Mountain Province’s Evans on Gahcho Ku’s solid numbers

Unlike so many involved in the diamond industry, Mountain Province Diamonds (MPV-T, MDM-X) president and CEO Patrick Evans hasn’t spent his entire career searching for the elusive gems or mining them.

Evans has also been involved with other commodities, most recently as CEO of Norsemont Mining, which HudBay Minerals recently acquired for $520 million for its copper-rich Constancia project, in Peru.

While he likes the compelling fundamentals of diamonds, Evans says he’s really only interested in them to the extent that a  project is potentially economic and in a stable jurisdiction.

“An awful lot of people have lost an awful lot of money exploring for diamonds and trying to build and operate marginal diamond  assets,” says Evans, who joined Mountain Province as its CEO about five years ago.

“What attracted me to Mountain Province is that Gahcho Kué is the largest diamond deposit under development anywhere in the world in terms of tonnage and carat resource,” he says. “It’s also the highest grade, 1.6 carats per tonne.”

In a sector where resources are often measured in carats per hundred tonnes, Evans points out that the project boasts 10 times the grade of many other recent discoveries.

Probable reserves at Gahcho Kué, a joint venture of Mountain Province (49%) and De Beers (51%) are pegged at 31.3 million  tonnes grading 1.57 carats per tonne for 49 million carats. The project contains another 6 million inferred tonnes grading 1.73  carats per tonne for 10.3 million carats.

A feasibility study released last fall outlined a 3-million-tonne-per-year project at Gahcho Kué producing 4.5 million carats per years over 11 years generating an internal rate of return of 20.7% (including sunk costs).  The study forecast initial capital costs of $549.5 million, working capital of $49.4 million, and operating costs of $48.68 per  tonne.

The conventional open-pit mine would exploit three kimberlites, dubbed 5034, Hearne and Tuzo. All three lie under Kennady Lake, which has an average depth of 8 metres. Under the feasibility, the partners propose to use dams 3-4 metres high to drain portions of the lake to access the ore.

Evans says all three kimberlites are open at depth, and the mine life of the operation could eventually be extended by going underground.

While Evans says there’s some “baggage” in the relationship with De Beers, which chose to advance the Snap Lake and Victor mines ahead of Gahcho Kué, the company has managed to look past that and move on.

For shareholders he says: “There was an element of relief that the feasibility study did in fact confirm how strong the mine is economically.”

Rio Tinto (RIO-N, RTP-L) is advancing India’s first modern-day diamond discovery — the Bunder project —  through a prefeasibility study that should be finished next year. With a production decision expected to follow by the end of 2014, Rio could be mining at the project as soon as 2016.

But Rio has had its share of difficulties advancing Bunder, where a  cluster of eight lamproite pipes have been found since the initial discovery of outcrop in 2004.

Not only does the “incredibly  hard” rock at Bunder make sampling technically challenging, said Andy Davy, consulting geologist for Rio Tinto in a presentation at this year’s Prospectors and Developers Association of Canada convention, but the country’s permitting process is complex  and lengthy. While Rio applied for a mining permit at Bunder in 2008, it is still going through the  approval process. Rio is the first foreign company to be granted a prospecting licence in India.

As permits are required to cut down trees over a certain size and the Bunder property is covered in trees, Rio has opted to avoid the trees when pitting or trenching, and has not been able to drill on a regular grid, instead making do with angled holes.   Samples have only been taken to 5 metres depth, as digging deeper would require a mining permit.

Still, and even though Bunder isn’t a very big project for a company like Rio, Davy said it is important for the diversified producer to gain a foothold in India. The diamonds mined at Rio’s Argyle mine in Australia are cut and polished in India — the diamond  cutting and polishing centre of the world — yet Rio Tinto is not very well known in the country. A key focus of the company’s  2011 marketing plan is to support the development of a domestic market for diamonds in India, where demand for diamond  jewlery is on the rise.

Bunder hosts inferred resources of 27.4 million carats in 37 million tonnes of lamproite grading 0.7 carat per tonne. When the prefeasibility study is complete, Rio will have both an indicated resource for the project, and scoping-study level economics.

The resource is limited to the southern section of the 17.5-hectare Atri pipe. The company says the Angiras pipe, which does not have a defined resource but is next in line in terms of size and grade, could lengthen the mine life at Bunder.

The project is  located in Madya Pradesh state, 500 km southeast of Delhi.

At presstime, two important pieces of news were set to be released.  First, the results of a revaluation of a Gahcho Kué parcel that was valued last April at US$134 per carat.

“We fully expect that the value’s going to be above US$160 a carat,” Evans said ahead of the announcement. The feasibility study used a price of US$102.48 per carat.

A development decision and initial budget for the project were also slated to be discussed at an  April 20 meeting of Mountain Province and De Beers. Evans said the most likely outcome would be a positive development  decision and the approval of an initial $100-million budget for things like long-lead items.

The development decision is subject to permitting, which is expected to take about 18 months. The partners submitted an  environmental impact statement for Gahcho Kué in December. Pending the outcome of the environmental review in 2012,  construction is slated to begin in 2013/14 with production following in 2014/15.

Mountain Province raised $23 million in a private placement of 4.6 million shares at $5 apiece in November. The company said the amount would cover operating expenses for 2011 as well as its next $10-million payment to De Beers, part of an agreement  with the diamond giant to repay $59 million in historic exploration costs.

Mountain Province is also planning a return to its Kennady North project, just northwest of Gahcho Kué. The project hasn’t seen any work since 2006. Mountain Province plans to do a helicopter gravity survey there in August.

At presstime, the company’s shares traded at $6.08 in a 12-month range of $2.10- 6.65. It has 77.4 million shares outstanding.