Bloomfield:
Posters here fall into two main camps regarding the Salman report. Some hope -- or believe -- the numbers will be an accurate reflection of reality in 2011. Others think it is unrealistically optimistic.
I'm in that latter group, but I do think Dr. Goldie arrived at his optimistic prices using his own optimism, however tenuous, not any incorrect or intentionally misleading data provided by Mr. Evans, Mountain Province or its partners.
The Salman report started with a $128 (U.S.) per carat value, but what is that? At one point, Dr. Goldie et al. call it a "Long Term Diamond Price In 2005 US$ Terms". What does that mean?
Later, they call it "Initial value of diamonds mined, "real" (2005) dollars." That does not clarify matters.
They also write, "Our model uses estimates, from the 2005 study mentioned above, both of diamond grades (carats per tonne) and of diamond values (dollars per carat).
Looking above, we find this sentence: "In 2005, De Beers prepared a more detailed evaluation of Gahcho Kué, parts of
which are incorporated in “An application report for the Mackenzie Valley Land and Water Board”, which was posted on the Board’s website."
Going to that report on the MVEIRB web site, there are only three references to value:
#1. The estimated average value of the diamonds at 5034 is US$85/ct, based on a 1.5 mm bottom cutoff and the Diamond Trading Company price book at June 2005.
#2. The estimated average value of the diamonds at Hearne is US$70/ct, based on a 1.5 mm bottom screen cutoff and the Diamond Trading Company price book at June
2005.
#3. The estimated average value of the diamonds at Tuzo is
US$56/ct, based on a 1.5 mm bottom screen cutoff and the Diamond Trading Company price book
at June 2005.
Meanwhile, the data on Mountain Province's web site is clear, once you look at it detail. Let's go through it:
The escalated capital cost to build the mine will be $980-million.Fair enough, they assume the expected price increases over the next five years.
The operating cost will be $65 per tonne. That's a projected value as well. The company also quotes it as $36 (U.S.) per carat, and it gives the grade as 1.64 carats per tonne. A quick mathematical manipulation (36 x 1.64) shows it expects operating costs to be $59 (U.S.) per tonne. That in turn proves the Gahcho Kue partners are using an exchange rate of 0.908 on the cost side. (Recall that Salman used a much more favourable rate of 0.832 for the revenue side during the years Gahcho Kue is in production.)
Mountain Province also states the projected margin is $65 (U.S.) per carat. Since we already know that the projected costs are $36 (U.S.) per carat, we therefore know the projected revenues are $101 (U.S.) per carat, net of marketing costs. Curiously, the web site neglects to point out the $101 (U.S.) per carat value is a projected value, but there it is -- proven mathematically. De Beers always charged 10 per cent for marketing, and that brings the gross diamond value to $111 (U.S.) per carat for some year no earlier than 2011.
Starting at a value of $83 (U.S.) per carat in 2005 that Mountain Province also lists on its web site, we would get to $111 (U.S.) per carat in 2011 if diamond prices rise by exactly 5 per cent. That's not unreasonable, since it reflects an increase of just 33 per cent over six years, not much above the 20 per cent in five years predicted by WWW.
So, I don't see how you can fault Mountain Province for the exuberance contained in any analyst reports.
I recognize Dr. Goldie spent eight long years earning his doctorate, something that I would never trivialize. What I am not sure of, is how much of that eight years covered diamonds. As most of you know, Masters and PhD degrees involve specialized study resulting in the writing of a thesis. I somehow suspect that Dr. Goldie's work had little to do with diamond pricing. From the Salman web site, we know, he worked for more than 20 years as a mining analyst before joining Salman. During that time he covered non-precious metals and fertilizer companies.
If you look at the list of mining companies covered by Salman, Mountain Province stands out as the only diamond company. There is no coverage of Aber, no Tahera, no Ashton, no Shore, no Stornoway. Whether that's reason for Mountain Province shareholders to puff out their chests, or be worried, I'll leave to you to decide.
The bottom line: I have no worries about any of the facts and projections published on either the De Beers or Mountain Province web sites. They are in agreement.
Regards,
WillP |
