Mountain Province valuation looking better
2004-06-18 12:03 ET - Street Wire
by Will Purcell
De Beers Canada Corp. has updated its modelled diamond values for three key Gahcho Kue pipes in the Northwest Territories, producing some good news for its partners on the project, Mountain Province Diamonds Inc. and Camphor Ventures Inc. The Gahcho Kue diamond values increased by nearly 20 per cent over the past year, and that increases the likelihood that De Beers can make a mine work at Kennady Lake.
Investors nevertheless seemed less than enthused with the result. There was early interest in the shares of De Beers's partners following the news on Wednesday, but Mountain Province's shares closed seven cents lower at $1.75, shedding about 4 per cent of their value, while Camphor's stock struggled one cent higher, closing at 56 cents. Despite the lukewarm reaction, the prospects for the project now seem rosier.
A buoyant diamond market accounted for the hefty increases in the diamond values of the three pipes, with the Hearne body chalking up the largest increase, pegged at about 22 per cent. Early last year, De Beers had come up with a value of just $50 (U.S.) per carat for the Hearne diamonds, but that figure now stands at $61 (U.S.) per carat, thanks to the healthier state of the rough diamond industry.
The increase at Hearne is especially encouraging, as it returns much of the theoretical value that had disappeared in recent years, due to a declining rough gem market and a more conservative modelling technique used by De Beers over the past year or two.
After the first big sampling program in 1999, De Beers produced a diamond value of $71.50 (U.S.) per carat for its Hearne diamonds, but a second sampling effort in 2001 resulted in a decline to $63.50 (U.S.) per carat. That 11-per-cent drop was no big surprise however, as the rough diamond market had lost about 20 per cent of its value from a peak in the summer of 2000.
De Beers and its partners collected a new sample in 2002, coming up with signs of larger diamonds from Hearne, which inflated the hopes of speculators, who expected a big boost to the value of Hearne's diamonds. Those hopes were dashed last spring, when De Beers delivered not an increase, but a 21-per-cent decline in the value of the Hearne gems.
That lower value was partially attributed to a further decline in the general value of rough diamonds, but a majority of the decrease was apparently due to the new method of modelling the value of Hearne's diamonds.
That approach may prove to be a more accurate representation of the diamond value, but it could just as easily be unduly conservative. That will remain an unknown until the Hearne diamonds are actually mined, but the latest boost in value increases the likelihood of a Gahcho Kue mine providing the answer.
Things are even rosier at the 5034 pipe, which remains the flagship kimberlite of the project, with a current diamond value of nearly $75 (U.S.) per carat. That value handily tops a 1999 projection of $69.30 (U.S.) per carat that had been the previous best, and it exceeds the 2003 estimate of $62.70 (U.S.) per carat by about 18 per cent.
Curiously, although the modelled diamond values followed the same trend as the Hearne projections, dropping from 1999 highs to a low in 2003, the decline was significantly smaller at 5034. That should bode especially well for the project, should the De Beers estimates prove to be conservative.
The diamond value at Tuzo also managed a hefty increase, climbing to $49 (U.S.) per carat, up from a projection of $41 (U.S.) per carat that was set last year. As with 5034, the latest estimate for Tuzo is marginally higher than the levels determined after the 1999 mini-bulk test.
The increases should improve the chances of making a mine at Kennady Lake, although the process of proving, permitting and building a mine in the Northwest Territories can be an excruciatingly slow process for a notoriously impatient market. That impatience has led to investor grumbling about the seemingly slow pace set by De Beers, and the usual array of conspiracy theories have popped up, suggesting the delays are deliberate.
Those opinions come much to the chagrin of Mountain Province president, Dr. Jan Vandersande. "There is a shortage of diamonds in the world at the moment. De Beers needs diamonds, so why would they want to slow us down?" he said, adding that there were no new mines slated to start production, beyond the Snap Lake and Victor deposits." Those are not big mines," he stated.
Dr. Vandersande has a point. According to preliminary plans, a Gahcho Kue mine would produce about 3.2 million carats of diamonds per year, worth about $215-million (U.S.) annually. Meanwhile, based on De Beers's current plans and projections, the Snap Lake mine will produce about 1.5 million carats worth about $115-million (U.S.) annually, while Victor is forecast to produce about 560,000 carats, worth about $160-million (U.S.) on an annual basis.
A Gahcho Kue mine would therefore deliver more diamonds than the other two De Beers projects combined, and the dollar value would also rank at the top of the list. Furthermore, all three projects would produce gross revenues of less than $500-million (U.S.), which is just half of the estimated current shortfall in the rough diamond market.
As a result, De Beers is now in the midst of a major project study that carries a $25-million price tag. The first phase of that program is now complete, although the full report will not be finished until the middle of next year. That slow pace will likely add to the growing grumpiness of some of Mountain Province's long-term shareholders, but Dr. Vandersande believes it is an indication that De Beers believes it has a mine in the making at Kennady Lake.
De Beers is completing its investigation to a level that would be used to support future mine permitting requirements, and the study will include detailed engineering and geotechnical data that will progress far beyond the desktop studies that have previously been completed. "Based on everything De Beers is doing, it looks like we are going to be a mine," he stated.
Even the typically conservative De Beers seems in a cheery mood about its prospects at Kennady Lake. Company spokesperson, Linda Dorrington, said that a detailed environmental baseline study had commenced and would continue into the summer. She confirmed that the detailed technical investigation would continue until the middle of 2005, and the work would be taken to a level supporting permit applications, "if we decide the project proved sufficiently economic to warrant that."
Ms. Dorrington said that based on the outcome of the detailed investigation, the next steps to be taken at Gahcho Kue would then be decided. Presumably those next steps could involve laying firm plans to proceed with building a mine, but such a decision will not come quickly. "We do take a very thorough approach to everything and we will continue to do that," Ms. Dorrington stated, adding that the approach has worked for the diamond giant in the past.
The spring drilling program failed to produce much in the way of promotable news, and that may have added to the muted market reaction to the new valuations. Dr. Vandersande said that De Beers had drilled a few larger targets in the area surrounding the Kelvin Lake and Faraday Lake area, but without much success.
None of the targets, which were away from the main zone, yielded any kimberlite hits. Just a single two-metre intersection was encountered along the trend containing the series of dikes and blows that run through the two lakes, up to 12 kilometres to the northeast of Kennady Lake.
There was a bit of sparkle in that result however, as it extends the known length of the feature by another 700 metres. So far, the trend of kimberlites has been traced for about 1,500 metres.
There could be a concerted effort to delineate the series of kimberlites in the area over the next few years, and the most opportune time might come when the main Gahcho Kue project is being nudged though the permitting process. Dr. Vandersande said that he thought there would be a concerted effort to delineate the features in the future, but the current focus was adding to the resource base in a more immediate way.
With a bit of luck, such an addition could come later this year. De Beers and its partners have identified a narrow and sharp kimberlite indicator mineral train in the area roughly five kilometres to the northeast of Kennady Lake, and Dr. Vandersande said that the swath appears to have come from a pipe, not a dike.
There was a ground gravity target near the head of the train that was drilled by De Beers this spring, but the effort failed to produce a kimberlite hit. Nevertheless, there are strong indications that a kimberlite pipe may be in the immediate vicinity of that failure.
Dr. Vandersande said that there were no indicators found in the area farther to the east, which would apparently provide a limited area to conduct a new search. As a result, the partners are expected to go back this summer to check out the area surrounding the lake, looking for signs of a land-based pipe. As well, more drilling seems likely for next spring, as kimberlites often elude the first drilling attempts.
For instance, the first drill hole into the A-154 target at Diavik managed to hit the narrow area of granite between the two incredibly rich sister pipes. As a result, continued drilling in the area could still give the Gahcho Kue project a significant boost.
Mountain Province traded as high as $3 last fall and came close to that mark again in mid-February, but interest has been flagging of late, although things remain much rosier than last year, when a share could be had for 60 cents.
The stock closed eight cents higher on Thursday, at $1.83.
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