Éric Lemieux is a metals and mining analyst with Laurentian Bank Securities. Lemieux is primarily focused on gold, but covers a number of companies around James Bay and in Northern Quebec. Stornoway Diamond Corp. (TSX:SWY) would normally not be a company he covers, but Lemieux’s knowledge of the area and confidence in the technical team and management have lead him to give the company a buy rating with a price target of $2.75.
Diamond Investing News: You paint a positive outlook for diamond producers in the future with compound annual growth rate (CAGR) of 5.6 percent in demand and only 1.8 percent in supply. Are there any variables that could significantly impact this equation?
Éric Lemieux: Obviously the sustained economic hardships in several parts of the World as well as China and India’s relative slow down are having a negative impact. The dismal global economic climate is having its toll on the robustness of demand. Diamonds are a luxury item that do not necessarily fare well in a recession and speculative purchases of gems have been dropping. On the supply-side, mining operations are getting more and more difficult to permit and environmental constraints and social acceptability being key challenges beyond the typical geological parameters. If there are signs of improvement in the U.S. economy, combined with China’s and India’s growing middle class, global diamond demand may eventually put pressure on the depleting diamond production supply-base.
DIN: Securing project financing seems to be one of the only remaining milestones to de-risk the project. It sounds like an off-take agreement is what company management is leaning towards. How many potential partners are there that could make such a large commitment?
ÉL: Probably a handful as this is a specialized niche market. Likely candidates would be large jewelry end users and perhaps specialized investors with a long-term commitment.
DIN: Other than project financing, what are the other remaining risk factors? There seems to be little else that needs to be done at this point.
ÉL: There are always the development and operational risks. No mining operation is immune to unforeseen challenges and hardships. Road construction speed will be tributary to weather, but indeed there are no other major challenges as we see with some other mining projects. Much of this related to the project going diligently through all project development aspects (resource delineation, mine planning, mineral reserve determination, permitting and etc.). Key take-aways are the social acceptability with local Cree support and somewhat discrete Quebec governmental participation.
DIN: Other than decreasing risk, the company also seems intent on increasing the resource or decreasing costs — things that would positively impact the net present value. What are some of the potential upcoming milestones that could increase the NPV?
ÉL: Results of the valuation of the Renard 65 (“R65”) summer/fall 2012 bulk sample could provide new mineral reserves and hence positive impact on project NPV. Review of mine planning scenarios could also lead to improved project NPV (e.g.: deferred capital costs). Key point is that the project will be road accessible and perhaps Hydro-Quebec will review its hydro-electrical supply cost service offer. We highlight that the Otish Mountains could be prime sector for wind farms owing to sustained winds.
I would also expect a re-rating of the project’s value, as it has been significantly de-risked, this based on the application of a lower discount rate. Probably has not been done in light of general market conditions and the project financing uncertainties. We would expect once project financing has been established, that the projects risk profile be substantially decreased improving project NPV considerably. We highlight that LBS uses an 8 percent discount rate.
DIN: In your July note on Stornoway’s bulk sample program, you mention that positive results could lead to an increase in throughput from 6,000 tonnes per day to 7,000 tonnes per day. What might the bulk sample program uncover that would lead to the increase?
ÉL: If the current R65 inferred mineral resources can be upgraded to the indicated category, then, if warranted by the mining plan, to a mineral reserve; it can be expected that the open-pit material can lead to increased throughput. Recall the field portion of the 5,000 t bulk sample program on R65 was completed in November 2012 and that initial diamond recovery results appear positive.
DIN: Is this increase in capacity already included in the feasibility study?
ÉL: No, the feasibility study could only use the indicated (and measured) mineral resources. This is a key requirement of NI 43-101. This potential upside has not been factored in as a benefit in the economic analysis but has been in part already cost.
DIN: How could the bulk sample program add tonnage to the open pit reserves?
ÉL: The bulk sample program shall not add directly tonnage to the open pit reserves, but could add confidence level to the mineral resources by conversion of material that is currently classified as an inferred resource to an indicated resource following third party diamond valuation.
DIN: Stornoway seems to be one of a number of companies that are building significant value and completing milestones without recognition of the market. Are there one or two of the companies you are covering that you want to tell our audience about?
ÉL: Indeed the market is certainly not in an over-heating bull cycle. Value and milestones are yet to be or are being slowly recognized, providing opportunities.
On the gold side, Adventure Gold Inc. (TSXV:AGE) recently came out with a maiden NI 43-101 mineral resource estimate on their Pascalis-Colombière project nearVal d’Or. The770,000 oz. Au inferred mineral resource sure seems unaccounted for a less than $25M market company with other diversified gold exploration assets.
My Top Pick remains Virginia Mines Inc. (TSX:VGQ) based on the value of the Eleonore 2.2 to 3.5% NSR royalty. Goldcorp’s Eleonore Mine is under construction and production slated for late 2014. Add Virginia’s portfolio of projects (important winter drilling expected on the Wabamisk gold project and Coulon base-metal project), $40M cash position and expertise in Northern Quebec, we believe Virginia is a compelling investment with limited down-side risk.
DIN: For members of our investor audience who want more information in Stornoway, what is the best way for them to contact you?
ÉL: Stornoway has a fine investor relations team and I believe they do not give to overly promotional information. Indeed a key criteria should be the quality of management; I believe that Matt Manson (CEO) and Patrick Godin (COO) are passionate about building a quality operation with a long life based on solid foundations.
I may be contacted as followed:
Éric Lemieux, MSc., P.Geo
Metals & Mining Analyst | Analyste, Métaux et mines
Laurentian Bank Securities | Valeurs mobilières Banque Laurentienne
Institutional Equity | Institutionnel actions
Tour Banque Laurentienne
1981, ave.McGillCollege, bureau 1900
Montreal(Québec) H3A 3K3
T: 514 350-2874
T: 819 472-8037 (Drummondville)
C: 514 754-6348
Disclosure: This interview was prepared as part of Stornoway’s paid advertising campaign with the Investing News Network. Éric Lemieux owns shares in Stornoway and has visited the Renard property. Please contact Laurentian Bank Securities for full disclosure information.