Orion's analyst, George Albino, put out his Research Note today. Its as bullish as it gets. Its too long, but here's some sample comments:
Star Value
• The much anticipated average value per carat has arrived. The Star Diamond value per carat is $110/ct, with an average modeled value of $135/ct – this is higher than our expectations of $105/ct.
• The average ‘modeled’ value of $135/ct is the midpoint of the
estimated range of $110/ct-$162/ct. This is based on a statistical model that estimates the average value of diamonds to be recovered from the mine based on proportion of large stones.
• With the diamond values in hand, a pre-feasibility study is next. The study will aim to determine the economic parameters of the project, along with further exploration and environmental baseline studies.
• At $135/ct, our NAV estimate increases by 79%. Using the $135/ct value as our new base mode increases our NAV value for the Star Diamond Mine (at 10% discount) to C$689 million from C$385 million. As a result of the increased NAV, we are adjusting our target price as well. We are increasing our target to C$11.00 from C$6.55.
• We reiterate our Overweight (Speculative) recommendation.
Summary and Investment Outlook
Shore Gold released the diamond parcel value for the Star kimberlite on Wednesday, February 23. We had expected this to be a defining moment for the Star project – if the diamond value had come in materially below the $100/ct mark we believe the potential returns on the project might not have justified Shore going to the next stage of evaluation for this large, but low-grade, diamond deposit. In the event, the estimated value exceeded our expectations. The company reported that the value of the 3,050 carat parcel was $110/carat, based on the average of four valuations provided by different groups. The groups included WWW International (which acts as the government diamond valuator for the NWT), R. Steinmetz and Sons (affiliated with Shore Gold shareholder Magma Diamonds), and the diamond marketing groups of global mining giants Rio Tinto and BHP Billiton. The four groups produced a consistent picture. As is common in the diamond world, the groups responsible for the valuations are not keen to be associated with a specific value. However, we do understand that all four estimates were very close, with the difference between the high and low estimates within 6%.
The modeled value is key. Even with a 3,000 carat parcel it is likely that large diamonds are underrepresented in the diamonds sent in for appraisal. As a result Shore, in common with other companies evaluating diamond projects (e.g. Tahera, De Beers) uses modeled values. The models are empirical, and intended to more accurately reflect the value of stones recovered during commercial scale mining. The modeled values were provided by WWW. This group, in addition to its role as government valuator, has extensive experience in evaluation of diamonds and diamond projects. Undoubtedly Rio Tinto and BHP have the capability of making similar estimates, but these were not within the scope of their involvement with Shore.
The $135/carat is the best estimate for revenue for Star. The range of modeled values was from $110/ct to as much as $162/ct. Even with 3,000 carats recovered there were only 33 stones greater than 5 carats. The company intends (as we discuss below) to increase the scope of the bulk-sampling program to obtain more large diamonds to better tie down the values of the stones.
An additional 10,000 tonnes will be mined. Shore would ideally like to see a recovered parcel of 6,000 carats to obtain better representation of large stones, and to reduce the “error bars” around the modeled value.
What Does All This Mean for Shore?
In our view, these data strongly support the idea of an economic diamond deposit at Star. In our view, the grade/diamond value combination suggests that a profitable mine can be developed at Star. By our estimate (using cost forecasts detailed in our February 9, 2005, initiation report) the project has the potential to provide an after-tax IRR in excess of 30%.
What Is It Worth?
Wednesday’s data was a huge step forward in assessing Star. We previously published tables that gave indicated IRRs and project NPVs at different diamond prices (as well as sensitivities to the US$/C$ rate and diamond grade). We have now inserted the modeled $135/ct value into our model and the results are as shown below (see Exhibit 1 and 2).
We remind readers that, by our estimates, Canadian diamond producer Aber is trading at essentially its 0% NAV. In our view this represents the maximum potential upside for Shore – the 10% discounted NAV we employ for our target is a reasonable reflection (in our view) of what De Beers paid during its hostile bid for Winspear Resources in 2000.
Exhibit 1. Orion Target Price (previous, using $105/ct)
Star NPV (10%) - 15cpht, $105/ct ($MM) $385.0
FD Working Capital ($MM) $53.6
TOTAL ($MM) $438.6
Shares FD (MM) 81.7
NAV/sh ($C) $6.55
Source: Orion Securities
Exhibit 2. Orion Target Price (current, using $135/ct)
Star NPV (10%) - 15cpht, $135/ct ($MM) $690.0
FD Working Capital ($MM) $53.6
TOTAL ($MM) $743.6
Shares FD (MM) 81.7
NAV/sh ($C) $11.00
Source: Orion Securities
Summary and Conclusions
With these data we are more confident that a diamond mining industry will emerge in Saskatchewan. Shore Gold has been a “discovery in slow motion” – the available data have pointed to the likelihood of a mine since we first saw the project three years ago. It has taken the company three years – working at a pace that put many other projects to shame – to reach this point. With an aggressive project through the third quarter (and possibly beyond) Shore will have an immensely better understanding of the project by year-end.
We continue to rate Shore Gold an Overweight (Speculative), but we haveraised our target price to C$11.00 (see our note of February 23) to reflect the better-than-expected diamond values.
AI
