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Tahera sees few barriers to Jericho
Tahera Corp
TAH
Shares issued 159,300,000
1999-11-30 close $0.06
Wednesday Dec 1 1999
TAHERA DECLARES JERICHO PREFEASIBLE
by Will Purcell
Late Tuesday, Tahera Corp. released the results of the prefeasibility study being
conducted on its Jericho diamond project in Nunavut, Canada. The study,
conducted by Steffen, Robertson, and Kirsten Canada Inc. (SRK), concluded
that a limited mining operation at the JD/OD-1 kimberlite pipe would be
profitable. The prefeasibility study is considered to be the first important step
toward Tahera's goal to place Jericho into production in 2002 as Nunavut's first
diamond mine. If the company can meet that goal, it would jump ahead of the
proposed Diavik project to become Canada's second operating diamond mine.
The study itself contained few surprises. The capital costs of the project were
estimated at a mere $40.3-million, a tiny fraction of the cash outlay required to
build the Ekati mine, or the proposed Diavik operation. The cost to prepare the
Jericho mine site, prestrip the kimberlite, and construct the required road was
determined to be just under $9-million, while a new 50-tonne-per-hour processing
plant planned for construction at Echo Bay's Lupin mine carries a price tag of just
under $14-million. An estimated $18-million in additional costs are foreseen, and
include infrastructure, working capital, payments due to Echo Bay for use of their
Lupin site, and a contingency fund.
The study estimates an eight-year mine life, based on a mining rate of 300,000
tonnes per year, or about 1,250 tonnes per day for the annual operating period of
the open pit mine. The JD/OD-1 kimberlite now contains a total geological
resource of 6.5 million tonnes of kimberlite, grading 0.82 carats per tonne. SRK
has determined that 2.345 million tonnes of this material, grading 1.13 carats per
tonne, contains sufficient value to be incorporated in the Jericho mine plan. Over
the life of the mine, the project could be expected to generate $254-million in
gross revenue, with operating cash flow projected at $106-million, based on an
assumed operating cost of $63 per tonne. Grant Ewing, Tahera vice president,
said that figure included the costs of mining, ore hauling, processing, waste
stripping, and general and administrative costs. Not included in the estimate are
allowances for marketing, or for depreciation. Mr. Ewing said that no decision had
been made regarding the marketing of the diamonds. He stated, "Our options are
wide open for marketing the product. We will do what we can to maximize the
value there." While the projected revenue and cash flow streams are modest, the
low capital costs make the project appear attractive. The time to payback was
estimated to be two years, and SRK projected a 33.2-per-cent rate of return on
the initial investment.
The report states that the project economics are most sensitive to kimberlite
grade, diamond valuations and the currency exchange rate. The viability of Jericho
does appear particularly sensitive to any variation in these parameters, but is
equally sensitive to variations in the operating cost of production as well. A
10-per-cent variation in any of these parameters would impact the operating cash
flow by 24 per cent. Further, it is likely that these parameters will indeed
experience such fluctuations over the coming years.
The 10,500-carat parcel of Jericho diamonds was recovered during the 1997
bulk sampling program at JD/OD-1, and a number of conflicting valuations have
been reported since that time. The parcel was originally valued at $59.25 (U.S.)
per carat, but this figure did not include a credit for special stones larger than 10.8
carats. When these larger diamonds were included, the value increased to $61.70
(U.S.) per carat. An independent evaluation was apparently performed by the
CSO, which resulted in a value of $59.61 (U.S.) per carat, for all diamonds. A
reappraisal was completed by the company, using the ADTEC system based on
the CSO prices in the spring of 1998, which resulted in a $69.65 (U.S.) per carat
valuation. If the most recent valuations accurately portrayed the 1998 diamond
market, then a modest increase might be anticipated, as current prices are
believed to be significantly higher for certain classes of diamonds. As well, Jericho
could be expected to achieve a better valuation from the special stone category.
Of the 10,500 carats recovered, approximately 350 carats can be attributed to
special stones larger than 10.8 carats. Based on the initial valuation data, it
appears that the 350 carats of special stones carried a value of only $135 (U.S.)
per carat. This calculation is likely too low, however the value does suggest that a
majority of the large diamonds recovered were not of gem quality. Indeed, the
two largest stones recovered, weighing more than 30 and 40 carats, respectively,
were considered to be boart, or industrial grade diamonds. A commercial
operation would normally be expected to encounter larger numbers of similarly
sized diamonds, some of which would carry considerable value.
Based on the information available, it would be reasonable to expect that the
valuations would increase, rather than decrease, however due to the fairly wide
variation in the earlier numbers, those expectations may already be incorporated
into the prefeasibility estimate of $65 (U.S.) per carat. Mr. Ewing said that the
prefeasibility estimate was based on the higher ADTEC valuation, but was
geologically modeled to account for the variations observed in the different phases
of the pipe. A re-evaluation is currently under way, and the updated result will be
incorporated into the final feasibility study on the project.
The effects of possible variations in the kimberlite grade of JD/OD-1 are difficult
to assess as well. While the resource as a whole carries an average grade of 0.82
carats per tonne, the body appears to contain a number of discrete phases of
kimberlite, with grades varying between 0.3 and 1.96 carats per tonne. The
current figures released by SRK represent a modest decline from their earlier
estimates released early in 1998. At that time, the body was believed to contain
6.1 million tonnes, grading 0.94 carats per tonne, with a mineable resource of 3.8
million tonnes, grading 1.01 carats per tonne. The prefeasibility study figures
represent a 38-per-cent reduction in the mineable kimberlite tonnage, and a
30-per-cent reduction in the potential diamond production. The latest SRK study
states that further resource definition at depth is required, and a four-hole drill
program has begun to conduct further testing between depths of 100 and 300
metres. SRK apparently chose a conservative approach to its geometrical
modeling of the resource at depth, and the lower mineable tonnage appears to
reflect this conservatism. The latest drill program may result in an increase in
mineable kimberlite, and a potential modest increase in grade is conceivable as
well. Mr. Ewing said: "The drilling has the potential to increase the reserves, and
the drilling is focused on the higher grade phase at depth. In the event that we
increase the size of it, and transfer this material from inferred to indicated status,
then it can be brought into a mine plan."
As diamonds are marketed in U.S. currency, fluctuations in the Canadian dollar
relative to its U.S. counterpart must also be considered. The prefeasibility study
assumed an approximate conversion rate of 68 U.S. cents. The Canadian dollar
has indeed traded in this range for the past two years, but the value is near
historical lows. As late as the mid-1970s, the Canadian dollar actually traded at a
premium to its southern neighbour, but declined steadily to below 70 cents (U.S.)
by the mid-1980s. A recovery carried the dollar as high as 88 cents (U.S.) by the
end of 1991, but another long-term decline set in and resulted in historic lows of
less than 64 cents by the summer of 1998. Since then, the Canadian dollar has
rallied from 63.5 U.S. cents to the current value, near 68 U.S. cents. Should the
Canadian dollar continue to appreciate, it would have a negative impact on
potential cash flow from the Jericho project, and all Canadian mines.
With the prefeasibility study in hand, the Jericho project now proceeds to the next
stages. A formal feasibility report is anticipated in the spring of 2000, and work on
environmental assessment and obtaining regulatory approvals will continue. Tahera
anticipates plant commissioning late in 2001, and the commencement of
production early in 2002. The formal feasibility study is expected to provide a
more comprehensive estimate of the costs and revenue streams, by incorporate
the results of the current diamond reevaluation, and the data obtained from the
latest round of drilling. As well, the study will finalize the operating plans for the
Jericho mine. Mr. Ewing said that under the current scenario, the open pit mine
would not operate continuously, but might be expected to run for about eight
months yearly. The ore would be stockpiled at the site, and then trucked to
another stockpile at Lupin, via a winter road. The hauling season over the winter
road would normally be about three to four months long. The amount of ore mined
and hauled to Lupin would be sufficient to operate the 50-tonne-per-hour
diamond processing plant on a year round basis.
While the contents of the prefeasibility report were as expected, the study
appeared to catch the market by surprise. Tahera shares, which had been mired in
a narrow range between 5.5 cents and seven cents for much of the fall, broke out
today on the positive news. Nearly 41 million shares changed hands in the first five
hours of trading, as Tahera hit an intraday high of 17 cents, up 11 cents on the
day. |
