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Winspear Resources Ltd -
Winspear a long-shot second Canadian diamond mine
Winspear Resources Ltd
WSP
Shares issued 39,238,388
1999-09-13 close $2.9
Tuesday Sep 14 1999
SNAP LAKE ADVANCES TO PREFEASIBILITY
by Will Purcell
Winspear Resources Ltd. has released the results of the updated scoping study for
the Snap Lake project, completed by Mineral Resource Development Inc.
(MRDI), a division of H.A. Simons Ltd. The original scoping study was released
last fall, and had envisioned a 1,000-tonne-per-day open pit mine, progressing to
a similar sized underground operation after two years. The projected 10 year total
cash flow of that operation, based on an assumed rock value of $400 per tonne,
was forecast to be $572-million. This report had caught the eye of investors with
its projected after tax discounted tax flow rate of return of 54 per cent.
The update of this report continues to project an initial 1,000-tonne-per-day open
pit mine, but now suggests a larger, 3,000-tonne-per-day underground operation
commencing after two years of mining. The scoping study assumes a diluted
kimberlite value of $251 per tonne, based on the results of the recently completed
6,000-tonne bulk sample, and just over 10 per cent dilution. The capital cost for
this expanded mine plan is now projected at $241-million, compared to
$103.8-million for the earlier, more modest mine plan. The tripling of the
production rate offers an efficiency in operating costs, with the cost of mining,
processing, general and administrative expenses forecast at $71.52 per tonne,
compared to the earlier $87 projection. The projected 10-year total cash flow for
the new plan is now forecast at $737-million, a 29-per-cent improvement over the
earlier plan. The after tax discounted cash flow rate of return remains a very
robust 44 per cent under the new plan.
The MRDI report allowed Winspear and its shareholders to breathe a huge sigh
of relief. The report followed on the heels of an unhappy announcement from Aber
Resources that the feasibility report for its Diavik project had projected a
significant increase in capital and operating costs, therefore the revised scoping
study should provide increased confidence in the Snap Lake project. MRDI is a
highly respected company, has been an active participant in the Northwest
Territories diamond play, and has considerable experience with arctic mines in
general. The company was responsible for the engineering, procurement, and
construction management for the Ekati mine, which was constructed on time and
within budget. MRDI also prepared some of the preliminary capital and operating
cost estimates for two development scenarios at the proposed Diavik diamond
mine.
The Snap Lake project now proceeds to the prefeasibility stage, with a major
underground bulk sampling program planned for next year. This extraction
process will involve establishing a 1,200-metre access drive from the surface, well
under the northwest dyke, and out under the lake. From this access, a ramp
would then be driven into the kimberlite dyke, with about 600 metres of mining
taking place. The operation will yield about 20,000 tonnes of kimberlite, along the
600-metre stretch. Three separate 2,000-tonne samples will be taken along this
ramp, one at the beginning, one at the end, and one presumably in the middle. As
a result, the samples will be separated by approximately 300 metres. The purpose
of this large sample will be to gain additional information as to the grade and the
value of the kimberlite underground, some distance from the previous bulk sample
sites. The remaining 14,000 tonnes of kimberlite would be then processed, and
would provide additional information, but will also generate revenue to partially
offset the cost of the bulk sample. A 20,000-tonne bulk sample might be expected
to produce diamonds valued at almost $6-million.
The extraction of large bulk samples by constructing kilometre-long access ramps
have previously cost in the neighbourhood of $15-million or more. A budget for
the proposed Winspear bulk sample has not been released yet, but $20-million to
$40-million might be a reasonable target. Much of the expense incurred will be of
benefit at a future date, however. Mr. Turner confirmed that much of the
underground workings required for the bulk sample would also be used for the
future underground mine.
Winspear will apparently be procuring and setting up a pilot processing plant at
Snap Lake, confirming what had been the subject of much speculation over the
past months. Mr. Turner stated that the decision had not yet been made as to
what size that plant would be, and added that the decision would be based on
what was the most cost effective overall. He confirmed that the
100-tonne-per-day processing rate was the maximum permitted under the terms
of the water license that the company has applied for, but he added that there was
no limitation as to what size of plant could be constructed. It may prove more
efficient to construct a 1,000-tonne-per-day plant now, if it could be expanded
later.
Expandability is now a key part of the Snap Lake plan. Winspear watchers had
been hoping the MRDI report would incorporate a mining rate in excess of 1,000
tonnes per day. This hope was generated late last winter when Deutsche Bank
analyst, George Albino, first suggested that a larger mine was likely. The updated
scoping study met those expectations, but also left the door open for a potentially
larger operation in later years. Mr. Turner stated that "a critical line in the report,
which people may not pick up on, mentioned the possibility that a second
underground operation could be set up in later years." He added that the north
shore portion of the dyke, or perhaps the southeast dykes could see such an
operation.
Further expansion of a future Snap Lake mine would necessarily be conditional on
proving additional tonnage of kimberlite. This expansion of tonnage appears likely.
The scoping study projects a total of 8.2 million tonnes of kimberlite will be mined
throughout the 10-year period. The project has currently outlined a global estimate
of nearly 20 million tonnes. Conceivably, a Snap Lake mine could be processing
6,000 tonnes daily, or more, late in the next decade. Mr. Turner stated that there
was "more than a possibility" of a second access being constructed in future years.
With potential further expansion in mind, Winspear will be conducting another drill
program over the next year. Mr. Turner stated that this additional drilling would
continue the process of proving tonnage by drilling on a grid, as well as step out
holes to expand the global tonnage, and to continue probing for the source.
Previous drilling on a grid has identified, to feasibility standards, a total of eight
million tonnes of kimberlite with a thickness greater than two metres, which is
sufficient for the proposed mine plan. An additional 10 million tonnes are
suggested through step out holes outside the grid area, and the continued grid
drilling will prove much of this kimberlite to feasibility standards as well. The dyke
remains open to the north and east, and the southeast dyke system has yet to be
extensively drilled. The global tonnage should also be expanded significantly
through the step out drill program. The continued expansion of available tonnage
will also have an impact on mine life, as well as expandability. For example, the
mine plan as outlined by MRDI requires eight million tonnes of ore. An expansion
to 6,000 tonnes per day, commencing in year eight, and running until year 18
would only require about 25 million tonnes of kimberlite.
Winspear is continuing the resource estimate analysis, and Mr. Turner said that the
results should be available within two to three weeks, approximately. He added
that a project update would also be issued over the coming weeks. The resource
estimate analysis is expected to classify the global tonnage as a resource, in
accordance with industry accepted standards. The process will involve assigning a
grade to other portions of the dyke that have not yet been bulk sampled, using a
statistical analysis comparing the microdiamond counts from these areas with those
from the bulk sample pits. Mr. Turner said that the process would determine the
probable grade only, adding that there was no similar process to estimate the
value of the diamonds. The planned large bulk sample will provide a clearer
picture of the value of the diamonds beneath Snap Lake, although the results to
date suggest a very consistent quality exists on the northwest peninsula.
The prefeasibility stage will also see the construction of camp facilities and a
900-metre airstrip, as well as an expanded environmental program. The baseline
environmental work has been in progress for some time, but the process will be
stepped up in order to file an environmental impact assessment with the
authorities, possibly as soon as early next year. Winspear also plans to submit the
formal project description to the regulatory authorities late this year. The filing of
these reports would initiate the environmental assessment process for the Snap
Lake mine. The environmental assessment for the Ekati mine, the first of its kind in
Canada, consisted of a complete independent panel review, however the more
complex Diavik project was subjected to the less stringent comprehensive study
process. Current expectations are that the environmental review process will be
complex, but not onerous, as the plan does not involve draining or damming lakes.
Snap Lake has been viewed as a potential diamond mine since June of 1998,
when the company first released the minibulk sample results. With the release of
the MRDI report, it appears that Snap Lake has suddenly emerged as a strong
contender to develop Canada's second diamond mine. At an underground mining
rate of 3,000 tonnes per day, Snap Lake could generate gross annual revenues of
$300-million. At current rates of production, grade, and value, the Ekati mine is
likely to generate gross annual revenues of $450-million over the next several
years. The proposed Diavik mine is expected to generate gross annual revenues of
up to $600-million over the first 10 years of operation. If a second access is
indeed constructed, a Snap Lake mine, expanded beyond 3,000 tonnes per day,
could rival Ekati and Diavik as Canada's largest diamond producer.
Mr. Turner stated that Winspear is pleased with the progress to date, and he
suggested it was now "time to start looking at the numbers." He said that "every
news release over the past six months has added more value to the project." He
felt that the two bulk sample results had proved the economic viability and the
consistency of the kimberlite, and the global tonnage estimate further enhanced the
project. He said that after the release of the scoping study update, "it is going to
be hard for anyone to criticize this deposit."
While the deposit certainly appears attractive, some questions do remain to be
answered about the Snap Lake project. The ownership of the property is
currently the subject of a legal dispute between Winspear and its joint venture
partner, Aber Resources Ltd. Winspear claims that Aber failed to provide written
notice of its intention to participate in the 1999 winter and spring budget, and
accordingly will suffer dilution to approximately 16 per cent ownership. Aber
disputes this, and has commenced legal action to restore its ownership to the
previous 32 per cent level. The issue arose over six months ago, and has dragged
since then. A recent boardroom shakeup at Aber had Robert Gannicott and John
Lamacraft replacing Kenneth Hanna and John Parker as the head officers. With
new blood at the helm of Aber, some hope has arisen that an early resolution of
the dispute may be possible.
Clearly, the matter of financing the prefeasibility work, and the capital cost of
developing the mine is the other major concern. The project will require a
considerable cash outlay to advance the project to production, and Winspear will
be responsible for the majority of the cash cost. With the project advancing
rapidly on other fronts, it is reasonable to assume that work to arrange for the
financing is well under way. While there are an increasing number of attractive
alternatives emerging within the industry, it is likely that further equity financing will
be required. Winspear spokesmen have previously stated, perhaps optimistically,
that it should be possible to raise up to 70 per cent of the capital costs through
debt financing.
It is unlikely that the entire capital cost will be required initially, however. The open
pit operation, slated to last for up to two years, might be expected to process
700,000 tonnes of kimberlite, and could generate $105-million in before-tax cash
flow. Much of this amount would be used to finance the additional cash outlay
required to develop the underground portion of the mine, and to expand the
facilities to support the tripling of the mining rate. The original scoping study had
forecast a capital cost of only $61-million for a two-year open pit operation, so
the total financing required in advance of production may well be less than
$200-million.
The approximate $50-million required for the prefeasibility work is a more
immediate concern, although Aber will ultimately be responsible for between
$8-million and $16-million of this amount, plus a retroactive payment for the
disputed work, which might amount to $3-million. Winspear will have little cash on
hand, but the exercise of outstanding warrants and options should raise
approximately $13-million. Even if Aber prevails in the dispute, Winspear would
still need an additional $17-million to finance the program, although the sale of the
recovered diamonds would likely account for nearly half the amount. Whatever
the source of the cash is to be, the issue of financing is likely to become a
mounting concern as the project advances.
Winspear continues to provide its shareholders with a wild ride. The stock
reached its all time high of $5.30 at the end of May, as investors anticipated great
results from the spring bulk sample program. The company shares steadily
declined in the weeks after the news, reaching a low of $2.35 in mid-August.
Winspear closed Friday at $3.07, up 35 cents on the week. It seems likely that
the ride will continue, as Snap Lake will continue to be a steady news maker over
the coming months, as the prefeasibility program progresses and some pressing
questions begin to find answers.
(c) Copyright 1999 Canjex Publishing Ltd. canada-stockwatch.com
Until next time. |
