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Deutsche Bank Securities Metals Research Winspear Resources MRDI Resource
Estimate Grade Increases From Bulk Sample Raises our NAV Estimate by 24%
Sept.27, 1999 WSP - VSE $2.59 Previous Rec.: BUY
Current Rec.: Buy
12 Mo. Target: $6 All Figures in CDN$ unless otherwise noted Key Points
*Last Friday Winspear released results of resource calculations for the Northwest Dike
at its 68%-owned Snap lake project in the NWT, where it is in joint venture with Aber
Resources (ABZ - TsE: $9.10).
* The significance of this announcement is that this is the fimt time that any of the Snap
Lake kimberlite has been formally classed as resource - the implication is that the grade
is now sufficiently well constrained to do so.
* The estimated tonnage is similar to that contained in the scoping study recently
completed by Simons Engineering, which according to the company indicated that the
Snap Lake project is financially extremely robust with an estimated IRR exceeding 40%.
* The resource as described in the current release includes an indicated resource of
9.25 MM Tonnes (on a diluted basis), with an additional inferred resource or 11.4 MM
tonnes, for a total of over 20 MM tonnes - this is for portions of the body over 1 m true
thickness.
* Using a cutoff of 2 m thickness, the total resource is approximately 16.5 MM tonnes.
* The grade estimated in this study increased by approximately 10% to approximately 2
carats/tonne.
* This estimate is based on an extremely detailed study by MRDI (a division of Simons
Engmeering) using diamond size data from the 1999 bulk samples as well as 189
diamond drill holes.
* As project economics are highly sensitive to revenue (see our note of September 10)
this increase in grade provides a boost in NAV in excess of 20% (based on a 6%
discount rate).
* As we have indicated in previous reports, we believe that Snap Lake will likely
emerge as Canada's next diamond mine, and that based on a range of valuation
methodologies (P/B, P/CF, NAV) Winspear shares have a long term value in the
$12-I5/share range - possibly higher based on realization of any or several sources of
upside for the project.
*We estimate a 12-month target of $6/share using a 6% discounted NAV and maintain
our BUY recommendation.
Resource Estimate
The September 24 news release provides a mix of the old and the new. The information
on tonnage (see table) reflects what was previously discussed by the company in its
September 8 news release (although more details are given concerning the pillars
excluded from the tonnage considered in the scoping study), but for the first time, an
estimate of grade for the Northwest Dike is given. Of note the diluted grade of the
indicated resource has increased approximately 14% compared to figures used in the
scoping study and our previous model.
Snap Lake, Northwest Dike Resource Estimate
Indicated Resource Infered Resource Total
>1m >2m >lm >2m >lm >2m
Tonnes(MM) 9.25 8.36 11.4 8.12 20.6 16.5
Grade 1.96 1.97 2.00 2.07 1.98 2.02 (ct/tonne)
Avg.Thick.(m)2.91 3.13 2.28 2.79 2.56 2.96
Source - Company news Release
Based on 1.18 MM square mesh bottom screen Tonnage/grade on diluted basis
Tonnage
As in the previous release, estimated tonnage for the dike is subdivided by category,
although this time the more familiar terms "indicated resource" and "inferred resource"
are used. The difference between the categories reflects the amount of data used in the
estimates, and therefore the relative degree of assurance, As before, tonnages are
provided for portions of the dike with estimated true widths in excess of 1m, 2m, and a
global (i.e. all inclusive) estimate. Additional detail is also provided in the form of in situ
versus diluted grades and tonnage.
To date the dike has been tested by an enormous amount of drilling - 339 core holes -
and shows remarkable continuity over a large area (2 by 2.5 km). Within the resource
area there have been essentially no holes that failed to intersect kimberlite - indicating a
geologically remarkable body. Physical continuity seems to have been well established
by the volume of drilling. The second obvious question is whether or not the kimberlite in
the dike is a single body, and therefore likely to be homogeneous with respect to
diamond content and diamond value The latter point can really only be assessed
following more extensive bulk sampling over a larger area, and ultimately will need to be
established by mining. The character of the kimberlite, however, has been well
established, and appears to be very uniform over the area examined. The issue of
diamond content we will delve into more deeply below.
The indicated resource included in the release is also discussed in light of mineability
issues. The tonnage considered as base case in the Simons scoping study, 8.225 MM
tonnes (diluted) does not include indicated resources of approximately 1.5 MM tonnes
currently designated as crown pillar and a structural pillar related to a complex fault
zone. As we'll discuss below this represents one of many sources of project upside.
Diamond Grade
Establishing a resource or reserve grade for the Snap Lake dike has always been a
thorny problem, as typically large bulk samples have been looked to for providing a
definitive view of grade. In the case of the Snap Lake project, however, that posed a
problem, as only a very small portion of the dike was accessible for bulk sampling, (i.e.
at the outcrop), and estimation of grade for the bulk of the body would need to be
inferred indirectly. There is a precedent for this in the very large Argyle diamond deposit
in Australia (60% Rio Tinto - RIO.L: GBP1O.47; 40% Ashton Mining - ASH.AX. A$
0.58) where statistical studies of microdiamonds proved useful in forecasting diamond
grade.
The approach taken by MRDI involved construction of size distribution curves for + 1
mm diamonds in the Snap Lake bulk samples combined with those recovered by caustic
fusion (representing the microdiamonds). These size distributions(plus absolute
abundances) were compared with those determined from 189 drill holes studied by
MRDI. We have seen summaries of the data from both bulk samples and the drill core
and it is clear that they represent the same population. With this homogeneity of stone
size distributions the microdiamond data for the drill holes (the only type of data
available for the holes) can be used to estimate the grade of commercial-sized
diamonds. We note that the current results, with the average grade for the dike higher
than that obtained for the bulk samples, is consistent with the respective nicrodiamond
contents of samples from the two areas (see our note of August24).
With the somewhat indirect means used to estitnate grade MRDI has estimated that the
actual grade of the dike is within 15% of the 2 carat/tonne cited.
Valuation Impact
The effect of the new data is to increase our forecast revenue per tonne by
approximately 14% to C$285/tonne from the previous estimate of C$251/tonne. We
provide below an NAY natrix for a range of ultimate deposit size and discount rates,
The impact on Winspear's NAV of the revised grades are substantial.
Tonnage Discount Rate for NAV/share Calculation
MM tonnes 0% 6% 10%
8.6 $10.55 $6.05 $4.37
10 $12.35 $6.97 $4.88
16 $18.58 $9.35 $6.17
20 $25.17 $11.32 $7.02
% Increase 24% 25.5% 27% @10 MMtonnes
Operating assumptions in table below - assume 55 MM shares FD, 50-5O debt:equity
split
Source - Deutsche Bank etimates
By our estimates the project IRR is also increased by approximately 5%.
Potential Sources of Project Upside
We have identified several sources of potential upside beyond the valuation implied by
our base case model. The most important one involves what we consider the very high
probability that the ultimate reserve will end up being much higher than our base case
figure of 10 MM tonnes. This can be broken down into: 1) conversion of currently
defined resource; 2) the ability of the mine plan to be altered to allow recovery of much
of the 1.5 MM tonnes currently included as pillars; 3)expansion of the still open
Northwest Dike. and; 4) delineation of mineable reserves in the "Southeastern Dikes"
(see our note of February 10, 1999). Th our opinion, several of these are likely to be
realized, and we believe that it is probable than at least 15 MM tonnes will ultimately
prove to be mineable. With the increased grade we currently estimate that each 1 MM
tonnes of additiona! kimberlite adds approximately $1 .20/share to Winspear's
0%-discounted NAV.
An additional source of upside is closely related to any increase in tonnage. That is the
possibility of expanding the production rate at Snap Lake beyond the currently
proposed 3,000 tonne/day mining rate. With the extensive nature of the kimberlite body
and the likelihood of a much larger tonnage it would be reasonable to develop a second
access point to mine the down dip part of the body concurrent with the mining of the
shallow areas by ramp access. Such an expansion in mining rate would have little effect
on the 0%-discounted NAV, but could materially increase EPS, CFPS, and NAV's
calculated at higher discount rates.
The project is quite sensitive to revenue per tonne, which of course is the product of
grade x parcel value (i.e. $/carat).We have seen with this release an increase in apparent
grade, and at this point are not inclined to suggest any further upside. The estimate of
average value of US$105/carat is based on a relatively large parcel of appmximately
11,000 carats. On this basis a very significant value increase such as that seen at the
nearby Ekati mine (where production revenues on a per carat basis have exceeded
those contained in the feasibility by approximately 20%) may be unlikely, but some
increase is possible. We are cautious on this point, however, given the small part of the
dike that has been directly sampled, and prefer to look at diamond valuation in terms of
risks.
The possibility that Winspear is able to increase its ownership position in Snap Lake is a
second source of potential upside. At the base case tonnage of 1O MM tonnes, going
to a 76% interest for Winspear, midway between the 68% original ownership and the
84% Winspear currently claims. results in a $1.37/share increase in NAV. As tonnage
increases this impact obviously grows as well.
Sensitivity @ 10 MM tonnes
0% 6% 10%
Revenue +/- 10% 15% 16% 16%
% Ownership to 76% 11% 11% 10%
Capex +26% -4% -7% -9%
0p. Costs +25% -10% -11% -11%
Source - Deutsche Bank estimates Risks
The Snap Lake project, given its forecast high operating margin, is relatively insensitive
to operating and capital costs (within reasonable limits). As shown in the table above
even a 25% increase in either capex or operating costs results in only about a 10% or
smaller drop in 0%-discounted NAV.
Diamond Value
On the other hand a 10% decrease in revenue (either from grade, diamond value, or a
combination or the two) results in a decrease of nearly 20% in NAV. We consider this
the single greatest uncertainty in the project, particularly the diamond value. The values
for the diamonds from the two bulk sample sites were approximately US$98 and
Us$112/carat. This variance (a difference of 14% between the two equates to a 25%
range in NAV.
We have examined the case where the lower of the two values from the bulk samples
(US$98/carat) is used for the deposit as a whole. The impact of this, which represents a
7% decrease in revenue, is to lower the NAV by approximately 10%.
Permitting
We have watched with interest the permitting status of the Diavik project as the
Aber-Rio Tinto joint venture works to get permits lined up in time to allow mobilization
over the 2000 ice mad. The delays experienced by Diavik, combined with the recent
changes in permitting regime in the NWT, argue for a careful examination of permitting.
We feel, however, that several aspects of the Snap Late project should render
permitting simpler than that for either Ekati or Diavit. The most important difference is
that of the scale of the open pit segment of Snap Lake (from which a total of 10-15
MM tonnes will be removed front a single pit) compared with the vastly larger open pits
at the other projects, which will involve mining several hundred million tonnes from a
series of pits. In addition, especially when comparing with Diavik, the land-based nature
of the proposed Snap Lake pit should ease environmental concerns.
With the dominantly underground nature of the Snap Lake project the surface "footprint"
of the operation will be much smaller. In addition, the planned use of paste backfill at
Snap Lake will end up returning a substantial portion of the tailings back underground.
This eliminates much of the surface impact of tailings disposal.
On the other hand, however, Snap Lake may be the first project for which permitting is
carried out under the Mackenzie Valley Act, with the Mackenzie Valley Environmental
Impact Review Board acting as the lead agency for the process. While we have no
reason to assume that permitting will be any more onerous under the new system, there
is the aspect to contend with simply of being the guinea pig. We don't view this as
adding risk to the ultimate developrnent of the project, but rather as a factor that could
make it tough to keep to an aggressive timeline for development.
Financing
The other type of risk is that involved in fmancing planned 2000 expenditures. At
present we estimate Winspear to have cash on hand of approximately $2 MM (Cdn).
The company has in-the-money options and warrants which expire by year end totaling
approximately $11.6 MM. If we look into 2000 there is approximately a further $1
MM in in-the-money instruments, as well as an additional $3.3 MM in warrants with
strike prices of $3.41 and $3.66.
-. We believe that there is a good chance that some form of agreement will be reached
between Aber and Winspear concerning their ownership dispute that would result in
Aber making up at least part of the estimated $6.3 MM that they would have
contributed to maintain their property interest. The planned program for the next 15
months is budgeted at approximately $50 MM Cdn. Depending on its interest in Snap
Lake Winspear would be on the hook for between $34 and $41 MM. We note,
however, that it is expected that a final feasibility study of the open pit part of the mine
plan will be completed by June 2000. At this point, with our expectation of a positive
result from this study, the Company's flexibility in financing will he greatly increased.
Nonetheless based on the projected expenditures we feel that the company will need to
raise at least $l0-l2 MM by year end to fund the heavy expenditures related to
mobilization on the winter road starting in January 2000.
Valuation
With the new data we feel it is time to revisit our valuation models for Winspear. We
have indicated in the past that we feel gold NAV, earings, and cash flow company
multiples are not applicable to diamond Companies. Based on comparisons with other
diamond companies at different stages (mainly Dia Met Minerals: DMM.A - TSE:
$22.00; DMM.B - TSE: $23.50 and Aber) we set an ultimate long-term target (when
the project has demonstrated that it works) - as equal to the O%-discounted NAV,
with the 6% NAV applying 3 years pre-startup, and 2%-discounted NAV at start-up.
We expect a P/E in the 15- 17x range to apply. Using these criteria we provide a
valuation matrix for Winspear below based on the base case of:
10 MM tonnes mineable
In situ grade of 2.06 carats (1.83 diluted)
Average value $1O5/carat ($Cdn $154/carat)
Capital - Initial $244 MM, Sustaining $55 MM
Average Op. Cost (life-of-mine) $71.65/tonne
Winspear Resources Valuation Matrix Amount Multiple Target Discount
0% NAV $12.35 lx $12.35 $6.15
2% NAV $10.15 lx $10.15 $6.67
6% NAV $6.97 1x $6.97 $6.97
Steady/stat EPS $1.04 15-17 $15.60-$17.68 $6.24
Steady-stateCFPS $1.40 9-11 $12.60-15.40 $5.26 * - Assumption 6% NAV is
current target, 2% NAV discounted back three years at 15%, EPS and CFPS targets
discounted back 5 years at 15%
Source - Deutschc Bank estimates Based on a variety of approaches we conclude that
an appropriate 12-month target for Winspear is in the $5.25-7.O0/share range. We
prefer to stick to the low end of this range at least until the expected completion of the
open-pit feasibility study in the second quarter of 2000. We reiterate our BUY
recommendation for Winspear with a 12-month target of$6.00/share.
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Author: DiamondWillie -- Date:1999-12-16 15:46:17
Subject: Thanks!
Most excellent, dude! I have a problem with one part of the report:
" Physical continuity seems to have been well established by the volume of drilling.
The second obvious question is whether or not the kimberlite in the dike is a
single body, and therefore likely to be homogeneous with respect to diamond
content and diamond value The latter point can really only be assessed following
more extensive bulk sampling over a larger area, and ultimately will need to be
established by mining. "
I thought the CF analysis laid to rest the possibility of negative surprises with the
new bulk sample. I guess if there was a large degree of certainty that they
wouldn't need to do the bulk sample though, eh?
I'd still settle for, say $8 right now if anyone wants to buy my shares. ;-)
-------------------------------------------------------------------------
Author: WillP -- Date:1999-12-16 16:12:44
Subject: Never Laid To Rest
I thought the CF analysis laid to rest the possibility of negative
surprises with the new bulk sample. I guess if there was a large
degree of certainty that they wouldn't need to do the bulk sample
though, eh?
Well, remember that mining is actually a never ending series of bulk
samples.
Albino believes that the significant upside potential is not that great, but it
should be noted that he is already using a value of $211 (U.S.) per tonne.
So, I'll concur. After all, $225 (U.S.) isn't "significant". [grin]
As for whether it's homogenized, err...homogeneous...well, the CF results
do indeed point in that general direction. It's far easier to nail things like
that down with certainty in a pipe, where a 6" core can give you 6-8
tonnes per hole. Not so here.
Nevertheless...the results do show highly probable homowhatever.
Albino's target suggests likewise.
Value is, of course, another question entirely. Hence the bulk sample. It's
less certain, of course, but given the approximate, but reasonably modest
$130 US value on commercial stones (grade around 1.6 ct/t) ... there's
likely a better chance for upside, than downside.
Ya rolls the dice, and ya takes your chances. Personally, I'm not terribly
worried about crapping out at this table.
Regards,
WillP |
