The recent exploration results have also been encouraging and have the potential to add to current mine life. We believe the next catalyst for the company would be approval of exploitation permits and receipt of project financing for construction, which should further derisk the project and help in rerating of the stock.
TGR: Mountain Province is unlike the others in that it is a diamond play. Since when does NBF cover diamonds?
PL: We started covering Mountain Province in 2010. The company just finished permitting, and it has tremendous upside. It looks a lot like Aber Resources back in 2000–2003. Diamonds are a different animal. The commodity price beta is not as high as gold.
TGR: What is the tonnage? The carat grade?
PL: A new feasibility study is due in Q1/14, so all the data out there right now is a bit dated. Basically, Mountain Province is looking to produce approximately 4.5–4.8M carats/year.
TGR: What value are you using per carat?
PL: We’re using $130/carat, but it could be as high as $140–145/carat.
Two exceptionally large stones found in the drill core were not included in the valuation. That would suggest a population of special diamonds that could take the average value per carat much higher once in production.
The same thing happened at Aber, where the value of the stones was boosted 15–20% in a larger sample set. There’s no guarantee that will happen here, but the data are eerily similar in that regard.
TGR: Do you use a deeper discount rate with diamond equities than gold equities, given that the Ekati and Diavik diamond mines in northern Canada both have run close to 10% below feasibility projections to date?
PL: I used an 8% discount rate when I valued Mountain Province. We will reassess the risk/reward profile using the new feasibility study.
Based on what I know now, I like the name. There may be an opportunity for the company to rerate in the range of 10 to 12 times operating cash flow. That would suggest a stock price, when it’s built by 2017, in the range of $13 to $15 per share.
TGR: Do you have a parting thought for investors as we usher in 2014?
PL: It’s been a challenging market on multiple fronts. There are a lot of moving parts and it has been frustrating for everybody in the mining space. A lot of exuberance has been flushed out of the system.
Nonetheless, there are good people doing some good things. There are value propositions out there. Solid management teams will be able to take advantage of this market to drive value in the longer term.
TGR: But you’re still preaching defense?
TGR: Paolo, thanks for your time and insights.
Paolo Lostritto currently serves as director of mining equity research for National Bank Financial. He has formerly worked with Wellington West Mining, Scotia Capital and MGI Securities. He holds a Bachelor of Science degree in geological and mineral engineering from the University of Toronto.
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