Winspear's old play Snaps ahead, Kennady waits on
Mountain Province Diamonds Inc MPV
Shares issued 50,272,170 Jul 29 close $1.09
Tue 29 Jul 2003 Street Wire
See (WSP) Street Wire
by Will Purcell
The Snap Lake project has crossed another important hurdle, as the Mackenzie Valley Environmental Impact Review Board has completed its environmental assessment of the project. The board has recommended to the federal government that the proposed mine proceed to the regulatory phase of approvals. The step brings what will be Canada's third diamond mine a step closer to achieving its goal of production by early in 2007. That could give at least a minor boost to the fortunes of the Gahcho Kue project at Kennady Lake, another De Beers project that is about 90 kilometres to the east of Snap Lake. Earlier this year, a National Post article dubbed the Snap Lake project a horror story for De Beers, and the Internet chat lines have occasionally buzzed with suggestions that the diamond giant might be looking to mothball, or even unload the rich deposit that it acquired through a takeover of Winspear Diamonds in 2000. De Beers steadfastly denies the stories, and the facts appear to support its stance. The slow pace of development at Snap has helped the rumours along, but the limited progress has been due to the rigours and delays of the environmental assessment process, rather than inaction by De Beers. Lower estimates of grade and value added to concerns about the viability of the project, but a Snap Lake mine should be quite profitable, even with the traditionally conservative numbers used by the diamond giant. The bid for Winspear took place just four months after Richard Molyneux came to Canada to become president of De Beers Canada, replacing the retiring George Burne. Mr. Molyneux is a geologist by trade who has worked for De Beers for more than 30 years, starting just after he received his geology degree from the University of Cape Town in 1970. He started off working as an exploration geologist in South Africa, and he was the resident geologist at the Premier mine in the latter half of the 1970s. The Toronto-based Mr. Molyneux spent several years as chief geologist at Namaqualand Mines, moving up to general manager in 1995. During his last three years before moving to Canada, Mr. Molyneux was the general manager at Central Mines. Since the arrival of Mr. Molyneux, De Beers Canada has been actively hunting Canadian diamonds. In addition to acquiring all of Snap Lake, the company has conducted three energetic drilling programs on a mammoth kimberlite in the Fort a la Corne region of Saskatchewan, along with two mini-bulk tests of two pipes at Gahcho Kue. As well, it has advanced its long-dormant Victor project toward a feasibility study. The Snap Lake project remains De Beers most advanced project however. The company now says that Snap Lake has a mining grade of 1.46 carats per tonne, and it placed a value of $76 (U.S.) per carat on the diamonds. That produces a rock value of $111 (U.S.) per tonne for what the company thinks is a mineable resource of 22.8 million tonnes. That is a far cry from the figures produced by Winspear in 2000, which featured a grade of 1.98 carats per tonne and a diamond value of $118 (U.S.) per carat, for a rock value of $232 (U.S.) per tonne. The reduction in grade is almost entirely attributable to increased dilution, according to Mr. Molyneux. He said that the company used underground mapping from the sampling development and geostatistical modelling to produce a detailed simulation of mining on a panel-by-panel basis, while the earlier estimates were based on borehole derived models. De Beers believes that those earlier estimates significantly underestimated the waste dilution that would occur during mining of the dike. Winspear's 2000 prefeasibility study was based on a diluted mining grade of 1.75 carats per tonne, and the figure was reduced to 1.70 carats per tonne in its updated scoping study that was prepared just after the hostile bid by De Beers was launched early that summer. Those rates reflected anticipated dilution rates that were between 10 and 15 per cent. Mr. Molyneux said that De Beers was now modelling the waste dilution at 34 per cent over the life of the indicated resource. As a result, there has effectively been no real change in the estimated grade of the Snap Lake kimberlite, which is just less than two carats per tonne, and that allows De Beers the opportunity to refine its methods and models to optimize its plans. Such a program is in the works if the permitting process goes as hoped. Mr. Molyneux said that De Beers would be busy next year, dewatering the existing development, and expanding it by approximately 4,000 metres, taking 150 more samples weighing about 80 tonnes each, for a total of 12,000 tonnes of kimberlite. That work should allow De Beers to test and refine its proposed mining methods and to confirm its dilution estimates. As well, the new program will allow De Beers to make minor adjustments to its proposed processing plant design. The chances seem good that De Beers can beat its dilution projections. Mr. Molyneux said that the company would be testing some new optical waste sorting equipment. The new technology has successfully been used elsewhere, but it has not been tested on the material at Snap Lake. As a result, the current models are based upon more conventional equipment. Nevertheless, De Beers believes the new system has the potential to significantly reduce the volume of waste that would be run through the processing plant. The use of low profile equipment underground presents another possibility in reducing the amount of dilution, as the dimensions of the access and footwall drives could be reduced, resulting in less waste rock being excavated and sent to the plant. As well, De Beers also plans to use high-pressure rolls crusher technology, which will be installed next year. Mr. Molyneux said that De Beers believes the new system will produce major benefits to both grade and value. He added that those benefits had been added into the company's models, although the technology had not been used in the previous sampling programs. Although the grade of the kimberlite remains virtually the same as it was in 2000, the diamond value has shown a steep decline, at least at first glance. Mr. Molyneux described the original figure of $118 (U.S.) per carat as "quite simply too high," adding that the initial valuations by De Beers had come back at about $90 (U.S.) per carat, using its realized value. That figure translates into a standard selling value of about $100 (U.S.) per carat. As well, Aber Diamond Corporation conducted an independent valuation of the diamonds, prior to it selling its one-third stake in the project to De Beers. That appraisal returned a value of approximately $90 (U.S.) per carat. The subsequent reduction is attributed entirely to the softening rough diamond market after the summer of 2001, which resulted in De Beers reducing its estimate to $76 (U.S.) per carat, which would be roughly $84
(U.S.) per carat using the standard selling value. The rough diamond market has since staged a comeback over the past nine months, and Mr. Molyneux said that the value of that Snap Lake diamonds was now about $83 (U.S.) per carat. That would imply a standard selling value of approximately $91
(U.S.) per carat.
Meanwhile, the costs for the project have increased over the levels suggested by Winspear's earlier studies. Mr. Molyneux now says that the operating costs will run at about $112 per tonne, which is up from the $94 figure indicated by Winspear's prefeasibility study and the $88-per-tonne value that the scooping study arrived at. The somewhat higher value is no real surprise however, as fuel costs are significantly higher than they were three years ago, and costs often escalate with a more detailed study. The capital costs of a Snap Lake mine have also increased considerably, although rising capital costs are no surprise. Mr. Molyneux said that De Beers estimates the construction cost of the mine will be $489-million, which is well above the $269-million indicated by the prefeasibility study. In all, De Beers will have shelled out nearly $1-billion for a Snap Lake mine. Still, the operation should be quite profitable, even with the currently conservative estimates of De Beers. The proposed mine will run at 3,000 tonnes per day, which should be good enough to extract about 1.5 million carats, worth a total of more than $190-million, using the current diamond value and exchange rate. With operating costs of just over $115-million, that would theoretically leave about $75-million in pre-tax cash flow annually, over a mine life of about 20 years. The expected efficiencies could improve upon that significantly. If the new techniques reduce the waste dilution to 25 per cent, it could add roughly $15-million to the annual revenue and cash flow figures. A Snap Lake mine will give De Beers its own source of Canadian diamonds, which adds to the importance of the project in the plans of De Beers. Meanwhile, the Gahcho Kue project could provide De Beers with an even greater supply of diamonds and a potentially lucrative cash flow, but the project remains on hold, as De Beers and Mountain Province Diamonds Inc. await a turn of events that would produce a better rate of return. De Beers completed another round of mini-bulk sampling earlier this year, but the company modelled the value of the diamonds in the two key pipes, Hearne and AK-5034, to be lower than its more optimistic projections made in the summer of 2001. There were some pleasant surprises in the updated desktop study, as the capital cost to build the mine was just a bit over $600-million, well below the cost of Diavik, or even Ekati. As well, the estimated operating costs dropped in a big way, to $56 per tonne, down from just over $80 per tonne suggested by the earlier report. Nevertheless, the project fell well short of the 15-per-cent return on investment that De Beers requires to advance the project to feasibility. It was the drop in projected revenue that seems to have been the key reason that De Beers elected not to advance the project to feasibility, but Mountain Province president, Jan Vandersande, remains cautiously optimistic that its partner will decide to proceed in any case. Dr. Vandersande said that no further sampling of the existing pipes would be done, but he had high hopes that further exploration would produce the added mine life and additional revenues that would make the project sufficiently attractive to De Beers. Dr. Vandersande said that an improving economy in the United States would also help matters. The Canadian dollar has gained more than 10 per cent against its American counterpart over the past several months, which has also hurt the projected bottom lines of both Snap Lake and Gahcho Kue. As well, increased diamond demand in the United States would boost rough diamond prices across the board. Exploration in the area to the northeast of the main pipes continues to produce new hope for the Faraday and Kelvin bodies, and with a seven-year dispute over the Doyle Lake claims now settled, De Beers is set to drill a prospective target that is just south of the Gahcho Kue project. Mountain Province has no interest in that play, but Dr. Vandersande and his company's shareholders would be ecstatic if De Beers and GGL Diamond Corp. made a big find that could be added to the Gahcho Kue mine plan, as it would go a long way to making a profitable mine at Kennady Lake feasible. The current mine plan includes just 20 million tonnes of kimberlite, which is enough for just 10 years, although there is another 10 million tonnes in the resource, which possibly could add five years to the life of a mine. There is cause for optimism. The updated study for Gahcho Kue calls for about two million tonnes of kimberlite to be processed per year, which would produce over three million carats of diamonds annually, worth something close to $200-million per year over the life of the mine, using the latest numbers. Based on the desktop study, the operating costs at a Gahcho Kue mine would be about $115-million annually, and the capital costs are only about 25 per cent higher than those projected for Snap Lake. As a result, De Beers could well be tempted to take Gahcho Kue to feasibility in the coming months, especially if it can expand the life of the mine through new finds. An operating Snap Lake mine would provide some minor benefits to Gahcho Kue, bit those would be limited to overhead issues such as spare parts and transportation. Mr. Molyneux said that distance and the constraints of winter roads prevented any significant operational synergies. Speculators seem hopeful of late. The shares of Mountain Province have poked above the $1 mark recently, after dipping to a 60-cent low after the decision to delay the feasibility study. Mountain Province closed up eight cents on Monday, at $1.03, and added another six cents to $1.09 on Tuesday.
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