Harry Winston revises life-of-mine plan at Diavik

VANCOUVER — Canadian diamond miner Harry Winston (HW-T, HWD-N) has released a much-anticipated mine plan update for its joint-venture Diavik diamond operation 300 km northeast of Yellowknife, Northwest Territories. Harry Winston owns 40% of the mine alongside mega-operator Rio Tinto (RIO-N, RIO-L), though Rio has been publicly shopping its diamond assets in recent months.

Harry Winston’s updated life-of-mine plan at Diavik includes current annual production estimates, as well as associated operating and capital costs through 2023. The last multi-year mine plan for Diavik was released in 2008, and the updated model involves the transition from open-pit to underground operations.

The plan assumes the development of the A-21 diamond pipe, which is subject to approval from Rio, and includes a preliminary economic assessment and advanced engineering report for underground operations.

Diavik’s expansion will come in two stages, with the first being the completion of a final feasibility and engineering study at a cost of US$5.8 million, which will be followed by crushing and screening tests for berm construction at a rough cost of US$47 million. The final stage includes berm and cut-off wall construction, as well as pit development and pre-stripping in 2017 — the A-21 diamond expansion budget is listed at US$507 million.

According to Harry Winston’s prefeasibility study the new plan will carry a net present value of US$2.64 billion at a 7% discount rate, including all reserves and resources. Life-of-mine capital costs through 2023 are pegged at roughly US$917 million.

Diavik’s total proven and probable reserves total 18.9 million tonnes grading 3.1 carats per tonne for 58.9 million contained carats — the study also includes 3.6 million measured tonnes averaging 2.8 carats for 10 million contained carats at the A-21 diamond pipeline. Harry Winston states that the measured resources at A-21 will be promoted to reserve status upon the completion of the development approval process.

The major change to Diavik’s development comes from a delayed development schedule on the A-21 pipe. Where Harry Winston previously expected 100% capital expenditures to total roughly US$400 million through 2013, the company has opted to delay development by one year at A-21 thereby dropping near-term aggregate development costs to roughly US$300 million. Capital intensity on the expansion is thereby reduced, as build-out expenditures are extended through 2017 when first production is now expected at A-21.

As a result of delayed development plans, Harry Winston expects a drop in short-term production and a subsequent increase in total cash costs at Diavik. Where the mine was projected to produce roughly 8 million carats per year through 2016, guidance has now been revised to drop below the 6 million carats per year range before jumping back to roughly 6.8 million carats per year by 2018.

Harry Winston is experiencing lower-than-expected throughput and grades at Diavik, and missed average analyst production estimates for the second quarter by roughly 5% — Diavik produced 720,000 carats during the quarter — though the company maintains its 2012 production guidance at 8.3 million carats. The company also revised its diamond price forecast during its quarterly report, dropping it from US$140 per carat to US$129 per carat.

Complicating matters is a number of shifting pieces in the diamond game, not the least of which is Rio’s ongoing attempts to sell its diamond business. Rio’s chief financial officer Guy Elliott said during a quarterly conference call on August 8 that the company is exploring multiple options following a 34% drop in profit to US$5.2 billion during the second quarter. Harry Winston said in June that it may be interested in Rio’s share in Diavik though has not offered comment on the sale in the past two months.

According to a Thomson Reuters report dated August 6, Harry Winston is in ongoing talks with BHP Billiton (BHP-N, BLT-L) regarding a purchase of the Ekati diamond mine, which lies close enough to Diavik to provide potential production synergies. Harry Winston has reportedly secured bank financing for the deal, but a lack of bidders has BHP considering holding its asset.

Harry Winston has been trending upwards during the second quarter, having gained 10% or $1.13 per share since early July en route to a $12.78 presstime close. The company has 85 million shares outstanding for a $1.1 billion market capitalization, and expects to generate roughly US$231 million in net cash flow this year.

Bank of Montreal Capital Markets analyst Edward Sterck has consistently dropped his target price on Harry Winston since mid-July. Sterck has maintained a “market perform” rating on the stock, though his target has decreased from $16 on July 17 to $13 following the Diavik mine plan update on August 21,

“The updated mine plan provides clarity on the outlook for Diavik as it completes its transition to underground mining, and later brings the A21 kimberlite into production,” writes Sterck in an August 21 research report. “However, a reduction to near-term [capital expenditures] is more than offset by lower-than-expected production and higher cash costs, resulting in an 18% reduction to Diavik’s valuation.”