Mountain Province Diamonds a top pick for Salman Partners

Salman Partners’ senior analyst Raymond Goldie has upgraded Mountain Province Diamonds (TSX: MPV; NASDAQ: MDM) from a “buy” to a “top pick,” after the junior reiterated it is on track and on budget to start production during the second half of 2016 from its jointly held Gahcho Kué diamond mine, now under construction in the Northwest Territories. Goldie has bumped up his 12-month target to $7.25 per share from $6.55.

Located at Kennady Lake, 280 km northeast of Yellowknife and 80 km southeast of De Beers’ Snap Lake diamond mine, Gahcho Kué is set to become Canada’s newest diamond mine. Mountain Province has a 49% interest in Gahcho Kué, with operator De Beers holding the remainder. 

On April 7, Mountain Province, led by president and CEO Patrick Evans, closed a previously announced US$370-million loan to fund the rest of its capital requirement to take the mine to commercial production in 2017. The loan was provided by a syndicate of lenders and has a seven-year term at an interest rate at a London interbank offered rate plus 5.5%.

The latest financing follows a $95-million rights offering completed at the end of March to fund a US$75 million cost overrun facility. Under that offering, the junior issued 23.8 million shares at $4 apiece, reflecting a 16% discount rate to the volume-weighted average trading price on the Toronto Stock Exchange for the five-day period ended Feb. 17. Last October, Mountain Province raised $100 million in a private placement of 20 million shares at $5 apiece.

With the funds for its 49% interest in place, Mountain Province sees the project as approaching the finish line. It recently reported the mine site received all planned equipment and supplies before the closing of the ice road that ran between Yellowknife and the site. The deliveries will help De Beers finish major construction by year-end. The project is more than 60% complete.

Plant commissioning should begin in the first half of 2016, followed by first production in the third quarter of 2016. 

“The ramp-up is from September 2016 to January 2017, during which time we expect to produce 600,000 carats. The average annual production for the 12-year mine life is 4.5 million carats, although we expect to produce more than 5.5 million carats a year in 2017, 2018 and 2019,” Evans notes in an email.

Gahcho Kué comprises four main kimberlite bodies — 5034, Hearne, Tuzo and Tesla — that are 2 km apart. The first three kimberlites make up the project’s total reserves of 55.5 million carats from 35.4 million tonnes grading 1.57 carats per tonne.

Throughout its estimated 12-year life, the open-pit mine could generate $7.7 billion in realized value revenues, resulting in a 32.6% after-tax internal rate of return and a US$1-billion net present value, using a 10% discount rate and excluding sunk costs of US$260 million spent before construction started in December 2013. Total life of mine capital costs are US$1.3 billion, including US$859 million in initial capital.

Of note, Gahcho Kué is “expected to rank third in terms of margin amongst existing producing mines,” Evans says. The company uses a US$182-per-carat value, a US$42-per-carat cost and thus projects a margin of US$140 per carat. This would put it behind only the producing Diavik and Jwaneng diamond mines.

“We expect Gahcho Kué to be strongly cash generative for Mountain Province shareholders who will see the benefit through a strong dividend policy,” Evans notes. 

With all the required permits and financing in hand for the proposed mine, Salman Partners’ Goldie says Mountain Province represents a good buying opportunity for investors.

Looking at how equities performed between a mine’s discovery and launch, Goldie writes that “the most consistent moneymaker is to buy a company the day it begins construction, and sell it around the time production commences.” 

Mountain Province is about a year and a half away from first production, and Goldie says it is in a similar position to that of Aber Diamonds in 2001. During this time, Aber, now Dominion Diamond (TSX: DDC; NYSE: DDC), was saw the building of its Diavik diamond mine in the Northwest Territories. Diavik initiated production in January 2003, and Aber’s share price rose from under $20 in 2001 to $50 in 2003. 

With the revised target price of $7.25 per share on Mountain Province, Goldie expects the junior will return 59% in the next 12 to 18 months. BMO analyst Ed Sterck has a $6.15 target and an “outperform-speculative” rating on the stock. 

Mountain Province recently closed at $4.53, within a 52-week trading range of $4.10 to $6.08.