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Message: MPV
Mountain Province Diamonds Inc. (MPV-T, MDM-N $3.69)
Recommendation: Speculative Buy
Paolo Lostritto, P.Eng (416) 640-4951; plostritto@wwcm.com
Christopher Thompson, MBA, P.Eng (416) 847-3406; cthompson@wwcm.com
September 1, 2010
All values in C$ unless otherwise noted.
Current Price $3.69 Target Price (12-Month) $6.00 Target Return 63%
Changes
Old New
Rating n/a Spec Buy Target. n/a $6.00 8% NAVPS n/a $6.07 5% NAVPS n/a $7.43
Company Profile
Mountain Province Diamonds Inc. is a Canadian diamond development company with a minority interest (49%) in the Gahcho Kué diamond project, operated by JV partner De Beers (51%). Extensive technical work has been done on the project culminating into a soon to be released feasibility study. We believe Gahcho Kué’s development is about to shift into high gear.
www.mountainprovince.com/index3.php
Canada’s Next Diamond Mine – Gahcho Kué Project is about to Shift into High Gear
• Maiden feasibility study expected to kick start market fervor.
Extensive technical work has quietly been done on the Gahcho Kué project. First feasibility study expected by Q4/10 should capture attention.
• Estimated IRR of +45% assumes US$933mm 100% LOM capital.
Pre-fabrication strategy still expected to take two years to construct. Recent diamond price estimate equates to 8% NAVPS of $6.07 (f.d.f.f.).
• De-risked, producing asset implies a three-year target of $12.00.
Once pre-production commences in H2/13, we believe the market should be willing to pay 1.5x our projected 5% NAVPS in 2013 of $8.07
• We are initiating coverage with Speculative Buy and $6.00 target.
Our $6.00 target is based on our est 8% NAVPS of $6.07. Likely catalysts: feasibility and EIS submission by year-end. Permits by H1/12. Investment Summary and Outlook
Given that De Beers is overseeing the engineering work at the Gahcho Kué diamond project, we believe a higher valuation for minority partner Mountain Province Diamonds’ is warranted once a clear timeline has been established and broadcast to the market. We expect a maiden feasibility study
by JDS Mining to be released by Q4/10, followed by an EIS submission before year-end. We believe the joint venture partnership will be focused on mobilizing construction materials in anticipation of a positive decision by both the review panel and the Federal INAC Minister to minimize the impact of seasonal weather patterns. Consequently, we are expecting construction to begin by the spring of 2012 with initial commissioning in late fall of 2013. If our assumptions are confirmed by the JDS feasibility study, we will likely lower our risk rating for Mountain Province Diamonds’ shares. We have conducted an extensive sensitivity analysis to try to assess the risk of our assumptions (Exhibits 2 & 3).
Once in the commissioning phase, we believe that Mountain Province Diamonds should command a 1.5x multiple on an estimated 5% NAVPS of $8.07 resulting in a share price of $12.00 per share (fully diluted and fully financed).
Model Assumptions
• Total life-of-mine ore fed to the mill is 35.3 million tonnes with an
average grade of 168 carats-per-hundred tonnes for a total of 59.3 million carats fed to the mill. We assume that higher grades are fed during the first three years (180 carats-per-hundred tonnes).
• Construction commences in the spring of 2012 with first phase
commissioning in the fall of 2013. Pre-production capital assumptions are US$677 million followed by sustaining capital for the life-of-mine totaling US$256 million (both on 100% basis).
• Plant is expected to process approximately 3.0 million tonnes-per-year or
8,500 tonnes-per-day.
• We assume a gross value of US$134 per carat produced with 95% of the
diamonds recovered and operating cost of $65.50 per tonne (US$40 per carat) assuming a 8:1 strip ratio life-of-mine.
• Effective tax rate of 31% (after capital cost carry forwards expire)
• Above assumptions result in an estimated IRR of over 45% and 5% NPV (project level attributable to MPV) of US$1,329 million. The pre-tax 8% NPV (project level attributable to MPV) equates to US$1,014 million. • To put these assumptions into context, the Diavik Diamond Mine was designed to process 2.3 million tonnes-per-year at a capital cost of $646 million (including $88mm for pre-stripping) and sustaining capital of $469 million LOM. The grades at Diavik were roughly double that of Gahcho Kué but the value per tonne was only 30% higher. Operating Mountain Province Diamonds Inc Paolo Lostritto, P.Eng (416) 640-4951; plostritto@wwcm.com September 1, 2010 – 3 Christopher Thompson, MBA, P.Eng (416) 847-3406; cthompson@wwcm.com Ryan Walker, M.Sc., Geol. (416) 640-4971; rwalker@wwcm.com costs averaged C$170 per tonne at Diavik – likely higher due to extensive pumping with the large dam. • US$405 million in project debt provided by De Beers (100% basis) with the balance funded from 49.792 million shares at $4.00 (49% basis). Valuation We are initiating on Mountain Province Diamonds with a Speculative Buy recommendation and $6.00 per share one-year target. We believe this valuation has room to grow as the visibility for operating cash flow improves. In addition, we will likely lower our risk rating once the JDS technical information is made available. The primary drivers for our target will likely be meeting development milestones that should help de-risk Gahcho Kué over the next six months as the joint venture publishes the first full feasibility study and submits an Environmental Impact Statement for panel review. We arrive at our one-year target by applying a 1.00x multiple on our estimated 8% NAVPS of $6.07 based on an average diamond price of US$134 per carat and a capital cost of US$675 million (100% basis). Mountain Province Diamonds have full rights to market their diamonds and should be able to command a premium similar to Aber prior to the Harry Winston acquisition.
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