From a July 8, 1998 Cannacord Research Report
There are only a few investment-grade diamond stocks in global markets.
Of the over 100 diamond stocks listed in Canada, only four or five are
actual producers. Dia Met Minerals joins the producer category this
September. In all likelihood, Aber Resources will enter the producing group
in 2002 through its 40% participation in the Diavik project, supplying
roughly 2-3% of the world's annual diamond production by weight and
about the same in value terms.
Our after-tax net present value (NPV) for Aber falls in the mid-teens
($/share) and estimated earnings circa 2002 are in the area of
$2.00/share. Adopting gold stock multiples on NPVs and earnings, a
target price in the $30.00-40.00 range can be projected. How quickly this
could be seen, naturally, is almost wholly a function of the money flow
back into resource stocks. The Asian financial crisis has contributed to the
brutal levels of mining share prices, but in stocks with outstanding
fundamentals such as Aber, we see this general malaise as an excellent
buying opportunity.
At the outset of the Lac de Gras discoveries, our not terribly sophisticated
thinking was that the strategic value of a world-class diamond discovery
owned by an independent junior company would lead to the acquisition of
that company by a major: we are still waiting. It is well known that Aber
retains the right to market its share of Diavik stones independently, and
that the run-of-mine production is considered "all readily saleable"; control
of the Company is "on the street", and the proposed shareholder's rights
plan was discouraged from being on the agenda at the 1998 annual
meeting by institutional investors. However, because "diamonds are
different", a prospective acquisitor would likely know the diamond
industry, and probably would like to have the opportunity to examine the
stones due to the diversity within the product mix. There are only a few
companies that we would consider likely acquisitors. None of the
established, senior, Canadian mining companies have demonstrated any
interest in diamonds, with the possible exception of Teck Corporation. The
receipt of the prefeasibility study highlighted last March (and the final
feasibility/production decision later this year) allows a refinement of
earlier mine models, and with Aber trading below our projected net
present value, the Company looks like an enticing takeover candidate.
Aber has become a much better known entity in the past year. The
Company has travelled extensively, most investment dealers now have
diamond mining analysts covering the stock, the prefeasibility study is
complete, the permitting process is well underway, and Aber's
neighbours, Dia Met Minerals and BHP Diamonds (et. al.), will become
Canada's first diamond producers this September with the new Ekati
mine. As funds gradually return to the resource sector (and the resource
mutual funds), Aber is likely to represent a priority buy-candidate, and we
recommend taking advantage of the current weakness to accumulate the
stock.
Happy investing,
Andras |
