Stornoway advances Quebec’s first diamond mine

Junior explorer turned developer Stornoway Diamond (TSX: SWY; US-OTC: SWYDF) is building Quebec’s first diamond mine, set to start commercial production in 2017, after having raised $946 million for its Renard diamond project in July.

“We think that is the biggest, single project financing deal for a publicly listed diamond company ever,” Matt Manson, the firm’s president and CEO, said in a recent presentation.

The package includes debt, equity and stream, plus an equipment loan and cost overrun facilities.

The company spent nearly two years putting the financing together to fully fund the estimated $811-million mine development at Renard. That figure includes contingencies and capital-escalation allowances.

Stornoway raised that kind of money for two reasons. First, it had strong sponsors, including the backing of the provincial government. Second, it simultaneously arranged each component of the financing “because everyone wants to be the last money in,” Manson said in an interview. 

“So it was like a big layer cake, and if we changed the recipe at any stage, we would have to go back to step one and re-bake it. So we were continually baking our layered cake. And when we finally got all the pieces working, we rolled it all out.”

On July 8, Stornoway closed the much-anticipated funding for Renard, located 350 north of Chibougamau in the James Bay region of north-central Quebec.

Private equity firm Orion Mine Finance provided US$360 million: US$110-million in equity financing, US$200 million for a 16% stream in Renard and US$50 million in a seven-year unsecured convertible loan.

Ressources Québec, a subsidiary of Investissement Québec, which is Stornoway’s largest shareholder, forked over $220 million: $100 million in equity, $100 million in a 10-year senior secured loan, and $20 million in a senior-secured loan for cost overruns.

Institutional investor Caisse de dépôt et placement du Québec kicked in $105 million: $22 million in equity, US$50 million for a 4% stream and $28 million in an unsecured, non-convertible loan for cost overruns.

Stornoway also raised $184 million in a public-equity financing, and received a US$35-million equipment loan from Caterpillar Financial.

Under the US$250-million stream, Orion and Caisse have a right to buy a combined 20% of Renard’s life-of-mine production at US$50 per carat.

Post financing, Investissement Québec and Orion hold 28.7% and 24.8% of Stornoway’s shares.

Construction at the fully permitted project began on July 10 and remains on schedule. Civil works are underway on the surface facility pads, site infrastructure and water-management systems. Orders have been made on long-lead items for the diamond-processing plant and the liquefied natural gas (LNG) power plant.

Two temporary construction camps are in place, which hold a combined 250 beds. SNC-Lavalin, the project’s engineering, procurement and construction management contractor, expects to finish a permanent 325-person camp and mine office by next March. Construction of the major facilities should start a month later. Subcontractors AMEC Americas and DRA Americas will provide specialized engineering and field-support services for the processing plant and recovery circuits.

During the two-year construction period, Manson says he will ensure that Renard meets all of its targets.

“I’m always worried about the schedule because when junior companies go over budget on their capital expenses, it is usually because their schedule has been delayed. Every dollar we spend until commercial production is capitalized, so the cost of standing still grows the capex budget. But we’ve put a lot of effort into mitigating that [risk],” Manson explains.

As part of the effort, Stornoway signed community agreements, completed permitting and built an all-season, 240 km road extension from Chibougamau to the site, with the provincial government building the first 143 km as part of its Plan Nord initiative to promote sustainable development in northern Quebec.

“We are optimistic — it is going to be the only diamond mine in Canada with an all-season road,” Manson says. Having that road helps the company move supplies and rarely worry about storage. This led it to switch Renard’s power source from diesel to LNG. An October 2013 optimized feasibility study shows Stornoway will save between $8 million and $10 million a year in operating costs by using LNG.

Along with construction, Stornoway is moving along with the drill program that began in April at the Renard 2 (R2) kimberlite, which is one of the five main kimberlites at the project.

Orin Baranowsky, the company’s director of investor relations, says the exploration program should upgrade the inferred material from 600 to 700 metres to the indicated category, and convert the “target for further exploration” (TFFE) material from 700 to 775 metres to inferred, and add more material below 775 metres into both the inferred and TFFE categories. The latter category represents a non-resource exploration upside.

“We are getting a lot of intersections and are delineating the orebody. We got the orebody [at R2] down to 970 vertical metres,” Manson adds.

Stornoway expects to wrap up the drilling in late October, and update the geological model and revise the grade distribution model after diamond-recovery work. The company intends to release a resource update by mid-2015.

Based on reserves of 23.8 million tonnes grading 75 carats per hundred tonnes for 17.95 million carats, Renard has an initial 11-year life, where it would process 2.2 million tonnes a year to produce 1.6 million carats a year. Operating costs are pegged at US$50 per tonne.  

A base-case diamond valuation estimated the reserves were worth US$190 per carat in March, but Manson notes that doesn’t take into account the project’s large diamond potential.

Using the base-case, Renard could produce $150 million to $250 million in operating cash flow after taxes each year.

The Renard project has growth potential. It holds 27.1 million carats in indicated based on 35.4 million tonnes grading 76.4 carats per hundred tonnes, which includes reserves, and has 16.9 million carats in inferred based on 29.7 million tonnes at 56.8 carats per hundred tonnes. In addition, Renard has 26 million to 48 million carats in the TFFE category.

Stornoway expects first ore from Renard in the second half of 2016, followed by commercial production by mid-2017.

Shares last closed at 59¢, within a 52-week window of 55¢ to $1.22. The company has a $446-million market capitalization.