Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The fracking boom in North America may have made ‘peak oil’ somewhat of a dated phrase but could ‘peak diamonds’ take its place as the new catch phrase for resource investors?
Perhaps not but De Beers CEO Philippe Mellier none-the-less thinks it’s true.
Mellier told the German press that diamond output will peak in 2017 after which time it will begin a steady decline. That looming supply constraint could meet with more demand if the current trend continues. Forecasts have the world diamond market growing by 4 to 4.5% this year alone, with the U.S., China and India being the key drivers.
Thus far, however, the shift in fundamentals hasn’t made much of an impact on diamond prices as traced by the Diamond Price Index. While the Index sustained a strong bull run from 2006 until late 2011, it has been trending side way through last year and into this year.
But if Mellier is right and constrained supply meets with rising demand the price effects going forward could be welcomed news to emerging Canadian diamond miners such as Lucara (TSX: LUC) and developers Stornoway (TSX: SWY) and Mountain Province (TSX: MPV). The latter two companies are perhaps already reflecting those improving fundamentals with their recent success in raising capital in the equities market.
Lucara’s story, however, is more about production. The company is out in front of Stornoway and Mountain Province, as it has already successfully brought new diamond production to the market via its Karowe diamond mine in Botswana.
Recently the company announced that, since the beginning of the second quarter alone, it has already recovered 13 stones that are over 100 carats at the mine. That grouping includes eight gem quality stones, two of which rang in at over 200 carats.
Those kinds of finds lead BMO Capital Markets analyst Edward Sterck to expect big things from the companies upcoming diamond tender on July 18.
“If all of the large stones recovered in the second quarter are included in the upcoming tender, it could be the best portfolio of diamonds in terms of size so far,” he wrote in a research note. “The previous best tender from a size perspective contained five stones in excess of 100 carats.”
The company generated US$50 million in revenues from its previous tender this year, but Sterck did caution that realized prices are very dependent on the colour, clarity and cutting and polishing characteristics of the individual stones.
Still, the impressive recoveries has Sterck believing the company will now have three special diamond tenders this year as opposed to two, which leads to him boosting his revenue forecast to US$95 million from the previous US$67 million.
“Reflecting the increased special diamond revenue estimate, the 2014 earnings forecast has been increased to US25¢ per share from US20¢ per share,” he wrote.
After Lucara, Stornoway is next in line in terms of development as it recently wrapped up a financing deal that should bring its Renard diamond project in Quebec to production in late 2016.
The company completed a $374 million equity offering with $132 million coming from a public offering and a $242 million coming by way of a private placement.
“Although the pricing of the equity issue appears dilutive for existing holders, the project is now significantly de-risked and should allow Renard to move into development stage,” Sterck wrote in a research note on the company.
As for Mountain Province the company recently filed a feasibility study for its 49% joint venture Gahcho Kué Project in the North West Territories. De Beers holds the other 51% of the project that is currently under construction, which is ahead of its mid-2016 start up schedule.
Mountain Province also announced a non-brokered private placement that will raise $35 million to cover its share of pre-development capex at Gahcho Kué. The company already has roughly $46 million in the bank.
But with a total of roughly $450 million required to fund its portion of development costs, investors should expect another financing in the near future.
“We believe that the current equity issue is more likely to be followed by a full project financing package including a public offering in the region of $100 million,” Sterck wrote.
Sterck has Mountain Province rated as outperform with at $6.15 price target. He has both Stornoway and Lucara rated as ‘market perform’.
