swy ..rbc coverage
posted on
May 11, 2010 11:19AM
Edit this title from the Fast Facts Section
Event
We are initiating coverage on Stornoway Diamonds with a recommendation of
Outperform, Speculative Risk.
Investment Opinion
Renard: Canada's next diamond mine
We believe a mine on Renard is virtually assured. Geological and financial data
suggest production in excess of 1m carats of diamonds per year from 2013,
peaking at 1.6m ct/year in 2016/17 with a mine life of over 25 years.
The outlook for rough diamond prices remains good
Our analysis of the likely supply of rough diamonds over the next five to ten
years suggests that there could be shortages in certain areas of the market,
particularly if China continues to grow its market share in the jewellery market.
Shorter term, the risk is that rough prices have risen too far too fast.
Capital and opex estimates point to sound IRR
We have modeled Renard using a DCF (8%) model and come to a valuation for
Stornoway's 50% of the project (the Quebec government owns the rest) of $313m
with a post-tax IRR of 21%. Our input assumptions differ from the company's
only in so far as we have modeled a higher second-year rough diamond price in
line with our forecasts for other diamond producers.
Renard valuation sensitive to rough diamond prices
The valuation is sensitive to rough diamond prices. Boosting our diamond price
escalation by 1% per year or a 10% higher starting price would increase our
Target Price ~20%.
Target Price based on 0.7x NAV
Our DCF valuation of Renard forms the bulk of our valuation. In setting our price
target at
.90/share we have used a 0.75x price:NAV multiple which is the same
as we use for other developing projects. For producing mines we use a 1x NAV
multiple suggesting an expanding multiple as production approaches.
Investment Conclusion
We view prospects for rough diamond prices favourably and our investment
stance continues to prefer companies already producing or those near to
production over explorers. We believe Stornoway offers one of the better ways to
gain exposure to a project close to production and should benefit from an
expanding valuation multiple as the green light is given to the project and the
commencement of mining approaches.