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<Aber Diamond Corp (C-ABZ) - Street Wire
Aber adds to its Diavik bounty
Aber Diamond Corp ABZ
Shares issued 54,591,920 Jul 31 2003 close $ 33.50
Thursday July 31 2003 Street Wire
by Will Purcell
Aber Diamond Corporation continues to come up with favourable developments at its Diavik diamond mine in the Northwest Territories. The mine has been ramping up its production over the past several months, and is now near full production, with its diamonds worth more than first thought. Meanwhile, a bulk sample of the A-154 North pipe, which had been regarded as little more than waste, has more than doubled the initial diamond value. That will trigger a change in the mine plan later this year and provide a boost to Aber's revenues for years. As well, the result bodes well for the two other pipes in the Diavik mine plan, especially A-21. All of that could have a big impact on the developing Canadian diamond industry.
Aber president, Bob Gannicott, said that Aber has now finished its third diamond sale, and was just working on its fourth. The company revealed that its initial sale of diamonds had fetched $96 (U.S.) per carat, which was well in excess of the $79 (U.S.) value that had been used for the bankable feasibility study. There has been no word of how well the sales have been going since then, but Mr. Gannicott said the subsequent sales were generally in line with the initial batch of diamonds. He added that Aber is using a figure of about $90 (U.S.) per carat for planning purposes, which is the same figure that the company was using after its first sale of stones. The actual numbers will be released quarterly.
The Diavik mine is still encountering some waste rock dilution, and some of the lower-grade material, but the uppermost portion of the mine reserve is now providing the bulk of the material. Mr. Gannicott said that they were getting some big production now, and the mine was approaching its expected full production rate.
Now officially open and closing in on its production targets, Diavik has been a good story for Mr. Gannicott, who grew up in England but immigrated to Canada in 1967 after he finished high school. He took up mining in Yellowknife, but subsequently moved to Ontario, earning a degree in geology from the University of Ottawa.
Meanwhile, Rio Tinto has been talking up its take on the new diamond mine as well. The company indicated that Diavik ran at 62 per cent of capacity through the second quarter, a rate it describes as being ahead of schedule, and it sold its first diamonds just a few weeks ago. Rio Tinto did not reveal its sale price, but the company described its diamond sale as "comfortably above those anticipated in the feasibility study."
The grade continues to vary somewhat on a weekly basis, but it has run in excess of four carats per tonne for stretches when the kimberlite that was originally included in the Diavik resource was being processed. Following the improving grade and value is likely a special treat for Mr. Gannicott, with his geostatistical background, and his interest in the field may have played a role in his early interest in diamonds. Mr. Gannicott worked for Cominco for several years, but he left in the mid-1980s to strike out on his own.
He had spent nearly 10 years working in Greenland, and his struggling Platinova AS has long been hunting minerals, including diamonds, on the Danish island. As president of Platinova, Mr. Gannicott had his first dealings with Aber in 1987, on a Greenland deal, and he has been involved with Aber since it took up the hunt for Lac de Gras diamonds in the early 1990s. Mr. Gannicott was a director of Aber through the big finds in the mid-1990s, and he took over as head of Aber from Ken Hanna in 1999.
The upper portion of A-154 South has a grade of about 5.6 carats per tonne, but the processing plant does not recover the smallest stones efficiently, and the production grade will likely peak at about five carats per tonne. Mr. Gannicott said that Diavik was improving those recoveries a bit, but the limited value of those stones would have little impact on the bottom line. "There is not much point in blowing your brains out on that," he concluded.
Much of the brainpower at Diavik will now be directed at coming up with a way to mine the A-154 North pipe in its entirety, based on the result of what amounts to a bulk sample of the lower-grade portion of the pipe. Diavik processed 19,342 tonnes of fine-grained layer of kimberlite ash and lapilli tuff, coming up with 11,771 carats. The value of those stones was modelled by WWW International Diamond Consultants Ltd. at about $82 (U.S.) per carat, which is far above the $33 (U.S.) figure that was arrived at from a tiny parcel in the late 1990s.
The difference should add to the value of the Diavik mine plan in a big way. The current Diavik reserve includes just 1.3 million tonnes at the top of A-154 North, good for about 4.5 million carats, but there are 11.5 million tonne of kimberlite, containing 27.5 million carats in the lower portion of the pipe. Based on those numbers, the value of A-154 North appears to have grown from a modest $150-million (U.S.) to an impressive $2.26-billion (U.S.), which is nearly the match of the gross rock value for the three pipes at Kennady Lake that De Beers hopes to make into a mine.
The increase in rock value is no great surprise, as the initial estimate was made on the recovery of less than 160 carats during the initial mini-bulk sampling program. As well, there could be a further increase, as the value of the latest A-154 North diamonds is still limited by the sample size. The latest parcel was very similar to that obtained from the 1996 bulk sample at A-154 South, which appears to have underestimated the real value of the diamonds to at least some degree. At this stage, there is no real reason to expect the diamond value to be significantly different between the two sister pipes, which make possible a further hike in the value.
All that bodes well for A-21 as well, which is thought to have produced some of the better looking Diavik diamonds at an early stage. Based on a recovery of about 90 carats, the A-21 parcel was too small to produce much information about the diamonds in the key range between two and five carats, and the diamond value was set at just $28 (U.S.) per carat. As a result, there is good reason to expect that the value of the diamonds in A-21 will also experience a dramatic increase. With a resource of 14.8 million carats, the gross value of A-21 could increase from the current $310-million (U.S.) to something close to $1.2-billion (U.S.), given a similar result as A-154 North has just delivered.
Using the increased diamond values produced by the larger sample at A-154 North and the start of production at A-154 South has a big impact on the gross value of the Diavik resource, especially if the increases are translated onto A-21 and A-418. If A-21 has a diamond value similar to A-154 North, and if the value at A-418 grows by an amount comparable with the increase at A-154 South, the Diavik resource would carry a value of more than $11-billion (U.S.), up from the $8.2-billion calculated in the feasibility study.
Getting at all of the diamonds in A-154 North is now a priority for Aber and Diavik. Mr. Gannicott said that Rio Tinto will be working on a revised mine plan between now and November. Coming up with a revised plan is not a trivial exercise, as the location of the retention dike limits what can be done. The most likely scenario would have the open pit dip more steeply in the area of A-154 North, but just how steep the walls can be will depend upon the condition of the host granite.
If the rock surrounding the kimberlite is sufficiently competent, or made so by grouting or rock bolting, the pit wall could be sufficiently step to allow most of the pipe to be mined by open pit. If a shallower pit wall is required, the base of the pit over the northern pipe would be made flat, allowing for subsequent underground mining of the northern kimberlite. The current plan called for much of the pipe to be frozen within the wall of the pit itself, making recovery of much of the kimberlite in A-154 North an impossibility. None of that was a particular problem, Mr. Gannicott said, adding that when you wanted to push the envelope, you have to look at what the alternatives are. The size of the potential paycheque within that A-154 North envelope makes a change to the mine plan a priority for the Diavik partners.
There are two other additional benefits to adding all of A-154 North to the mine plan. The addition of up to 10 million tonnes of rich kimberlite delays the capital cost of building the water retaining dikes around A-418 and A-21 by at least a few years. As well, adding the lowest part of A-154 North to the underground plans adds to the efficiency of the existing underground plans for A-154 South in the latter stages of the life of Diavik.
With the initial stages of production continuing to add more promise to Aber's bottom line, Mr. Gannicott said that the company was looking for ways to send the profits back to its shareholders. A hefty dividend seems certain, but Mr. Gannicott and Aber have some additional plans that they hope will attract new interest in the company. Mr. Gannicott the geologist has long been interested in the marketing side of diamonds as well. He was chairman of Aber's diamond marketing committee and he oversaw the diamond valuations from the company's sampling programs.
Mr. Gannicott said that they were serious about coming up with a linkage to a good retail name brand. "It has to be the right name, at the right time and the right price," he said. The time seems right, as the recent downturn has hurt many retailers, but Mr. Gannicott said that he would prefer to wait until Aber had a year's production under its belt. Nevertheless, the company is taking a pretty serious look at a couple of things now, he said, adding that one of those things might come to pass before the end of the year.
The attraction of acquiring a brand name is the increased exposure it would provide. Mr. Gannicott noted that there were many more luxury retail analysts than there were diamond mining analysts, and his goal was to attach Aber to the image and additional coverage that a luxury brand retailer could provide. He said that such a move seemed attractive from the other end of the tube as well. "Having your own diamond mine is a wonderful sales suck for the rejuvenation of an existing diamond jeweler."
A move to the retail side of things might seem to spell the end for Aber as a diamond hunter, but that likely will not be the case. Aber will not be cranking up a grassroots exploration program on some new diamond prospect, but it could play a major role in developing some new discovery down the road. Mr. Gannicott said that Aber had the good fortune to ride the first wave during the 1990s, and subsequent explorers might have a tougher time in the market. He said that as a Canadian equity, Aber might well be in a position to offer a tax-free rollover to a prospective explorer with a new discovery. Alternatively, the company might take a significant position in a junior explorer with a good find, especially at depressed prices.
Mr. Gannicott and Aber know a few things about depressed share prices. Aber's shares peaked at $28.50 early in 1997, but the stock plummeted to a low of $6.95 late in 1998 and remained below $10 until mid-2000, despite the fact that it was abundantly clear that Diavik would be a cash cow. The shareholders of Dia Met Minerals also experienced a similar ride, dipping to a low of $7.62 in the spring of 1995, down from a peak of $26.80 a few years earlier. At the time, there was no real doubt that Ekati was destined to be a very profitable diamond mine.
Much of those declines were due to the lengthy environmental assessment and permitting processes, but investors also seemed unsure of just how the Diavik and Ekati sampling results would translate to the bottom line of an operating mine. Mr. Gannicott and Aber can afford the wait and they have a good idea of what makes a diamond mine, as Aber now has an extensive library of diamond size and distribution plots from the many kimberlites on the Diavik property. Those plots include the four rich pipes, as well as a few others that are potentially economic, and a significant number that are clearly not. That range of data will help the company to evaluate the deposits of other explorers as they turn up.
Mr. Gannicott ruled out acquiring royalties on prospective diamond projects however. With the Tiffany deal and a possible acquisition of another brand name, Aber wants to control its own diamond sales, rather than simply raking in cash from the sales of others.
Investors seemed happy with the results from A-154 North. Aber's shares jumped $2.24 on Thursday, closing at $33.50. >
stockhouse.com
I view ABER as a very nice long term buy with the added kicker of a possible takeover battle. |
