Jericho Camp, Nunavut — Now that
Public hearings concerning Tahera’s application for a Type A water licence have been scheduled by the Nunavut Water Board for Dec. 6 and 7. Following the hearings, the decision and recommendations of the Nunavut Water Board are forwarded to the minister of Indian and Northern Affairs in Ottawa, who has 45 days in which to respond. “That is consistent with our time-table expectation for construction to begin in early 2005 and commercial production approximately a year later,” says Tahera Chairman Peter Gillin.
Tahera has a short, 3-month window in which to take advantage of a seasonal ice road that reopens in January and links the far-northern operations of Lupin, Ekati, Diavik and Snap Lake to Yellowknife. The winter road is used to haul in fuel, supplies and equipment. Tahera plans to start doing so in the new year and to begin preparing the site in February or March.
Situated 420 km northeast of Yellowknife and 26 km north of the Lupin gold mine, the Jericho project reached a milestone in early June when it received approval from the minister of Indian and Northern Affairs based on the findings of the Nunavut Impact Review Board (NIRB). After conducting public environmental hearings, the NIRB recommended federal approval subject to some 53 terms and conditions specifically related to areas of monitoring, noise, wildlife, fish and aquatics, environmental management, abandonment and reclamation, and socio-economics. The NIRB did express serious concerns about the project’s potential impact on wildlife, particularly the migratory habits of the Bathurst caribou herd.
Tahera proposed developing Jericho as a small open-pit and underground mining project capable of producing 3.1 million carats of diamonds over a life span of at least eight years. Between 110 and 175 people would be employed. A decision to expand the capacity of the processing plant to 680,000 tonnes per year elevates the total capital costs for the project to about $76.5 million, without taking into account the underground component. By comparison, SRK Consulting outlined a cost of $65.4 million in a June 2003 feasibility study; that estimate is based on a 330,000-tonne-per-year kimberlite processing facility, and includes underground development. The capital cost of the open-pit operation alone was estimated at $52.7 million.
“We decided we could expand the processing plant at relatively modest costs and that that would give us significantly more capacity, thereby allowing us the operating flexibility to process additional inferred resources in the early years of production,” explains Gillin. “Much of the increase is accounted for by the increased capacity of the plant, which we think is going to serve us well.”
Tahera has entered into a diamond purchase and marketing arrangement with renowned jewelry retailer
Tahera intends to finance the balance of its working capital requirements for the Jericho mine via a proposed $45-million equity offering through a syndicate of underwriters led by GMP Securities, and including TD Securities, National Bank Financial, Dundee Securities, Westwind Partners and Paradigm Capital. The public offering consists of 132.5 million shares priced at 34 apiece. The underwriters have the option of purchasing up to an additional 15.3 million shares for 30 days from the closing date, scheduled on or about Nov. 8, for a further $5.2 million in proceeds.
Tahera has 479 million shares outstanding, or 552 million on a fully diluted basis, and less than $13 million in cash.
Tiffany will buy a “significant” portion of Jericho’s run-of-mine production for its own manufacturing requirements. With respect to the diamonds Tiffany does not purchase, the diamond jeweller will sell them, on behalf of Tahera, in the international diamond market for a fee. This purchase-and-marketing arrangement is a commitment for the full life of the mine, which is estimated at eight and a half years. Valuation and price discovery mechanisms are in place, says Peter Gillin, which will ensure Tahera receives competitive market prices for its diamonds. “We will be allowed, from time to time, to have our goods sold to third parties in order to establish a price independent of the valuation assessment made by ourselves and Tiffany.”
Gillin says Tahera will also share in the diamond manufacturing profits on a formula basis, which will depend on the size of the individual diamonds.
Gillin cannot be any more specific with respect to the portion of production Tiffany will buy for its own manufacturing purposes. He says it is a number that will not be known until such time as Tahera is actually supplying Tiffany with rough.
Tiffany will bear all responsibility for marketing, insurance, shipping and security once Tahera’s “goods” have been delivered to their diamond processing facilities in Yellowknife. Tiffany already has a direct sourcing arrangement with
“From our perspective, it’s a fairly significant cost advantage, and it eliminates a lot of the worry and issues that would arise out of a small producer having to market its diamonds independently,” says Gillin. “In the course of the past few months, we had many discussions with a variety of potential marketing partners, and at the end of the day, we found that the transaction with Tiffany had the best balance and combination of benefits to the company. . . . We think this is an excellent deal for Tahera and its shareholders.”
As one of the premier retail brands, Tiffany & Co. possesses a rich and storied past that spans 167 years. Founded in 1837, Tiffany currently operates 148 Tiffany & Co. retail stores and department store boutiques in 17 countries; 54 of those are in the U.S. Worldwide sales increased 17% to US$2 billion in 2003, while net earnings rose 13% to US$216 million, or US$1.45 per share.
For the first six months of 2004, sales of US$934 million were 11% higher than in the first half of 2003. Net earnings remained essentially unchanged at US$77 million, or US52 per share. Consistent store expansion into key markets is a foundation to the company’s growth strategy, with an objective of increasing worldwide square footage by 5% annually. “Our strategy is simple: to reach those many potential customers who have yet to discover the joy of shopping at Tiffany’s and the joy of owning the best there is,” said Tiffany Chairman Michael Kowalski at a recent consumer conference hosted by Thomas Weisel Partners.
Tiffany’s product line includes an extensive selection of fine jewelry, timepieces, sterling silverware, china, crystal, stationary, fragrances and accessories. The company is also engaged in product design and manufacturing activities, producing more than half of its jewelry at two major facilities. “We intend to increase that production share further,” says Kowalski.
So far this year, Tiffany opened three new locations in the U.S., one in London, two in Japan (a third is scheduled for November in Osaka), one in Taipei, and a second site in China. There is also a new boutique in Shanghai. “China represents a great opportunity, but it’s going to be a long slow growth,” predicts Kowalski.
Every year, the company intends to open 3-5 retail locations in the U.S. alone, the ultimate target being 80 locations in that country. “That’s an easily achievable store count,” says Kowalski. “We’re still dramatically under-stored. We opened new stores in smaller markets, and i
nvariably we have been pleasantly surprised.”
Kowalski still sees some growth opportunity in Japan. “We are at fifty some stores and boutiques, but I think that there it’s a question more of quality than of quantity.” With limited opportunity for growth in Europe, Kowalski, surprisingly, thinks Latin America may provide better opportunity. Tiffany has four stores in Mexico and two in Brazil, and “they are all doing wonderfully well,” says Kowalski.
Tiffany complements its retail distribution with direct marketing activities, including e-commerce, catalogue, and business gift sales. “We believe Tiffany & Co. should not be all things for all people, so we have established our specialty retail channel of distribution to expand Tiffany’s overall market share,” says Kowalski. Tiffany owns Little Switzerland, a duty-free retailer in the Caribbean, and has invested in the business of jeweller designer Temple St. Clair. The company recently launched a retail concept under the trade name “Iridesse,” which will focus exclusively on the pearl jewelry market.
The Jericho project is centred on the lone land-based Jericho pipe, one of seven kimberlites discovered on the 760-sq.-km claim group. The others include the JD-03, Contwoyto-1, JD-02 and TAH-1 pipes, as well as the OD and Bird Lake dykes. The project occupies the Jericho watershed at the northern end of Contwoyto Lake, in the Kitikmeot (western) region of Nunavut, some 60 km south of the Arctic Circle and 170 km northeast of the Ekati diamond mine.
Discovered just south of Carat Lake in 1995, the Jericho pipe is a multi-phase elliptical intrusion measuring 300 metres long and up to 100 metres wide. It has been defined to a depth of 350 metres by 133 drill holes totalling 28,000 metres. The pipe contains an indicated and inferred resource of 7.1 million tonnes averaging 0.84 carat per tonne, for almost 6 million carats. The indicated portion alone contains 3.7 million tonnes grading 1.17 carats per tonne, or 4.3 million carats.
The Jericho kimberlite is believed to have formed from multiple eruptive phases or events, including a precursor dyke and three major intrusive phases or lobes, South, North and Central, each of which has a distinct diamond distribution. In 1996, a 787-metre-long exploration decline was driven 287 metres in kimberlite and used to collect 14,555 tonnes of bulk-sample material at a depth of 65 metres below surface. In total, 10,539 carats of diamonds at a bottom-size cutoff of 1 mm were recovered from 9,435 tonnes of processed kimberlite. A number of larger stones were recovered, including 44 diamonds in the 5-to-10-carat range and 23 stones larger than 10 carats. The largest stone weighed 40 carats, and the largest gem-quality diamond was almost 24 carats.
The original feasibility study was prepared by SRK Consulting in 2000; it was updated in June 2003 to reflect current market conditions based on a minable reserve of 2.6 million tonnes grading 1.2 carats per tonne, or 3.1 million carats averaging US$81 apiece.
Analysis
Tahera retained WWW International Diamond Consultants to provide a comprehensive analysis and valuation of the Jericho diamonds. Two size frequency distribution models were produced: a combined model for the Centre and JDF2S lobes, which show a high incidence of large diamonds, and a second model for the North lobe. According to the WWW valuation, the model assumes that the better-quality, larger stones “that were absent in the samples will be recovered in production, and that the model price for the better-quality large stones has been deliberately viewed conservatively.” WWW estimated a US$94-per-carat value for the Central lobes and US$75 per carat for the North lobe.
At SRK’s request, the WWW valuation was reviewed by Metinus Oosterveld, who is considered an authority on diamond pipe evaluation, and an alternative model was proposed. Oosterveld came up with a more conservative estimate of US$72 per carat for the Centre lobes and US$59 per carat for the North lobe. SRK used the average of the two models, US$83 per carat for the Centre lobes and US$67 per carat for the North lobe, in the feasibility study.
The proposed mining plan for Jericho as outlined in the updated feasibility study entails three years of seasonal open-pit production (April through December), followed by one year of underground development, then two years of underground production, and finally two years of processing from stockpiles only. The processing plant will operate year-round. The pit model contains 2 million tonnes of kimberlite ore grading 1.23 carats per tonne (equivalent to 2.4 million carats) and has an overall stripping ratio of 8.1-to-1. Mining will be contracted out.
The mine plan calls for the Centre lobe ore to be processed first, followed by ore from the North lobe. An additional 1.6 million tonnes of lower-grade kimberlite material from the pit will be stockpiled for processing, should it prove economically feasible.
Operating costs over the entire mine life are estimated at $56 per carat, or $68 per tonne for the open-pit portion and $64 per tonne for the underground portion. Assuming an average carat value of US$81 (or $117 per carat), the SRK base case scenario for Jericho generates $365 million in revenue and a net cash flow of $126 million. This translates into a pretax internal rate of return of about 33% and 3-year payback.
By expanding plant capacity, Tahera will have the flexibility to process, rather than stockpile, lower-grade kimberlite during the early years of production, providing an opportunity to capitalize on a robust diamond market. “We are optimistic about the price of diamonds and therefore are trying to plan our facilities to capitalize on that,” says Gillin.
As part of this review exercise, Tahera has studied the possibility of an alternative mine plan based solely on an expanded year-round open-pit operation without the underground mining component. “We could possibly extract more carats at a lower cost and therefore enhance the overall cash flow,” says Gillin. A modified mine plan contemplates the production of some 4.7 million carats over a life of nine years based on a revised pit model containing 5.5 million tonnes of potentially minable resources averaging 0.85 carat per tonne, at a stripping ratio of 6-to-1.
The pit model, preliminary in nature, pushes the open pit 50% deeper to a depth of 270 metres by incorporating steeper pit walls and additional pit “pushbacks.” In order to support an increased production rate of 680,000 tonnes per year, inferred mineral resources and additional indicated resources are included in the open-pit production.
“This is a work in progress,” says Gillin. “There are certain aspects of the plan that require additional engineering and analysis. One of the issues in this plan was that the pit walls are a little steep, so we are doing some re-engineering there.”
SRK, which has carried out a preliminary assessment of Tahera’s alternative mining proposal, expects subsequent engineering will result in a pit that does not extend as deep as the preliminary design utilized in Tahera’s optimization plan.
In making its case for an open-pit-only mining scenario, Tahera relies solely on the WWW 2003 Jericho valuation model and a recent WWW forecast of the expected price trend for rough and polished diamonds through to 2013.
Tahera uses higher modelled values of US$103 per carat for the Centre lobe and US$82.50 for the North lobe to suggest its alternative mine plan could generate $683 million in revenue and a net cash flow of $219 million over the life of mine, based on a $70-per-tonne processed cost. At a revised capital cost of $76.5 million, the base case scenario shows a 30% internal rate of return, before royalties and taxes.
It is SRK’s opinion that the Tahera evaluation indicative economic results are optimistic. Tahera, on the other hand, believes its base case analysis shows that the project’s potential for improved economics is greater than indicated in the 2003 feasibility study.
Tahera believes it has not yet exhausted the potential for new discoveries at Jericho;
nor has it ruled out the possibility that some of the other Jericho pipes might serve to prolong the mine’s life. Tahera struck a deal with
Tahera can earn an initial half-interest in the Polar property package covering 360 sq. km immediately adjacent to Jericho by spending $11 million on exploration before the end of 2008. The agreement allows for mining should a particular project in the joint-venture area prove economically feasible as determined by an independent consultant.
For projects with a defined value of up to $750 million, Tahera will remain the operator and have the right to buy an additional 25% stake from De Beers for anywhere from $6 million to $12 million, depending on the project’s worth. Conversely, for projects exceeding $750 million in value, De Beers will have the right to increase its ownership to 70% and assume operatorship by paying Tahera as much as $24 million based on a project book value of up to $1.7 billion, and up to $48 million for projects exceeding $1.7 billion.
This summer, Tahera carried out a $2.5-million exploration program on its northern properties. Seven targets on the Polar joint venture were drilled without encountering any kimberlite. One of two new holes drilled into the known Voyageur kimberlite intersected 33.5 metres of kimberlite before stopping prematurely (while still in kimberlite) because of technical difficulties. Ground geophysical surveys, along with till sampling, were done in several areas of the Polar ground.
Summer drilling on the Jericho claims focused on the Bird Lake area, where a diamondiferous kimberlite dyke was found in 2003. Last year’s drilling encountered narrow, 0.6-to-1-metre-wide kimberlite intercepts in a confined, 20-metre-long area. A 7.6-kg kimberlite sample held five microdiamonds. Tahera says this year’s drilling extended the inferred strike length of the steeply dipping dyke system to 300 metres. Three of the six holes drilled at Bird Lake intersected kimberlite, ranging from 0.7 to almost 11 metres in width. The additional Bird Lake samples will be analyzed for microdiamonds.
The Bird Lake area has at least three kimberlite indicator mineral trains, J, K and L, emanating from it. The summer drilling tested several targets within 1 km of the Bird Lake dyke and farther north, near the head of the J-train, with five holes that encountered no kimberlite. The drilling tested gravity targets that lie close to the Bird Lake dyke and had good indicator mineral grain support. Tahera whittled down more than 100 targets for its 11-hole program.
The summer’s work also included further till sampling on the Rockinghorse project, 100 km northwest of the Jericho project.
Be the first to comment on "Tahera lines up financing for Jericho"