Mountain Province Diamonds Inc - Street Wire
Mountain Province iffy for mountains of value
Mountain Province Diamonds Inc MPV
Shares issued 62,246,188 Sep 11 2002 close $ 1.16
Thursday September 12 2002 Street Wire
by Will Purcell
Speculation about a possible De Beers takeover has already begun, although shareholders of Mountain Province Diamonds Inc. likely have a few more months to wait to discover if the modelled revenue at the Gahcho Kue project has increased enough to warrant the advancement of the project to feasibility. That speculation is the result of some encouraging numbers from AK-5034, which is the flagship kimberlite pipe of the project, and if there is a similar batch of good news in the results from the Hearne pipe, the buyout speculation will likely grow in scope and in stature.
Although De Beers is not expected to finish its modelling exercise for some time, the larger diamond parcels from the two key pipes should result in increased gross rock values for Gahcho Kue, but whether such an increase will be enough to advance the project to production is still uncertain. That makes speculation about the likelihood and price of a possible takeover little more than a guessing game at this stage. If Gahcho Kue fails to achieve the required improvement in revenues, De Beers will not advance the project, which would carry little value as a result, and Mountain Province's market value would likely drop dramatically. That would be a surprise at this stage however. Mountain Province president, Jan Vandersande, said that he would be shocked, as would De Beers, if the rejigged numbers for Gahcho Kue did not reflect an improvement over the previous projections.
If the rock value at the two pipes were to increase by about 20 per cent, there seems little doubt that De Beers would advance the project to feasibility, but whether the company would be sufficiently enthused to consider making a friendly takeover of its partners is hard to say. As well, just how much such an offer might be worth depends on how the project would be valued. There are a number of recent precedents that offer some insight as to what Gahcho Kue might be worth, should the revenues climb to a sufficiently interesting degree. One of those precedents is the 2000 hostile takeover of Winspear Diamonds Inc. by De Beers, and the subsequent purchase of a minority interest in the Snap Lake project from Aber Diamond Corp. The Snap Lake project was at a roughly similar stage of development as Gahcho Kue is today. As well, the 2001 friendly takeover of Dia Met Minerals Ltd. provides an indication of the value of an operating mine.
In 2001, De Beers predicted a grade of 1.64 carats per tonne for the 12.5 million tonnes of rock at AK-5034, along with a diamond value of $69.30 (U.S.) per carat. That latter figure actually declined somewhat after a subsequent mini-bulk sample, with a predicted value of $65.50 (U.S.) per carat. All that suggested a gross rock value of $1.34-billion (U.S.), and if the latest modelling exercise produces a 20-per-cent increase, the AK-5034 rock would be worth about $1.6-billion (U.S.).
There seems no doubt that the Hearne kimberlite would also be part of any Gahcho Kue mining plan. The initial modelling work by De Beers suggested a grade of 1.71 carats per tonne for the 6.86 million tonnes of kimberlite, with a stone value of $71.50 (U.S.) per carat. As with AK-5034, De Beers dropped its projected diamond value to $63.30 (U.S.) per carat, after the 2001 mini-bulk test. Part of that decline seemed to be due to a smaller number of larger diamonds, but much of the decline was due to a significantly softer rough diamond market at the time. Nevertheless, the Hearne kimberlite carried a gross value of about $750-million (U.S.), and if De Beers can fashion a 20-per-cent increase out of the latest results, that value would grow to about $900-million (U.S.).
That would make the two key pipes worth a total of $2.5-billion (U.S.), but there apparently is more that must be included in the current mining plan. The 1999 sampling program at the Tuzo pipe brought some very bad news, as a low grade zone in the midsection of the pipe seemed to spell its demise. Not so, says Mr. Vandersande. There is a higher-grade zone in the top 100 metres of Tuzo, that remains a part of a hypothetical mine at Gahcho Kue, and work continues in the hopes of adding much more to the plan. There is only about one million tonnes of kimberlite in the richest portion of Tuzo, which was modelled with a grade of 2.7 carats per tonne, with a stone value of $51.70 (U.S.) per carat. As well, there is an additional 2.4 million tonnes of rock in the top 100 metres with a grade of 0.94 carat per tonne and diamonds worth $36.30 (U.S.) per carat. Combined, that would provide a resource of 3.4 million tonnes with an average rock value of about $65 (U.S.) per tonne, and a gross value of about $220-million (U.S.), and adding that portion of Tuzo to the mine plan would increase the gross rock value of the project to about $2.7-billion (U.S.).
That value pales in comparison with Snap Lake, especially if the inferred resource is included. In 2000, Snap Lake contained about 22 million tonnes of kimberlite, with a estimated grade of about 1.9 carats per tonne and diamonds worth about $118 (U.S.) per carat. That suggests a gross rock value of about $4.9-billion (U.S.), and in addition to that, Snap Lake contained an additional inferred resource that was roughly equal to that amount, increasing the gross value of the project to about $10-billion (U.S.). Including the latter amount is probably unrealistic, as it would not be mined for many years to come.
Still, it appears that De Beers was able to buy Snap Lake for a small fraction of its gross rock value. In 2000, De Beers successfully acquired Winspear for $5 a share, which amounted to a payment of $305-million for a 68-per-cent stake in Snap Lake. That deal implied a total value of about $480-million for all of Snap Lake. Late in 2001, De Beers picked up the remaining share of the project, by paying Aber $173-million for its 32-per-cent share. That arrangement pegged the value of the entire project at about $540-million. In all, De Beers acquired its 100-per-cent stake in the project for about $300-million (U.S.). That amounts to about 6 per cent of the gross rock value contained in the indicated resource. A similar percentage would imply a value of about $250-million for Gahcho Kue, or about $90-million for the portion that would remain in the hands of Mountain Province. With roughly 53 million shares, options and warrants outstanding, that would amount to a value of roughly $1.70 per Mountain Province share, significantly more than the stock is currently trading for, but much less than the rosier hopes of some of the company's shareholders.
The percentage of gross value contained in a bid would increase as the project is advanced however. BHP Billiton paid a significantly higher percentage for Dia Met's 29-per-cent stake in Ekati, which had a gross rock value of roughly $5.2-billion (U.S.), with an additional amount that could be considered blue-sky potential. BHP paid $21 per share, which amounted to nearly $1.5-billion (U.S.) for the entire mine, or just over a one-quarter share of the gross rock value. Of course, Ekati was generating cash flow by then, which would account for the much greater offer.
The Ekati mine produced gross revenues of about $440 million in Dia Met's last full fiscal year, which ended early in 2001, and it probably had earnings of about $175-million. Dia Met's share of that was about $50-million, so the BHP bid amounted to about 13.5 times the company's earnings. That would provide another possible comparison for a Mountain Province buyout if an offer was made in several years, once a mine was running. Coming up with an estimate of annual earnings for a Gahcho Kue mine is a formidable task however, especially as even De Beers is likely operating with little more than some fairly rough guesses at this stage.
The capital cost of a future Kennady Lake mine will be a key component of any such calculation. Mr. Vandersande was confident that Gahcho Kue would cost much less than the $1.3-billion that is being spent at Diavik. Like Diavik, the Gahcho Kue pipes lie in a rather large lake, but Mr. Vandersande said that the Kennady Lake dikes would not be the major undertaking that the Diavik ones have proven to be. The water in Lac de Gras is up to 25 metres deep, but Mr. Vandersande said that the water at Kennady Lake would be just six metres deep. As well, De Beers has no plans to run trucks over its dikes, and the structures will be significantly smaller as a result. The Kennady Lake dikes will have to close off an area larger than just the individual pipes however, as both Hearne and 5034 will have to be accessible from the camp and treatment plants. As well, there would have to be room for an airstrip, along with the required rock containment areas and other mine components.
None of that will come cheaply, although Mr. Vandersande says that De Beers will be building a Chevrolet, rather than a Rolls Royce. He has been suggesting a mine could be built for about $650-million, but that might prove a bit optimistic, as most first guesses subsequently prove to be. In any case, the capital cost will amount to a significant portion of the gross rock value currently in the mine plan at Gahcho Kue, and finding ways to cheaply build a mine will be a priority. Snap Lake could be of some help, although Mr. Vandersande said that sharing a processing plant was out of the question, as the two deposits were about 90 kilometres apart. Nevertheless, there would be some savings to be had, such as sharing stockpiles of fuel, spare parts and other supplies.
Another key component of the financial equation will be the operating costs at Gahcho Kue. Mr. Vandersande suggested that $50 (U.S.) per tonne was a realistic figure, given a proposed mining rate in the neighbourhood of 5,000 tonnes per day. The Ekati mine now estimates its costs to be just less than $35 (U.S.) per tonne, but that is based on a mining rate more than double what is proposed at Kennady. Meanwhile, Diavik has estimated that its operating costs will run at about $55 (U.S.) per tonne, with a mining rate similar to what is likely at Gahcho Kue.
That would suggest that Mr. Vandersande's estimate is quite reasonable, especially if it proves cheaper to run a De Beers Chevrolet than a Diavik Rolls Royce. Keeping a lid on the operating costs will be a higher priority at Gahcho Kue however, which would have an average rock value of about $120 (U.S.) per tonne, even with a 20-per-cent increase in value, far less than the $400 (U.S.) per carat at Diavik's A-154 South. Those lower margins are also a concern when comparing the project's gross value with others in the region that enjoy a higher rock value.
Nevertheless, there could be considerable room for profit at Kennady Lake, if De Beers models a significantly higher value for the existing pipes, and if some of the other finds can be mined profitably. Mr. Vandersande said that two smaller deposits, Wallace and 5034 South, could well be part of the mine plan, and there was a chance that Faraday and Kelvin, several kilometres to the northeast, could be added as well. In addition, De Beers is still poking away at MZ Lake, exploring a number of diamondiferous sills. Furthermore, there are several unexplained mineral trains on the property that could lead to new finds.
Whether there will be a friendly takeover bid for Mountain Province will largely depend on the company itself, along with its largest shareholder, Bottin International Investments, which owns about 25 per cent of the actual shares outstanding. There is no indication of what Bottin would say to an offer, but Mr. Vandersande suggested that many shareholders would be quite receptive to a reasonable bid. He cited the time value of money as the key reason, noting that everybody had a finite life expectancy. If that assessment applies to a majority of the company's shareholders, and if De Beers can make a mine at Kennady Lake, the life expectancy of Mountain Province might be quite finite as well.
The potential value of Gahcho Kue will hopefully become clearer in the coming months, as De Beers trots out its updated model values and additional results. Meanwhile, Mountain Province's shares have been slowly drifting lower after the initial wave of enthusiasm over the preliminary results from the AK-5034 sample. The stock had traded as high as $1.55 after that news, but it closed down four cents Wednesday, at $1.16. |
