Friday, September 25, 2015

To spend or not to spend

To spend or not to spend?

When is this good for the shareholder?
When is this bad for the shareholder?

or could it be both good and bad?

The classic case is whether a company should spend $$'s at a significant depth to increase resources to a project. The deeper the drill-holes, the more costly to firm up those resources.
Most companies may just leave it as 'open at depth' and leave it for once the mine is in production and the area is more accessible from lower development.

Having finite numbers can be a lot easier to promote to the marketplace than just the generic 'open at depth' . You cannot put a $ figure on 'open at depth'...or at least the company cannot...analysts or investors are free to extrapolate as they like.


Should regulations stop companies from promoting part's of their projects or force them to spend unwise $$'s to get solid and expensive numbers.

What you end up with are companies with unrealized asset's that the public and investors do not get to hear about unless they have a casual voice to voice conversion with opinions (and not fact's) being shared.

At Chidliak, the flagship open pit deposit (CH-6) could contribute close to $2.5 billion plus in revenue to the project. The company is spending core exploration $$'s in firming up this deposit.

On the flipside, there is a string of pearls kimberlite that is about a 1/4 hectare in size (CH-20) that the open pit of CH-6 will naturally break into one the one side.

The cost to firm up any resources in CH-20 will be expensive....yet the contribution to the project in a production environment could be close to or above $100 million.

$100 million sounds like a lot of money and it is. Spending $10 million to firm up $100 million down the road is also a lot of money to spend. The company is wise not to spend that money and firm up the additional mill feed when they actually open pit CH-6 and expose CH-20 for no additional $$'s.

This is material that probably will not get into a mine study and not be included in the resource, but is a very significant addition to the cashflow.

The company knows the kimberlite pearl is there, they know it will have some value, they do have a drillhole sample...yet it is more wise to spend exploration $$'s expanding the flagship CH-6 to the maximum resource as possible as they will get the most bang for the buck.

A $100 million cash flow item hidden within the project for a company that is worth only US$35 million is not right.

Wednesday, September 23, 2015

Margin Squeeze

The margin squeeze in the diamond industry has become very transparent in 2015.

This recent article talking about Russian production clearly shows a squeeze is on.

Article -- Russia - Exports - Diamonds

Excerpt 1:

"The ministry reported that the average price of production increased 13 per cent to US$109.13 per carat."

That is the cost to produce a carat in Russia. A portion of this and the whole industry is the transition to underground mining at many operations. All underground mines are not alike and different problems need different solutions at each operation.

Excerpt 2:

"Recently, mining giant Alrosa issued its half-year report, announcing it has sold 18 million carats of rough diamonds for US$2.1 billion in the first half of 2015 - a 22 per cent drop compared to the same period last year (US$2.7 billion). Alrosa’s mines now generate 25 per cent of the world's diamond output."

A Russian diamond generates -- US$2.1 billion over 18 million carats or US$116 per carat

Problem:

You now have a quarter of the industry producing carats at a very small margin of US$7 per carat.

What do you do when your margins are being squeezed.

Pull back production? Change your long term outlook and adjust production strategically?

How about:

You end up with this quote: --> Article

"According to Reuters, ALROSA’s CFO, Igor Kulichik, said the company was increasing its stockpile of goods rather than reducing production.

"Cutting production leads to a (relative) rise in costs, so we better grow the stock," Kulichik told a conference call, as reported by Reuters."

Sounds somewhat similar to the iron ore industry. Revenue is being pressured...so crank up the production to reduce overall operating and fixed costs.

Recently it has been reported that Alrosa is considering cutting diamond prices in the second half of 2015. If they cut 6%, they are basically breaking even....according to the above information.

Reducing production might be a solution, temporarily closing down a low or negative margin mine might be a better solution...however, closing an operating mine in a Russian town might be a bit harder to stomach with the government overseeing you.

In times like this, profit margin is KING!

Chidliak has a huge margin built into it's project. A carat adjustment of $10 or $20 per carat does not squeeze the margin very much at all.

Profit Margin #1 -- Chidliak profit margin

Profit Margin #2 -  Chidliak Profit Margin 2






Wednesday, September 9, 2015

CH7 Rediscovered Domain 5

Sometimes you get a chance to go back over old data and re-discover significant results.

Something that was labelled 'marginal' for some reason exceeds all expectations.

There is a good chance that this has happened for Domain 5 - Kimberlite CH-7.

Please read about it here -- Domain 5 - CH7

This would confirm a third stellar result for Domain 5 with another one to come over the next couple months and a whopping 22 filtered tonnes over the next 6 months.

This may be the biggest new diamond tonnage in Canada.