Dominion Diamond’s sparkling start in fiscal 2015

Toronto-based Dominion Diamond (TSX: DDC; NYSE: DDC) reported a strong operational start to the year, with higher-than-expected diamond production, sales and average prices for its first quarter of fiscal 2015.

Dominion recorded quarterly revenue of US$175.5 million from its two diamond mines in Canada’s Northwest Territories, where it sold a combined 841,000 carats for the three months ended April 30, 2014. The producer sold 259,000 carats from the Ekati mine for US$92.8 million and 582,000 carats from the Diavik mine for US$82.7 million.

Dominion holds: an 80% interest in Ekati, with mine finders Charles Fipke and Stewart Blusson each retaining a 10% stake;  and a 40% interest in Diavik, with Rio Tinto (NYSE: RIO, LSE:RIO) holding the rest.  While Dominion beat its revenue target, it missed BMO analyst Edward Sterck’s US$255-million  forecast by 30%. Sterck attributes the missed revenue to lower sales due to the timing of tenders. Dominion held two diamond sales in the first quarter and is set to hold three tenders in the second quarter, whereas the analyst had anticipated an even split.

That said, quarterly production from both mines surpassed Sterck and the company’s projections. Ekati churned out 561,000 carats from 962,000 tonnes grading 0.58 carat per tonne — a quarter more than what Sterck and Dominion had expected.

Output from Diavik totalled 1.84 million carats from 591,000 tonnes grading 2.97 carats per tonne, 13% ahead of expectations. Dominion’s 40% production share at Diavik equals 746,000 carats.

The average realized prices per carat were US$358 at Ekati and US$142 at Diavik, well ahead of Sterck’s estimate of US$312 per carat and US$125 per carat.  

The higher production coupled with stronger rough diamond prices have contributed to the US$100-million boost in estimated value of the company’s production at current prices, Dominion says. It adds that rough diamond prices are up 7% from the start of the calendar year.

Dominion notes it has also produced and sold another 100,000 carats from Ekati’s Misery South and Southwest kimberlite pipes while pre-stripping the Misery Main pipe, which were not included in the quarterly sales. For that sale, it received US$6.9 million, or an average of US$75 per carat.

At the end of April, the company’s inventory stood at US$285 million, up from US$205 million at fiscal year-end, with Sterck expecting the inventory to grow.  

Based on the quarterly results, the analyst has trimmed his estimated fiscal 2015 full-year earnings to 71¢ from 76¢ per share, mainly due to the lower sales, which he expects will lower the first-quarter profits. Nevertheless, he has an “outperform” rating and $20 target price on the stock. “Dominion’s near-term outlook for revenue, cash generation and earnings remain robust,” he writes in a client note.  

Dominion gained nearly 6% on the quarterly update to close May 20 at US$14.05 per share, for a $1.2-billion market capitalization.