Simple Investment Analysis of ACA:
I write for a San Francisco investment research firm (health sciences NOT mining), and I've been following Ashton since May of last year. Although I've also followed this thread for nearly a year, I've resisted the temptation to post since its professionally considered dubious conduct. Sorry! For this reason, I'll try not to duplicate this effort again.
This said, hello everyone.
THE PROBLEM
One of things that has rented space in my mind over the last year has been the project economics of building a diamond mine. Simply, everyone talked about the comparative costs of northern Alberta versus the NWT, but nobody really offered any detail. Well, guess what I did for fun this weekend? Yep, I gathered up all the pertinent details, and decided to find out -- to a reasonable degree of accuracy -- whether we've all been blowing smoke or whether there really is something resembling "'gold' in d'em der Buffalo Hills.'" What I did was create a model that, if given several variables, could give a snapshot appreciation for a project's feasibility.
Several research reports from reputable firms and analysts aided me in my cause. You can get these from investext at www.investext.com. They were:
"Dia Met Minerals" February 27, 1998, RBC Dominion Securities
SMK Securities
Hilton Ashton 011-27-833-8110
"NWT Diamond Report" February 23, 1998, HSBC James Capel Canada
Brian Christie 416-947-2701
Yannick Archambault 416-947-2741
Also, I used another one from First Marathon, but I can't find it now.
Now, let me state emphatically that investment analysis is a feeble science, and the assumptions I made in my model are large and certainly in error (In other words, no lawsuits!). Having said this, it is fun trying to count your chickens while they're still in the eggs -- or the hen for that matter!
ASSUMPTIONS
Here are some of the biggies.
I assumed that there was a resource of about 110 million tonnes. I base this on the published dimensions of pipe as well anecdotal evidence gleaned from conversations with principals and agents of the JV partners. If you look at K91 from the air, it looks like a giant "8" that's been stretched longitudinally. Big tonnage, though unknown.
The "Av. Value per Carat" is a plug -- a "made up" number, but certainly a possible one, especially if Jesse's report from the MEG conference in Calgary was correct. One may recall that there Don Sheldon is rumored to have whispered that the diamonds recovered from the Buffalo Hills "thus far" had been roughly 75% gem quality. Likewise, the figure for "Cash Cost per Tonne" also come from Mr. Sheldon's alleged remark that costs would be likely around "$15" per tonne. Actually, I calculated costs independently and then used his remark as a check. Interestingly, I couldn't get costs to $15 per tonne. Instead, they came in around $13.50 a tonne. Plenty of room for variation (interest rate changes and other crap like that), though.
The 0.6 ct/tonne figure is also a plug. I based this on the Orapa pipe; in terms of size and grade, this is what I think we're dealing with here. While this grade is higher than anything recorded thus far, it is common for grades to increase with size sample and exploration method.
Tax and capital structure. I know that the NWT is in federal jurisdiction, and that the Buffalo Hills falls into the tax regime of the provincial government. I don't understand the differences between rates and royalties etceteras, though I believe the province's greed is somewhat less that the federal governments. Be this as it may, I simply extrapolated figures from those published to Dia Met in their feasibility study. These figures are commensurate with each company's interest in their respective project, so they're not immediately comparable (42.5 versus 29%)
Likewise, I included an "interest rate expense" for Ashton, even though I don't know what the company's ideal capital structure would be. Such things rely on corporate versus personal income tax rates and, if you really want to get crazy thinking about it, where most of the company's shareholders live and so on. In the end, it really doesn't matter too much. Either you'll win at the tax level and loose that the share treasury level or vice versa. The errors implicit in modeling make the "enormity" of this one meaningless. In the end, the numbers were simply extrapolated from Dia Met's feasibility study.
Figures for "operating costs" were correlated to tonnage; in short, I observed how marginal costs decrease for additional tonnage. For example, in Dia Met's feasibility study, expected costs per tonne to "move and crunch" kimberlite average US$7.60. Add an additional 885,000 tonnes and this number goes down to US$5.60. Working this way, I pegged Ashton "move and crunch" costs at US$5.20/t. Depreciation was similarly extrapolated, but the methodology might as well amount to a guess.
Finally, there's the number of shares out. I used Dia Met's number (both classes combined) because it allowed a direct comparison. This said, its not an unlikely number. Who knows, right?
Overall, my methodology was fairly scoping, but nevertheless cautious in detail. I felt it was safe to extrapolate the data from Dia Met since, although I have no specific idea how much lower costs are, I am certain they are lower (and not generally higher). Not only have I not overstated the significance of Ashton's progress to date, but I've also been fair to Dia Met. For example, I could measure ACA against DMM in year 2000. However, the company "Av. Value per Carat" number slips this year to US$87 (owing to the commencement of production on the Misery pipe), while its tonnage increases by a million. The effect is lower revenue (107 million) and earnings in the neighborhood of $1.39 per share -- quite similar to the current result for ACA.
THE RESULTS (See the next post please)
On the whole, what I think this indicates is that we're definitely in the hunt for a mine. One certainly less endowed with diamonds per tonne, but with much else equally necessary for the profitable extraction of carbon crystals from rock.
In conclusion, I would just like to say that tackling something like this is a little outside my forte. So, if I've made an egregious error, please consider that before launching an attack. Part of my enthusiasm for doing this stemmed from my educational interest. Besides, it was a lot of work. While I was burning up my spreadsheet, Frank F was swimming in his pool and working on his tan lines.
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