Stornoway navigates the road to production

Recent media reports have suggested Stornoway Diamonds’ (SWY-T) Renard diamond project in Quebec may face delays given that construction of the Route 167 extension from Chibougamau to the Otish Mountains is slightly behind plan, but the company’s CEO Matthew Manson says it’s too early to tell.  

“I wouldn’t say at this stage Renard is behind schedule,” Manson comments over the phone from his Toronto office. 

He concedes there is “a little bit of slippage on the road schedule,” but adds the company is “not necessarily certain that will cause slippage in the production schedule.”  

Asked how off-track the province’s 243 km, all-season road might be, Manson replies: “probably a few months.”

Stornoway previously said it should gain road access to the Renard site by July 2013, but Manson sees this happening near the end of 2013.

He adds that no changes will be made to Renard’s production guidance until the company receives more details from Quebec’s Ministry of Transportation, which is in charge of building the road.

So for now, the junior tasked with bringing what could be Quebec’s first diamond mine on stream says it will keep its previous timeline, estimating first ore into the plant by July 2015, with commercial production starting by Jan. 1, 2016.

This may provide a slight relief for investors that gradually drove the stock down to a year low of 62¢ on Sept. 26, almost two weeks after speculation rose regarding the Route 167 extension.

The province kicked off the $332-million road development in February as part of Plan Nord to fuel growth in its northern communities.

Seeing value in the prospect, Stornoway jumped on board last year, agreeing to pitch in $44 million over 10 years to help fund the route that would provide all-year access to Renard, currently a fly-in project located 350 km north of Chibougamau, halfway between Labrador and James Bay.

The firm will begin payments in 2015, the year Renard is anticipated to roar to life, assuming the road is on schedule. 

Along with reducing the project’s operating risk and costs, the company boasts that the road will make Renard “the only diamond mine in Canada you can drive to year-round.”

While Stornoway waits for clarification from authorities before reiterating when it should transition from an explorer to a mine builder and eventually a producer, it is busy lining up financing to fund the $802-million project. Renard is envisioned to produce an average of 1.7 million carats a year over its 11-year life, based on reserves. 

In early September, the firm signed a mandate letter with seven financial institutions for a US$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, National Bank Financial analyst Eldon Brown says in a note.

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

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

Stornoway is set to build a 6,000-tonne-per-day open-pit and underground operation at Renard, as soon as it receives road access to the site via the Route 167 extension. From the looks of it, that should occur in late 2013, assuming there’s no more “slippage.”

To reduce the project’s start-up costs, the junior is studying the feasibility of initially mining underground with a ramp, and deferring the development of a shaft until later in the mine life.

“That trade-off study is ongoing, and in parallel with the financing we are doing with our potential project lenders,” Manson notes, not divulging how much the firm expects to save by putting off the shaft.

“We won’t know what that capital cost saving is until likely towards the end of the year,” Manson says, adding it should substantially reduce the capital expenditure, despite modestly lifting operating costs. 

BMO Capital Market analyst Edward Sterck forecasts that a ramp or decline could lower Renard’s development costs by a net amount of $80 million to $100 million, in exchange for a higher operating expenditure (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 ten to twenty percent,” he writes in a Sept. 25 report, summarizing his recent site visit.  

Asked when the shaft would be added, the company’s manager of investor relations Nick Thomas says by email that this is “still being studied, but definitely not in the first four years, while we pay back the debt.”

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

On the financial front, Stornoway is also exploring other avenues to raise funds, including selling a percent of its diamond output.  

“We are really non-dogmatic,” Manson says of the company’s financing strategy. “We want to balance our financing, based on minimum capital and minimum equity.”

He comments that the junior is open to signing a substantial off-take agreement or royalty stream if it is accretive to its shareholders.

“If it’s a large-scale deal that makes sense in terms of the economics of the project, and makes sense in terms of the other pieces of the financing puzzle we are doing, we will certainly do that,” he says.

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

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

The bulk sample should convert the R65 inferred resource to indicated and then to reserve, Manson says, noting this could lengthen the mine life.

Asked what the biggest hurdle was in bringing Renard online, Manson doesn’t mention jurisdiction or geology, but rather the “traditional challenges of a junior company financing its first project. So that is overcoming the skepticism of the capital markets that we can do it.”

If the company scores the US$475-million loan, it would be a “major achievement” in the history of junior diamond-mine builders, Manson says.    

Stornoway recently traded at 67¢ a share, within a range of 62¢ to $1.72. It has 138.7 million shares outstanding.

Sterck has a $1 price target and a “market perform” rating on the stock, while National Bank’s Brown has a $1.80 target, and rates Stornoway as “outperform.”