The purpose of this analysis is to highlite the mineral resources of Aber Resources
Limited. It is also an attempt to show how the media and mining analysts have
virtually ignored one of the greatest mineral discoverys of this century, with the likely
result being the sale of this resource to powerful international interests at a fraction of
its true value.This concern is highlited by the recent decision by mutual funds to
reject a shareholder rights plan.Mutual funds are seeking the fast return that a
takeover will bring, ignoring the true value from a long term holding .
Diavick Project
The Diavick Project is a joint venture between the project operator, Diavik Diamond
Mines(60%),a subsiduary of Rio Tinto and Aber Resources(40%).It is located in the
Lac de Gras area of the Northwest Territories,300 km northeast of
Yellowknife,Canada.It is located next to the Diamond mine BHP/Dia-Met are
currently building.
To date,50 kimberlite pipes have been discovered on the property of which 20 are
known to contain diamonds.In August/97,the Diavik project commissioned an
airborne survey to help define magnetic and electromagnetic anomalies for future
drilling.It is possible that more kimberlite pipes will be discovered.
Of the 20 kimberlite pipes known to contain diamonds,4 kimberlite pipes are
currently part of a pre-fesability study,with at least 6 other kimberlite pipes waranting
additional work.Current resource estimates are as follows:
Pipe Name Million tonnes Carats/tonne Value/Caret Classification
---------- -------------- ---------- ---------- -------------- --------------
A-418 8.9 3.8 U.S.$60 measured
A-154 South 11.4 4.6 U.S.$63 measured
A-154 North 11.5 1.9 U.S.$35 indicated
A-21 5.5 2.7 U.S.$38 indicated
The above resource figures are to mean sea level,a depth of 400m.Below this depth
there is an additional inferred resource of an additional 10% for each of the A-418
and A-154 North pipes.
Their is considerble potential for current resource estimates to increase.The deepest
hole drilled to date was in pipe A-154 South which bottomed in mineralization at
532m.Currently their are no inferred resources for Pipe A-154 South below the 400m
level.Pipe A-21 has the least surface area defined,with additional potential on surface
as well as at depth.Their has also been some speculation that pipes A-154 South and
A-154 North may merge at depth,thus increasing resources further.While additional
drilling is required to fully define resources,should mineralization extend to
600-650m,the tonnage increase will be substantial.Additional potential may come
from other pipes currently being evaluated or that may be discovered.With the large
number of World Class pipes discovered by Aber/Dia-Met in the Lac de Gras area,it
must be reguarded as the most prospective area for new economic discoveries.
Economics
With an indicated value of $290 and $228 per tonne for pipes A-154 South and
A-418,they are the most valuable pipes in the world.In the upper part of pipe A-418 is
approximately 1.4 million tonnes grading 5.6 carets per tonne at a value of U.S.$73
per carat(value of $409 per tonne).As this will be the first material mined,it will
generate sufficient profits to repay mine costs in as little as 6 months.
In projecting project economics,I have relied on fesability work completed by
Rio-Tinto/Aber as reported on March 6,1998 as well as BHP/Dia-Met.As compiled by
Yorkton Securities and reported on Canada Stockwatch on June3,1997.Project
economics inU.S.dollars for this joint-venture are as follows:
Mine Capital Costs $500,000,000
Mining Rate 9000 tonnes/day or about 3,240,000 per year
Average Value PER Tonne 1.09ct/tonne * $84/ct =$91.56
Mining Costs $28/tonne
Total Mine Profit(annual)
$296,654,400 - $90,720,000 = $205,934,400
Value of Dia-Met's 29% share $59,720,976
Dia-Met pre-tax profit/share $59,720,976/32,400,000(shares fully diluted)=$1.84
In compiling a similar analysis for Aber/Rio Tinto,I have considered only the mining
of pipes 418-A and 154S.While pipes A21 and 154N are amongst the riches in the
world, to simplify the analysis,these are assumed to have no value.I have also
assumed that production will occur at more than the 2,000,000 tons per year
announced in the pre-feasability study.A simple analysis of the present net value of
this deposit clearly shows that mining at this rate substantially reduces the present net
value of the project and that present mining estimates are only used to help conceal
the real value of this mine..
Mine Capital Costs $600,000,000
Mining Rate 9000 tonnes/day or about 3,240,000 per year
Average value per tonne ($290+$228)/2 = $259
Mining Costs $40/tonne
Total Mine Profit(annual) $839,160,000 -$129,600,000 =$709,560,000
Value of Aber's 40% share $283,824,000
Aber's pre-tax profit/share $283,824,000/45,500,000 =$6.24 (cdn$9.17)
It should be mentioned that the above analysis does not make allowance for a 2%
royalty on the Aber/Rio Tinto property and assumes 100% recovery of diamonds.
However,the diamond recovery plant is not 100% efficient and is not recovering all
of the diamonds in the sample. It is also breaking diamonds which substantially
reduces the true value.Also,infortmation reported by Rio Tinto may be be somewhat
conservative.Rio-Tinto certainly has not been anxious to inform anyone that this mine
could earn pre-tax profits of $710 million and that it's 60% share would ammount to
$426 million representing 25% of it's 1996 world wide pre-tax profit of $1731
million.
To compare this mine to a gold mine,to generate a profit of $710 million,a gold mine
with cash costs of $200 per ounce would have to mine 7,100,000 onces per
year(assuming a gold price of $300).Considering it would likely take several times the
capital investment required to build the mine then Diavik will cost,even this gold
mine would fall far short of the investment return that Diavik will provide.
The pre-fesability report recently indicated that mining would occur at 2,000,000 tons
per year.I would argue against a lower mining rate based on the following:
1) Just mining pipes A-154-South and A418 based on reported resources,the project
appears to have a higher net present value mined at 9000 tonnes/day as compared to
5500.Assuming a 6% discount rate, the mine has a present net value of U.S.
$3,030,000,000 mined at 9000 tons per day vs U.S. $2,673,000,000 mined at 5500
tons per day.This represents U.S.$39/share(cdn $57)vs U.S.$34/share(cdn$50) for
Aber's 40% interest.
2) This is only enhanced by the following:
--- Resources for pipes A-154 South and A-418 will ultimately be substantially higher
than reported (as indicated mineralization in pipe A-154 South extends to at least 532
meters).Should mineralization continue down to 600-650 meters as many expect,total
mineralization in pipes 418A and 154S could approach 30,000,000 tons.Present net
value would increase to U.S.$4,351,000 mined at 9000 tons/day vs U.S.$3,673,000
mined at 5500 tons/day. This represents U.S.$57/share(cdn$84) vs
U.S.$47/share(cdn$69) for Aber's 40% interest.
--- The project net present value will be increased the sooner pipes A-154 North and
A-21 are mined,which happens sooner with a higher production rate.
--- Should additional discoveries be made,project net present value will be increased
with a higher production rate.
--- Based on mining the initial 1,400,000 tonnes from pipe A-418,It would appear
that mine payback costs would be completed faster at a higher production
rate.Consider the profit generated over the first 156 days at various production
rates(value $409/tonne - $40/tonne costs)
9000 tonnes/day $518,076,000 Aber's profit per share $4.55 (cdn$6.69)
7000 tonnes/day $402,948,000 $3.54 (cdn$5.21)
5500 tonnes/day $316,602,000 $2.78 (cdn$4.09)
It must be stressed that these are profits that will be earned in only the first 156
days(about 5 months) of production.
Based on potential pre-tax earnings of U.S.$6.24/share(cdn$9.17),Aber's present
price of $8.85(U.S.)/ share(cdn$13)appears to be somewhat undervalued.The pre-tax
net present value of pipes 418A and 154S have a value ranging from US.$34 to
U.S.$57 per share. To this must be added present cash holdings,the value of pipes
154N and A21,and the vast exploration potential of both the Diavik Project as well as
Aber's numerous exploration properties.It must also be stressed that Aber has been
breaking diamonds in the pilot plant and that valuations are extremely conservative.
The world is on the verge of a potential financial collapse which could destroy paper
financial assets. In times of duress,assets such as gold and diamonds have often been
the only means of preserving ones wealth. Should this occur,the relative value of
diamonds will increase substantially ,which will make these valuations
ultra-conservative.
We must certainly question why Aber has not released infortmation,has not released
news on a timely basis, and has not helped the public or the brokerage community
understand exactly what they have.
The sections of 418 and 154S should be released to the public.
The results of deep drilling done to 500+ meters on A154S should be released to the
public.
We should be advised of the estimated value of diamonds that would be obtained
assuming that no diamonds had been broken.This could substantially increase
profitability.
We should be advised whether diamond valuation is concentrated in a few very
valuable diamonds ,or is mostly of diamonds of lower quality.
Aber should provide a detailed cash flow projection based on a production rate that
will maximize the present net value and includuing projections for what the real value
of the deposit is.(including tonnage estimates down to 650 meters and real value of
broken diamonds)
Pipes 418 and A154S are the richest kimberlite pipes ever discovered in the
world.Mining capital costs will be repaid in the first 6 months of production.The real
value of Aber is several multiples of the present share price.Should the world enter a
period of financial duress,this value will increase substantially.In a world of great
uncertainty it provides a unique investment opportunity.As the project enters
production , its value must rise to reflect the cash flow and tangible net worth of this
mine.In a period of financial duress, this cash flow and tangible net worth will
increase dramatically.
John Kutyn |
