contain about 40 million tonnes of kimberlite raised eyebrows, the company might have further surprises in store in about six weeks. Additional drilling is already under way, with four rigs drilling and a fifth being mobilized. The company is planning to drill additional holes to the north and northeast of the existing portion of the northwest dike, and also to the southeast, between the northwest and southeast dikes. This new region of interest has yet to be drilled, and it encompasses an area of about four square kilometres, as compared with the approximate 6.75 square kilometres that now contain the minable tonnage.
The area generally believed to hold the most promise is to the northeast, but Winspear president and promoter, Randy Turner, said that he personally thought that the region between the two dikes was also a promising target. One possible reason might be that the dike is at a shallower depth in the latter region, as compared with the northeastern extremities. The current drill program will be testing portions of the dike that lie between 500 metres and 1,000 metres in depth, some of which would exceed the currently planned shaft depth of about 700 metres.
In addition to a tripling of the tonnage available to the proposed mine, the updated scoping study also contemplated a greater mining rate. The mine proposed by the prefeasibility study would be augmented by the addition of a second access point on the north shore, with construction commencing in the second year of operation. This access will apparently be a vertical shaft, through which an additional 3,000 tonnes per day from the deeper portions of the dike will presumably be skipped to the surface, joining the feed from the original access which was to be limited to the topmost 350 metres.
Earlier speculation suggested that Winspear's reluctance to publicly consider a plan greater than 3,000 tonnes per day, using more than one access point, was primarily due to concerns that the project would receive far greater scrutiny in the environmental assessment permitting processes. This may have been the case, as the company made a point of stating that the new plan would not have a significantly greater footprint than the earlier plan, although, with the current management under the gun of the De Beers hostile bid, the permitting process is now among the least of its worries.
Yesterday's scoping study included greater numerical detail than earlier releases, and it went so far as calculating project net present values, discounted not only at 5 per cent, but also at 8 per cent, rather than leaving such calculations for industry analysts. Winspear now claims a project net present value of $2-billion, over the full 21-year mine life, which would translate to about $22 per fully diluted Winspear share, roughly tripling the earlier calculations of most brokerage house analysts. Even at an 8-per-cent discount, Winspear would have a net present value of about $15 per share. Part of the increase is attributed to the later years of mine life, and many proponents of net present value do not consider the portion of mine life past a certain point, varying between 10 and 15 years. Nevertheless, the figures succeed in presenting a joyous value of the project for shareholders.
What the study did not state was what annual after-tax cash flows were likely to be. Those cash flows are likely to average about $100-million for the initial stages of the operation, reaching a level of $200-million once the mine reached full production of 6,000 tonnes per day. That would suggest that Winspear would receive about $70-million annually, reaching $140-million at full production. Such a figure would equal an after-tax cash flow of about $2.30 per fully diluted share, more than half of the De Beers offer.
While that figure may be enough to convince shareholders to at least think twice before tendering their shares, the question of how the mine will be paid for still remains. During the conference call yesterday, Winspear chief financial officer, Don MacDonald, said that the study assumed the initial cash for the first stage would come from equity financing, with the remaining portion funded from cash flow. Such a scenario would see Winspear raise about $200-million through some form of equity issue, which would probably result in significant dilution. Even in what might be the worst-case scenario, if the company was forced to issue an additional 60 million shares, the economics of the project would remain positive. It is likely however that Winspear will continue to pursue debt financing for a portion of the initial capital cost.
Nevertheless, with a hypothetical base of 120 million shares, Winspear's share of the project's net present value would remain at about $11 per share, at a 5-per-cent discount, and the after-tax cash flow at peak production would be about $1.15 per share, with most of that likely reaching the bottom line as net income.
Analysts are still digesting the news this morning, although a few were hot off the mark with morning comments. Canaccord Capital's Graeme Currie reiterated his opinion that the De Beers bid does not recognize the enormous development potential that ... is evident at Snap Lake, although he noted that there was a risk De Beers would simply withdraw its offer should its conditions not be met. (Mr. Currie's employer, Peter Brown, and Mr. Brown's client, Jimmy Pattison, are strong supporters of Winspear.)
Yorkton's Art Ettlinger said he was underwhelmed by the news, largely because most of it was already built into his estimates. Nevertheless, he stated that the increase to 6,000 tonnes per day was an important move, and he added that he hoped the new drill program would display some creativity, primarily by trying some angle holes in an attempt to locate a high angle feeder for the kimberlite, which could add greatly to the tonnage if it were at a reasonable depth. Mr. Ettlinger is maintaining his $7 target, at least for now.
Wendell Zerb, analyst for Pacific Securities, said that he was maintaining a speculative buy rating on Winspear, with a modest $5 target, although he suggested that a competing offer would present a whole new ball game. He expressed mixed feelings about the updated scoping study. Mr. Zerb said he was encouraged that MRDI had signed onto the increased tonnage, but he was concerned about incorporating the full amount into a mining plan at this stage.
Despite Winspear's efforts to provide the market with a clearer and more pleasing picture of Snap Lake's potential, De Beers has been quite insistent that it will not be raising its offer above the $4.25 initial cash bid. Whether or not De Beers sticks to its guns will depend on just how badly the company wants a Canadian diamond mine. De Beers is facing increasing international pressure, and could ultimately be faced with the prospect of losing the right to market Russian diamonds. The right to market roughly half of the Russian production will be auctioned next year, and a strong bid is expected from Lev Leviev, one of the largest diamond manufacturers in Russia and the second largest diamond exporter in Israel. With other diamond producers increasingly eager to market their diamonds outside of the Central Selling Organization, the offer for Winspear might well represent an attempt by De Beers to maintain its stranglehold on the world market.
If so, there were a number of recent takeovers that saw industry leaders acquire a junior company high on promise, but low on proven reserves. The battle for the Voisey's Bay nickel deposit was a classic example of two companies vying for supremacy in the market, with both willing to pay a substantial premium for the resource, while Robert Friedland's Diamond Field Resources merrily went on drilling and expanding the deposit's tonnage. At last report, Voisey's Bay contained a resource of about 137 million tonnes, with an average grade of 1.59 per cent nickel, and 0.85 per cent copper. That resource carries an in-situ value of about $30-billion at current prices, about four times greater than Winspear's share of the value contained at Snap Lake. Inco Ltd. ultimately paid about $4.3-billion to acquire the resource, about 16 times more than De Beers has offered for Winspear.
Another recent takeover with parallels to the current situation was the 1996 Barrick Gold Corp. bid for Arequipa Resources Ltd. In the summer of that year, Barrick stunned the market with a $27-per-share offer for Arequipa. Just days before the offer, a Yorkton analyst estimated the company had a resource of about three million ounces of gold, with the potential for up to 10 million ounces. Barrick offered a healthy premium, adding that it would not increase its bid, as it did not expect a higher offer to be made. The takeover bid sparked Arequipa to commence an aggressive drilling program, and although there was no competing bid, a month later Barrick upped the ante, offering $30 for each Arequipa share. The $1.1-billion buyout was successful, and Barrick acquired a gold property that then had an estimated in the ground value somewhere between $2.5-billion and $5-billion, although much of that value remained to be established. At last report, the Pierina mine had reserves of about seven million ounces of gold, with a value of about $3-billion.
Both takeovers involved senior producers willing to pay a pretty price for a potentially premiere property, with much of that potential still largely unproven. While a sizable portion of the price ultimately paid for Voisey's Bay resulted from a bidding war between Inco and Falconbridge, Barrick was the only bidder for Arequipa. How the Snap Lake drama will unfold will depend on how desperately De Beers needs ready access to its own Canadian diamonds, and at what price a majority of Winspear shareholders will be willing to move on to other investments. One of the shareholders most reluctant to move on is Mr. Turner. "We have put nine years into this," he said, adding that he would love to see Winspear remain a Canadian diamond company, bringing to production "one of the most important undeveloped resources in the world." Winspear shares reacted in a mild, but positive fashion to yesterday's news, closing up another 15 cents to end the day at $4.70.
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