Stornoway lands $944M financing for Renard

Stornoway Diamond (TSX: SWY) announced in April that it had lined up a $944-million financing to build its Renard diamond mine in north-central Quebec.

The binding agreement with several different parties constitutes the largest ever project financing package for a publicly listed diamond company.

The complex deal involves debt, equity and streaming components, and funding from the Quebec government, a private equity firm, an institutional fund, and an equipment manufacturer.

Each element in the proposed series of transactions is conditional upon completion of the others. Stornoway shareholders will also have to approve the comprehensive financing package at a special meeting in late May.

If all goes smoothly, the company expects to start construction in June, plant commissioning in the third quarter of 2016, and commercial production in the second quarter of 2017.

The details of the financing are as follows.

Private equity firm Orion Co-Investments will provide US$360 million ($396 million): US$110-million in equity financing; US$200 million for a 16% streaming interest; and US$50 million in a 7-year, unsecured convertible loan with an interest rate of 6.25%.

Ressources Québec, a subsidiary of provincial agency Investissement Québec, will provide $220 million: $100 million in equity financing; $100 million in a 10-year senior secured loan at an interest rate of prime plus 4.75%; and another $20 million in a senior secured loan for credit overrun facilities.

Institutional fund manager Caisse de dépôt et placement du Québec will provide $105 million: $22 million in equity; US$50 million for a 4% streaming interest in Renard; and $28 million in an unsecured, non-convertible loan.

Another $184 million in equity will be offered to the public.

Stornoway has also entered into a mandate letter with Caterpillar Financial for equipment financing of at least US$35 million (for equipment manufactured by Caterpillar and others).

Matt Manson, Stornoway’s president and CEO, noted in a release that the financing package was designed to fund Renard through construction to commercial production, including all contingencies, capital escalation allowances, and other costs.

“These transactions have been carefully structured through a balance of debt, equity and stream with a goal of allowing full participation by our shareholders in the value that will be created with the project’s development,” he said.

Preproduction capital costs at Renard were last pegged at $755 million. The project is fully permitted and vital infrastructure, including a 240-km road extension from Chibougamau, have been completed.

Streaming agreement

The streaming component of the financing will allow Orion and Caisse de dépôt to buy for a total of $275 million 20% of Renard’s life of mine production at US$50 per carat, subject to 1% annual inflation and a 3% marketing fee.

Ed Sterck, a mining analyst at BMO Capital Partners wrote in a note to clients that while the amount Stornoway receives from the forward sales deal should be enough to cover production costs, the loss in future revenue makes the deal roughly 20% dilutive to Renard’s net asset value.

Although Sterck says the financing is expensive (especially the forward sales deal), the net impact is positive because it allows development to move forward, and increases the potential for future shareholder returns.

“Without this, Stornoway and its shareholders would likely continue to tread water, with the risk that Renard is continually delayed,” Sterck wrote.

According to a 2013 optimization of the company’s 2011 feasibility study, the project has a post-tax net present value of $391 million after taxes and an internal rate of return of 16.3%.

It has an 11-year mine life based on reserves of 23.8 million tonnes grading 75 carats per hundred tonnes for 17.9 million carats.

At the RBC Diamond Investor Seminar in March, the company noted that a 10% decline in the Canadian dollar over the last year translates to a 20% improvement in NAV.

Stornoway will also conduct some drilling at Renard this year with the proceeds of a $10-million flow-through financing in December. The program will focus on converting inferred resources at Renard 2 to indicated, adding new resources and assessing the depth potential of the pipe to 1,000 metres or greater.