Stornoway Diamond Secures Financing, Cuts Overhead

Following a slow start to the year, Canadian gem producer Stornoway Diamond (TSX:SWY,OTC Pink:SWYDF) can breathe a sigh of relief after finalizing a bridge financing arrangement while it undergoes a continued strategic review.

The Quebec-focused diamond miner has been engaged in a strategic review process since earlier this year, aiming to ensure the long-term viability of its flagship asset, the Renard diamond mine.

Despite the company’s efforts to secure financing and cut operational costs, company shares were down as much as 43.31 percent this week.

Under the terms of the newly penned financing agreement with private mining solutions company Diaquem, Stornoway will receive up to C$11.7 million through a senior loan reserve account maintained by Stornoway’s subsidiary, Stornoway Diamond (Canada) (SDCI).

“In addition, amounts equivalent to royalty payments to be made by SDCI to Diaquem under the existing royalty agreement, up to an estimated amount of C$1.9 million, and to interest payments accruing under the senior loan agreement between SDCI and Diaquem up to an estimated amount of C$2.5 million, have agreed to be advanced by Diaquem,” states Stornoway’s announcement.

The Renard mine is Quebec’s first diamond mine, and gem mining in the province has proved challenging. Revenues for 2018 were down C$31 million from the previous year to C$165.5 million. Operating costs climbed by C$41 million to C$128.9 million last year.

Diamond industry analyst and consultant Paul Zimnisky understands why the company is looking so closely at its bottom line in light of the recent quarterly numbers.

“Given the position the company was in coming into 2019, it appeared they had at least 12 more months to allow for the diamond market to improve or for operational improvements to support profitability; however, missing cost guidance in Q1, coming in at C$57 per tonne versus C$47 to C$54, has really shortened that window,” Zimnisky told the Investing News Network.

Meanwhile, Stornoway’s skyrocketing operational costs have put it at a disadvantage in the current market despite global prices rising.

Zimnisky continued, “This is despite the company realizing an improvement in average price per carat in Q1 of C$83, versus C$77 in Q4 2018, driven by a stronger product mix. That said, the average price in Q1 was still below the full-year 2018 average of C$93. For context, global rough diamond prices are up about 1 percent this year, according to the Zimnisky Global Rough Diamond Price Index.”

Reduced revenues and higher operational costs prompted the diamond miner to initiate a strategic review and temporarily suspend open-pit mining operations at the Renard 65 orebody, one of the three orebodies currently in operation at the site.

The move will likely help reduce overhead costs without affecting production output as the Renard 65 orebody contributes roughly 6 percent of company output.

“We have taken the decision to temporarily halt production from the Renard 65 open pit, as current Renard 65 ore stockpiles are sufficient to maintain its planned contribution to the process plant’s feed into the second quarter of 2020. As such, no effect on revenue in 2019 is to be expected. Surface equipment operators were trained and have begun transitioning to our underground operations,” Patrick Godin, president and CEO, stated in the company’s Q1 report.

There is no word on when the company plans to complete the strategic review process.

“As disappointing as it is, it appears that the mine is just not economic given the current variables,” said Zimnisky. “Unless we see a significant improvement in diamond prices achieved by the company or another factor that improves profitability in the next quarter or so, I think there is a real likelihood that the mine is put on care and maintenance within the next year or so.”

Shares of Stornoway were up 25 percent on Thursday (June 13), trading at C$0.025.

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.