Stornoway’s road to Renard just got longer

Stornoway Diamond (SWY-T) delivered the good news in mid-October that it had received the mining lease for its Renard diamond project, in Quebec. The final permit required, the certificate of authorization, was expected to follow shortly after.

However, the company also confirmed in October that construction of the Route 167 extension that will give it full-year road access to Renard is behind schedule.

Matt Manson, Stornoway’s president and CEO, told The Northern Miner that the holdup in the road, which is being built by Quebec’s Ministry of Transportation, will push back the construction and production schedule at Renard.

The company is not yet sure how much of a delay it could be looking at.

“Until we have more information from the government we can’t give a specific guidance on what that is,” says Manson.

Renard, located in the province’s Otish Mountains, is currently a fly-in project.

The 243-km all-season road, from Chibougamau to the Otish Mountains, is being built as part of the Plan Nord initiative to fuel growth in Quebec’s northern communities.

In a statement, Stornoway explained the road is being constructed in four segments, labelled A to D, with work on the southern segments, A and B, well advanced. To date, 109 km out of 143 km in segments A and B have been completed.

However, Quebec’s Ministry of Finance has decided to put off awarding civil work contracts for the northern segments, C and D, until it reviews overall construction spending on the road.

In early October, Quebec’s Finance Minster Nicolas Marceau and Treasury Board president Stéphane Bédard told local media that the costs for major projects have soared in recent years, including for the $332-million road, which began development in February under the former Liberal government.

To get a better handle on expenditures, the new PQ government has called for an independent review of all major infrastructure projects.

Manson says he expects the review will be completed by year end, after which work on the northern segments should continue.

“By no means is construction of the road ending here,” he says, adding that the majority of the 75 workers in the company’s camp are still working on the road.

“So it’s an ongoing project, but. . . the schedule that will give us road access will be late.”

Stornoway previously anticipated having vehicle access to the Renard site by July 2013, but that may now happen at the end of 2013 or later.

“We are basically scheduling our construction process on when the government tells us we will be able to drive start to finish on the road, and that milestone is trending later, “ Manson explains.

He notes that the company has “limited ability to mitigate that risk.”

But Stornoway does have one bargaining chip. Last year, the company agreed to commit $44 million toward construction of the road, and up to $1.215 million per year for maintenance. Stornoway’s contribution, however, is dependent on completion of the road on schedule. The junior is currently discussing alternative construction strategies with the government to prevent further delays.

“It’s possible to build it on a smaller, more modified scope, which could be done more cheaply and more quickly,” Mason says.

“BMO Research speculates that a winter road linking Renard with the southern segment of route 167 could still allow for some construction equipment to be mobilized over this winter,” BMO mining analyst Ed Sterck wrote in a research note in October.

Under its agreement with the province, Stornoway’s $44-million contribution to the road is to be paid over 10 years, starting when Renard begins production.

To move closer to production, the company is working on financing and permitting the $802-million project. In early September it signed a mandate letter with seven financial firms for a potential $475-million loan.

The lead arrangers include the Bank of Montreal, Caterpillar Financial, Export Development Canada, Investissement Québec, Nedbank Capital, Société Générale (Canada Branch) and the Bank of Nova Scotia.

Investissement Québec subsidiary DIAQUEM is Stornoway’s largest shareholder at 25%, and has already committed $100 million to Renard’s development.

The company says the syndicate should execute a commitment letter by early next year and complete documentation by mid-2013, prior to mine construction.

Stornoway plans to build a 6,000-tonne-per-day, open-pit and underground operation at Renard as soon as it gets the green light to access its site via the new road.

To manage the project’s startup costs, the junior is currently studying the feasibility of initially mining underground by a ramp only, and deferring the development of a shaft until later in the mine life.

In a September interview, Manson said that option could substantially reduce the capex while modestly raising operating costs.

BMO’s Sterck forecasts that a ramp/decline could potentially lower Renard’s development costs by a net amount of $80-100 million in exchange for a higher opex.

“The increased fuel requirements and mechanical wear for hauling ore and waste up the decline are expected to result in an increase in opex of 10% to 20%,” he wrote in a Sept. 25 report.

Asked when the shaft will be added, the company’s manager of investor relations Nick Thomas said in an email: “That is still being studied, but definitely not in the first four years while we pay back the debt.”

Sterck estimates the sinking of the shaft could occur in Renard’s eighth or ninth year of production.

On the financial front, Stornoway is also exploring other avenues to raise funds, beyond debt and equity, including an offtake agreement or royalty stream.

With a potential financing tied to its diamond supply, along with the reduced startup costs and debt package, Sterck predicts the company may need to raise as little as $150-200 million in equity.

Meanwhile, onsite, workers are processing a 5,000-tonne bulk sample from the Renard 65 kimberlite pipe, with results expected in early 2013.

That bulk sample should convert the inferred resource at R65 to indicated and then to reserves, says Manson, noting that adding R65 to the mine plan could lengthen the mine life.

Based on reserves, Renard currently has an 11-year life with annual output estimated at 1.7 million carats once in full production. A 2011 feasibility study showed that using a 7% discount rate, Renard has a pretax net present value of $672 million ($376 million) and an internal rate of return of 18.7% (14.9% after taxes.)

Under the current, but soon-to-be revised timeline, Renard is anticipated to start commercial production by Jan. 1, 2016.

Manson says despite the road hiccup, the company is moving along with permitting and financing. It received the mining lease for Renard on Oct. 18, and expects the certificate of authorization shortly.

“So this is a real situation, the road is being built – albeit it’s looking like it’s going to be late now,” he says, adding that the project is almost fully permitted.

On Oct. 31, Stornoway shares closed up nearly 2% to 61¢. The stock has traded within a 52-week window of 56¢-$1.58, with 138.7 million shares outstanding.

Sterck has a $1 target and a “market perform” rating on the stock.

— The author is a staff writer with The Northern Miner, where a version of this article originally appeared.