Analyst keeps close watch on Aber Diamond

Dorothy Atkinson was a government geologist based in Yellowknife during the heady days of the diamond rush in the Northwest Territories. Today, as senior mining analyst for IPO Capital, she’s keeping tabs on companies expected to become diamond producers in the next few years. Among them is Aber Diamond (ABZ-T), which holds interest in two projects at the feasibility study stage. One is the 40%-held Diavik diamond project on East Island in Lac de Gras; the other is the 32%-held Snap Lake project, 100 km south of Diavik.

About a year ago, with the shares trading at $8.50, Atkinson issued a “buy” recommendation for the company and set a 1-year target of $13. This target was reached before it settled back, as a result of uncertainties related to permitting, in the $12 range. However, in August of this year, the Diavik project was awarded the final regulatory permit, a Class A Water licence, which completes the licensing requirements for the construction and operation of the project as established last year by the federal environment minister. Benefit agreements have been signed with three aboriginal groups.

Aber and partner Rio Tinto (RTN-N) are now reviewing the licence and expect to make a formal production decision shortly. Atkinson expects that Diavik could come on-stream in late 2002, though she notes that “good scheduling and procurement are essential for this remote site.” Snap Lake is also poised to become a producer within the next few years, giving Aber Diamond a significant interest in two prominent mining ventures.

“Our analysis indicates [that] the share price should move much higher,” she states in a recent report. “Thus we have a new target of $18 for the shares in the next 12 months.”

The capital cost of Diavik is estimated at $1.3 billion. Aber will be required to arrange financing this winter for about $250 million, primarily in debt. However, with payback anticipated in 32 months, this is not viewed as problematic for a mine that has proven and probable reserves of 107 million carats, enough for at least a 20-year mine life.

“The proposed Diavik mine is expected to be a cash cow similar to the adjacent Ekati mine of BHP [Diamonds] and Dia Met [Minerals],” Atkinson notes, pointing out that, during the first decade of production, the mine is expected to deliver ore to the mill with a value of about $600 per tonne, and with a total operating cost of about $90 per tonne. “Aber anticipates its share of annual profits will exceed $200 million.”

The Diavik mine will initially mine four kimberlite pipes — A-154 South, A-154 North, A-148 and A-21, all of which are situated in shallow water under Lac de Gras. They will be mined sequentially as three open pits, beginning from a single pit on pipes A-154 South and A-154 North. Subsequently, A-154 South and A-418 will be mined from underground. Since the pipes are under water, three dykes (incorporating existing islands) will be constructed so as to retain Lac de Gras.

Diluted minable reserves are estimated at 25.7 million tonnes containing 106.7 million carats, for an average reserve grade of 4.2 carats per tonne. About half the carats are in the A-154 South open pit. Total resources (to a depth of 420 metres) are about 37 million tonnes containing 138 million carats, for an average grade of 3.7 carats per tonne.

The reserve assumption prices were set at US$79 per carat for A-154 South, US$56 per carat for pipe A-418, US$33 per carat for A-154 North, and US$28 per carat for pipe A-21.

The Diavik project covers 54 known kimberlites, 26 of which are known to be diamondiferous. “Additional exploration and evaluation are required,” Atkinson notes, “but the upside for further discovery of economic pipes is excellent.”

Meanwhile, a $50-million program of advanced exploration is continuing at the Snap Lake project, now operated by partner De Beers Canada. This work is designed to allow the completion of a feasibility study next year.

The project has recoverable resources of 12.5 million tonnes of indicated and inferred mineralization at a grade of 1.75 carats per tonne, within a global resource of 21.3 million tonnes grading 1.97 carats. A previous bulk sample yielded 10,708 carats of diamonds valued at US$118 per carat.

Atkinson sees Aber as a logical candidate for consolidation. “We believe any bid would be countered aggressively by Rio Tinto or De Beers,” she notes. “Such manoeuvres would see the stock easily exceed our target.”

What makes Aber unique among producers is that it has the right to market all its diamonds, which, in this case, amounts to about 2% of world diamond sales. “The company has positioned itself to be a brand-name diamond company and has close ties to Tiffany [the upscale American jeweler], with which it has marketing agreements,” Atkinson writes. “Canadian-produced diamonds may demand a premium to others as the Western World moves to avoid ‘conflict diamonds.'”

Tiffany is expected to buy at least US$50 million of diamonds per year, though Atkinson believes higher annual purchases are possible.

Aber has 56 million shares fully diluted and $158.4 million in working capital. Tiffany & Co. and Franco-Nevada Mining (FN-T) are significant shareholders.