Bummer, we should have held out for more :-((
Aber sparkles
Aber Diamond Corp ABZ
Shares issued 53,855,383 Dec 21 close $14.00
Fri 22 Dec 2000 Street Wire
by Will Purcell
With the widely expected decision to proceed with construction of the
Diavik diamond mine behind them, Aber Diamond Corp. made another -- less
expected -- move Thursday that will pare back the company's debt financing
requirement and allow the company to receive its share of revenues from the
mine a year earlier. Combined with changes to the Diavik construction plans
and possible pleasant surprises, Diavik could be even more lucrative than
earlier thought.
Aber has agreed to sell its 32-per-cent stake in the Snap Lake project to
De Beers, completing that company's acquisition of the potentially
lucrative project, once owned by Winspear Diamonds Inc. Aber president, Bib
Gannicott, said that it was not an easy decision to sell the company's
interest in an advanced project, adding, "It is a good price and the money
does something very immediate for us."
It seems a good price indeed. De Beers clearly remains very enthusiastic
about the merits of Snap Lake, as the company agreed to pay Aber
$173-million for its minority interest. Just four months ago, Winspear
shareholders accepted an improved offer of $5 per share for their company,
after weeks of wrangling over the hostile bid, which was originally pegged
at $4.25 per share. The final Winspear offer pegged the value of Snap Lake
at about $450-million, but the Aber sale now increases the value to about
$540-million, a 20-per-cent hike. That increase would have translated to a
$6 offer price for Winspear shares. While the deal might rankle former
Winspear shareholders who accepted a lower offer, Mr. Gannicott said that
there were advantages for De Beers to increase their ownership to 100 per
cent, and they were clearly willing to pay a bit more to accomplish that.
"It was a pleasure dealing with De Beers, it was very straightforward," he
added.
Prior to the sale, Aber had expected that its cash supply would be
exhausted by next summer, but the extra cash will now carry Aber through
the hectic 2001 construction season, and into the following year. With
$350-million now on hand and part of its share of the capital cost already
spent, Aber will only need another $150-million to meet its 40-per-cent
commitment. All of that cash is likely to come from debt financing,
although the company is also looking at other, more innovative forms of
financing. Mr. Gannicott was not saying just what those deals might be,
although he did state that none of the alternatives involved selling
additional Aber shares.
Although the formal production decision had been originally expected
several months earlier, the decision to proceed was only in doubt during
the many levels of negotiations. The project required some large dredging
equipment to construct the dikes, and the deadline to order the equipment
passed last summer. Despite the delay, the dredges have been ordered,
built, tested in Vancouver harbour, taken apart and are now on their way to
Yellowknife awaiting the opening of the winter road. Diavik plans to ship
about 4,000 truckloads of supplies up the ice road to the Diavik site this
winter, more than triple the number they had originally planned to deliver
last year. All of the arrangements required to have the goods delivered are
now in place, and the cold weather might allow the first loads to move a
week earlier than scheduled. Despite the increased load, expediting the
shipments should be a far easier task than during last winter's frantic
rush to beat the closure of the ice road.
Although next year was always slated to be the busiest in the construction
program, a considerable portion of the work planned for 2002 has now been
moved forward. If all goes well, the Diavik mine could be in production in
advance of the projected June 2003 start-up date -- perhaps by the fall of
2002. That could depend on a new technique for removing sediment from the
bottom of the lake, over the planned pit. A suction dredge will be used to
remove the sediment from the footprint of the dike, and the same equipment
will be used to perform the same function within the area enclosed by the
dike. If all goes as expected, mining could begin as soon as the pit was
dewatered.
An earlier start-up date combined with a shorter debt repayment period
would have a positive impact on the net present value of the project to
Aber. Under the original plan, Aber would have incurred about $300-million
in debt, or would have been required to issue new shares to raise a portion
of the money. As a result, Aber could conceivably start receiving hard cash
from a Diavik mine about 18 months earlier than believed.
Aber's revenue stream could be significantly higher than earlier thought.
The Diavik mine will commence with an open pit operation at the lucrative
A-154-South pipe, with feed from the neighbouring A-154-North pipe added in
a few years. The two pipes are expected to exclusively feed the processing
plant for the first six years, and make a significant contribution to the
mine's production over the first full decade of operation.
That will provide a quick return on the investment required to build the
mine. The plant has been designed to process 1.5 million tonnes of
kimberlite annually, and with the grade at A-154-South estimated to be over
five carats per tonne, annual production could run to 7.5 million carats
for the first few years, dropping gradually as the somewhat lower grade
pipes increasingly come on stream.
Aber's 40-per-cent share of the Diavik diamonds would amount to about
$350-million (U.S.) annually, based on the $79 (U.S.) value for the
A-154-South diamonds. But that is not all. Aber's sales agreement with
Tiffany & Co. and its partnership with Antwerp-based Overseas Diamonds N.V.
are expected to further add to Aber's revenues -- perhaps as much as 10 per
cent. All that should add up to more than $200-million in annual profits.
Although Aber's revenues would gradually drop as the pipes with a lower
diamond grade and value were mined, that drop may not be as significant as
believed. The feasibility study used a value of $33 (U.S.) per carat for
the diamonds from pipe A-154-North, the same value that was determined by
the formal valuation that was conducted a few years ago. The diamonds from
the two main pipes were reappraised earlier this year, which resulted in a
hike of 20 per cent in their value. It is possible that the A-154-North
diamonds would have been valued at about $45 (U.S.), had they been examined
again this year. In fact, the diamonds may ultimately be closer in value to
their southern sisters. Mr. Gannicott said that the stones seemed to be
part of the same general population, adding that he thought the north
diamonds might well carry the same value as the southern stones. "That is
one of these upside opportunities," he said.
There are other potential upsides to the Diavik project as well. The
diamonds in pipe A-21 were assessed a value of just $28 (U.S.) per tonne,
well below the $33 (U.S.) value obtained earlier. Again, there is an
excellent chance that the A-21 diamonds will be worth much more, especially
since the pipe displayed the coarsest diamond distribution of the four
pipes.
Much of the uncertainty about the true value of the A-21 diamonds centres
on the fact that the pipe, along with A-154-North, has never been bulk
sampled. Both bodies were subjected to a series of six-inch diameter
drilling, but only a small parcel of diamonds was recovered. That is of
little importance at A-154-North, where much of the rock would have to be
mined as waste in any case, but A-21 will require the construction of a
substantial water-retaining dike for it to be mined. Despite the apparent
risk involved, A-21 is not likely to be bulk sampled before the dike is
constructed. In fact, the waste rock from the A-154 mine will be used to
construct the A-418 dike, and in similar fashion, waste rock from A-418
will be used for the A-21 dike. As a result, there is little cost risk
involved in the plan, as the two additional dikes could just as easily be
considered waste rock disposal sites.
In addition to a probable higher diamond value, more diamonds are likely to
be mined. Although the current mine plan calls for only the extraction of
just 25.7 million tonnes and 106 million carats of the estimated 37.4
million tonnes and 138 million carats present, it will be highly unlikely
if the Diavik mine stops there. "Plans will come along to extract them
all," said Mr. Gannicott of the diamonds not included in the current mine
plan.
Additional diamonds may await discovery as well. The last economic pipe was
discovered in 1995, and although the main priority of Diavik since then has
been to get the mine designed, permitted and operational, exploration has
continued to a much lesser degree. Another reason for the temporary
slowdown in exploration is cost. Once the mine is constructed, it will be
used as a base for further exploration, which will result in a significant
saving.
Nevertheless, new kimberlites are being found, and some are being drilled.
In fact, Diavik has plans to minibulk test no less than four kimberlites
this winter and spring, although they are not expected to be economic
bodies. The drilling will be conducted to add to Diavik and Aber's
knowledge base and will attempt to correlate microdiamond recoveries from
small core drilling to macrodiamond grades established by the large core
drilling. Through the years, the partners have been blessed with some
extraordinary micro and macrodiamond counts from its finds, but it has
comparatively little knowledge of kimberlites with less prolific counts.
The added knowledge will make their projections of grade, based on initial
drilling, more accurate.
Much of the speculative interest this year in Aber -- and Dia Met Minerals
Ltd. -- has centred around a possible takeover bid by De Beers or another
major. Although many analysts have suggested both companies as a potential
target of De Beers, that may not be the case. The company has stated that
it is not interested in making an offer for Dia Met, and it does not appear
to be considering a bid for Aber, based on the sale of Snap Lake. As well,
Mr. Gannicott said that he did not expect a bid by De Beers, based on his
conversations with the company. "We do have a very prominent American
company as a major shareholder," he added, referring to Tiffany, which
holds just under 15 per cent of Aber's shares. A prominent Canadian company
holds a sizable stake as well, as Franco Nevada Mining Corp. Ltd. holds
about 14 per cent of Aber's outstanding stock.
With the additional cash on its way and the permitting problems of last
year settled, Aber should now have a much easier path to production.
Although the deadline for requiring additional money has been pushed back
into 2002, Mr. Gannicott said that he expected to have a deal in place
within six months. With any luck, that will be the last hurdle of
significance faced by the company and its shareholders. Aber moved up 50
cents Thursday, closing at $14 before being halted in the last hour of the
session, pending the Snap Lake announcement. |
