Dominion Diamond forges ahead

Dominion Diamond (TSX: DDC; NYSE: DDC) may have missed the Street’s expectations due to some accounting rules, but the company showed it is steadily restoring the prominence of Canada’s first diamond mine: Ekati.

Earnings per share for the fourth quarter came in at 12¢, missing the Street’s consensus estimate of 17¢ per share.

The lower-than-expected results were connected to lower sales from Ekati in the Northwest Territories due to pre-commercial accounting treatment for the Misery satellite production at the site.

Once an adjustment is made for the accounting issue, earnings per share rise to an unexpected 18¢ per share.

The company benefited in the quarter from higher diamond prices, which have been up 4% at both Diavik and Ekati since year-end. Realized prices for the quarter came in at US$160 per carat, which was an improvement from the US$133 per carat it received for the same period last year.

In the fourth quarter Diavik produced 2.1 million carats from a 0.54 million tonne of ore compared to 1.9 million carats from a 0.47 million tonne for the same period the year before.

At Ekati, the company processed 917,500 tonnes of ore for 481,000 carats.

And while it mined a 0.25 million tonne of kimberlite from the Misery South and Southwest pipes, and recorded an overall grade of 1.4 carats, the Misery Main Pipe won’t move into production until 2016.

Adding the pipe should boost future financial statements, as the pipe averages over 4 carats per tonne at an average US$105 per carat. These figures make for one of the richest kimberlite orebodies in the world.

With an asset like Misery in its pipeline, Scotiabank analyst Tanya Jakusconek expects improved cash-flow growth in the next few years, and believes the increased production will match improvement in the U.S. economy, which should bolster demand. The U.S. represents 38% of the diamond jewellery market.

This forecast is behind her “sector outperform” rating on the stock, with a US$20-per-share price target.

Regarding the diamond market, the company said that the year’s first quarter has seen an upturn in rough diamond prices of just over 7%, mostly from restocking in the U.S. after high demand in the U.S. holiday season and more demand in China.

Dominion said there is evidence that jewellery sales are increasing in India on the back of a strengthening rupee. India is a major source of consumer demand, but has had weak sales over the last few years.

Dominion acquired the Ekati diamond mine early last year, with the aim of extending the mine life of Canada’s first and most famous diamond mine.

So while production at Ekati began in 1998, Dominion’s plan has been to bring three new kimberlite pipes into production: Lynx, Cardinal and Jay.

The Lynx kimberlite sits 3 km southwest of the Misery pit, has indicated resources of 1.3 million tonnes grading 0.8 carat per tonne and inferred resources of 100,000 tonnes at the same grade. In late 2012, modelled prices for Lynx diamonds were US$257 per carat.

The Jay and Cardinal kimberlites sit 7 km northeast of Misery, and Jakusconek says that Jay in particular could contribute to the company’s production if developed.

A prefeasibility on Jay is due out later this year.

The kimberlite has indicated resources of 36.2 million tonnes grading 2.2 carats per tonne for 78 million carats, plus 9.5 million tonnes of inferred resources averaging 1.4 carats for 13 million carats. Dominion estimates the value of Jay diamonds at US$74 per carat.

On April 4 — the day after the results were released — the company’s stock was off 5¢ to $14.75, with 185,000 shares traded.