Could Peregrine Diamonds (PGD) actually go it alone and make the Chidliak mine a reality?
Looks like a tough task for a junior miner to raise over CAD$400 million and than some. Closer to CAD$500 million when you add the next couple of years into the mix.
Does Peregrine Diamonds have tools at their disposal that not necessarily everyone has?
To answer these questions, one needs to look at the capital costs, look at the assets of Peregrine Diamonds and look at the resources that it may have at its disposal.
Pre-Construction Capital costs:
$3.2m - Pre-stripping (2020)
$28.4m - Mining Equipment (2020)
$21.0m - Infrastructure/ancillary (2019/2020)
$95.0m - All Weather Road (2018/2019)
$12.3m - Other roadwork and site development (2020)
$65.0m - Process Facilities (2020)
$25.9m - Utilities (2019/2020)
$27.2m - Ancillary facilities (2019/2020)
$51.7m - Indirect costs (2018/2019/2020/2021)
$27.3m - EPCM (2018/2019)
$21.1m - Owners Cost (2018/2019/2020/2021)
$56.7m - Contingency (2021)
Total - CAD$434.9 million
Seems overwhelming?? Split it apart and do items one by one...do the easy ones first.
$28.4 million - Mining Equipment (2020)
How to fund this?
Simple - Equipment manufacturers want your business and they are very, very competitive with other manufacturers. They will finance the equipment that they sell most companies as an option.
PGD - Get's financing for the equipment and will pay it back with future cash flow.
Manufacturer - Get's to sell its equipment to Chidliak and associated service contracts, etc.
As a bonus, the manufacturer doing the financing might also be able to get dibs on the All weather road contracted out equipment.
When can this arranged? Now - PGD should get on the phone with Caterpillar and all other manufacturers of equipment and line up a financing loan. The loan starts basically when the equipment is needed and delivered. There can be price protection as well, so an index between now and the estimated time of start can be limited to inflation or 2 or 3%. This loan can have milestone requirements as one being financing for the rest of the mine must be in place to activate the loan agreement.
There is sustaining capital required for mining equipment..so possibility this agreement could be for CAD $40 million.
Sign a deal, let the press and shareholders know and that part of the capital is a done deal!
Remember what Caterpillar says on their website -- "We're at your side" Time to prove it with paper and pen. Heck, the manufacturers are so competitive...they might be able to finance beyond your equipment needs and part of your financing is just that...a financing and a cash contribution to the project.
What is left to finance or raise money for? -- CAD$406.5 million
$56.7 million - Contingency (2021)
How to fund this?
This is a contingency if needed. May or may not be used.
This deserves a credit facility at x % and can be secured by the property if drawn or unsecured.
The interest rate can be quite lucarative as it is a just in case funding mechanism.
It should be place, no doubt about it.
A CAD$60 million Credit facility at 10% annual interest rate to be available starting in mid-2020 through to the final construction phase.
Again, this can be tied to other milestones (other financing's confirmed). But, again, this could be signed today. If other financing/milestones do not occur...then there is no risk to the provider as the credit facility will no longer be an option. If the milestones are met, then there is a good chance they will get a nice 10% interest rate if used.
Sign a deal now, let the press know and that part of the capital is a done deal!
What is left to finance or raise money for? -- CAD$346.5 million
95.0 million - All Weather Road (2018, 2019)
How to fund this?
There are couple of options mentioned recently -- Government Funding -- and these are legitimate possibilities.
The first one is a straight up grant/contribution/tax sponsored funding out of the federal government infrastructure fund. The federal government could easily look at the future tax revenue and determine if it just makes sense to help build a road. The Deep water port was an easier decision as it wasn't just dedicated to a future mine, but had been required for decades from the city of Iqaluit.
Could easily see the federal government chipping in for a 1/3rd of the capital cost in the form of an actual grant or, maybe more likely, an infrastructure loan to Peregrine Diamonds that will be paid by future earnings.
A CAD$35 million infrastructure loan to the Chidliak project payable at 5% interest rate and to be paid back during production years.
The government doesn't just get 5% back annually on this project, but also gets tax revenue out of that $35 million spent to various companies and also gets access to an all weather road for the next 5 decades.
A firm commitment probably is not attainable right now..but an intent of interest to be firmed up later is possible. Talk to the government and get a verbal acknowledgement that Chidliak could be eligible for a infrastructure loan of up to CAD$35 million.
What is left to finance or raise money for? -- CAD$311.5 million
95.0 million - All Weather Road (2018, 2019)
The other option mentioned with respect to the all weather road is a share cost between Peregrine Diamonds and the QEC (Qulliq Energy Corporation). QEC is a crown corporation of the Nunavut territory.
In theory, the QEC is looking to place a hydro project somewhere near Iqaluit. One of those locations is close to Chidliak (15 km's away). If the project went ahead and a location east of Iqaluit was selected, the use of that all weather road would be ideal.
This is a long horizon project and the QEC is far from any firm decisions. There could be a letter of intent or a preliminary agreement indicating that if the QEC selects a site close to the all weather road, than it will contribute part of the capital for that road. Could be anywhere between CAD$5 million and $30 million.
I would say a preliminary agreement of CAD$10 million that has no real weight in the court of law could be hacked out and released to the press. It would show a potential point of capital infusion for Chidliak...but may fall through the cracks...one good reason to have a contingency.
What is left to finance ? -- CAD$301.5 million
CAD$301.5 million - remaining items (2019/2020/2021)
This will be the core of the pre-construction capital that needs to be obtained by Peregrine Diamonds and will set the stage for many of the milestones in the above items mentioned.
At this point, going to a bank and asking for CAD$300 million loan is probably not attainable, no matter how hard you try.
Asking Robert Friedland for CAD$300 million in debentures? Again, probably not attainable.
This is where creativity must come in. Stornoway Diamonds used creativity all the way to the pre-construction and construction of Renard. It is not unheard of to be creative.
Where can Peregrine Diamonds be creative?
Assets can be looked at right away.
DO-27 - Lac De Gras
Peregrine Diamonds owns 72.1% of the property that DO-27 is on.
The Technical Report concludes that there are reasonable prospects for eventual economic extraction of the DO-27 kimberlite pipe.
Who would benefit from the pipe? Companies that already have mills and mills that are running out of material in the future. Those two would be the Diavik mine (Rio Tinto/DDC) and Ekati mine (DDC/others)
So, it would either be DDC or Rio Tinto that might be interested in DO-27.
Both Rio Tinto and DDC have big pockets and may be interested in acquiring DO-27.
Could PGD sell it's share of DO-27 to either DDC or Rio Tinto for $10 million, $20 million, $30 million or $40 million?? Negotiations would be tough on both sides and it may end up being no deal at all. Are there other options? Both Rio Tinto and DDC would have a very large treasury at their disposal. They could easily obtain the DO-27 from Peregrine Diamonds in exchange for a Loan with a reasonable interest rate and a royalty on DO-27 on the assumption that they might take it into production. Talk to both companies and see what agreements can be made. Get a loan for CAD$40 million at 5 or 6% (much better then bank interest) and also a 3% royalty that can be reduced in the future with a reduction in loan payment required (eg. $10 million reduction in the loan for a 1% reduction in the royalty).
Total - CAD$40 million @ 5% available and will be paid back by Chidliak cashflow.
Marketing rights - CH-6
CH-6 has an interesting population of yellow stones and a potential for fancy stones.
An agreement with Tiffany's on the CH-6 pipe only could yield a good cash contribution and/or cash/loan contribution. Tiffany's have previous agreements like this in previous projects, so this is not abnormal. Tiffany could contribute a direct contribution to the project of $10 million in exchange for marketing rights of CH-6 (yellows and whites). CH-6 will produce a lot of nice quality stones. PGD can also ask for a financing loan from Tiffany as well in the order $10 to $20 million at a reasonable interest rate (5%)
Let's say $20 million @ 5% and $10 million in exchange for the rights.
This leaves the huge potential of other pipes and other populations still in PGD's hands. That itself has huge upside.
Total - CAD$20 million @5% and CAD$10 million straight up
A lot of the items mentioned above can be acted on or agreed in principal to, etc.
But some of the bigger loans (CAD$100+ variety) will probably need the study to move to a PFS or FS level before finally committing...but it is a far cry from the $1 billion that Renard (Stornoway) needed for it to move to construction.
Other creative financing
Stornoway came up with some creative financing before it headed to the big financing.
This was back in 2012:
May 4th, 2012 - $20 million
The loan will bear interest at a rate of 12% per annum, payable 100% in cash or 50% in cash and 50% in Stornoway shares prior to commencement of commercial production, and 100% in cash thereafter. Principal is to be repaid in equal monthly instalments commencing approximately one month following the date of commercial production at Renard, but not before May 3, 2016 and not later than May 3, 2017. The final maturity is May 3, 2021. In connection with the loan, Stornoway’s subsidiary has granted the Lenders a 1% contingent secured royalty interest in the Renard Project which is only triggered upon the occurrence of certain specified events, such as a payment default or a default following a change of control of Stornoway, in each case capped at an amount equal to the aggregate value of the principal and interest then outstanding on the loan. The loan agreement contains additional representations, covenants and commitments customary for a facility of this nature.
It was quite an interesting set up, steep interest rate...but it wasn't expected to be paid back until commercial production occurred...but it was a quick infusion of $20 million for SWY that it probably needed.
Could look at this steep financing and raise a CAD$20 million in the near term to pay for the next big step toward PFS or FS. This could be an option.
Another option is a debentures. A lot of debentures are assigned to convertible shares...which adds dilution to current shareholders. This may be an option at higher share prices when the convertible rate is much higher and less dilutive.
Where do we sit:
Sign agreements or intents (based on milestones):
CAD$40 million - Equipment manufacturer
CAD$60 million - Credit facility for contingency if needed. Tied to milestones
CAD$35 million - Federal infrastructure loan @ 5%
CAD$10 million - preliminary agreement with QEC. May fall through...but show it as potential.
CAD$40 million - Ratio of Loan/payment from DDC or Rio Tinto for rights to DO-27 pipe.
CAD$30 million - Combination payment/loan from Tiffany's for CH-6 marketing rights.
Total -- CAD$215 million that can be signed now.
Available in the short term when needed - CAD$70 million from DDC/Rio Tinto and Tiffany's.
Available later -- CAD$145.
What is actually needed?
2017 (1st half) - CAD$15 million
2018 (1st half) - CAD$15 million
2018 (early summer and beyond) - Road construction starts (CAD$35 million Loan infrastructure)
2019 - Finish Road construction (CAD$60 million)
2020 - Bring big materials on port to site - Significant capital - (CAD$255 million)
2021 - Equipment and contingency (CAD$85 million)
So, the immediate funding and the infrastructure loan and the QEC pays for all money required through to the end of 2019. Approximate.
2021 is also set up (debt facility and equipment financing)...so that leaves the bulk of the CAD$255 million for financing in 2020.
CAD$255 million could be raised by a partial equity financing and 2 or 3 loans from various banking and financial institutions.
If some of these agreements highlighted above (Equipment financing, Government infrastructure loan, Tiffany's deal, DDC/Rio Tinto deal) all come into play in the next 12 months, the stock price should react quite favourably and then raising money by equity will be much less dilutive and a reasonable option.
Sometimes you have to get the simple agreements out of the way (no matter if they don't pay for years) to help make an equity financing reasonable.
Robert Friedland could also commit to a debentures agreement for 2019/2020 for 10's of millions of dollar as well.
This is one vision of how PGD could go it alone and adding significant value to the existing shareholders.
First step for PGD - Do the easiest one first -- Talk to the equipment manufacturers who absolutely want to talk to you. Negotiate a future deal now and let the press know. Then move onto the next item. Negotiations with Government/Rio Tinto/DDC, jewellery's like Tiffany's or Chow Tai Fook. Work them all over. They want your business/assets/opportunities. Chidliak wants money to fund a mine.
Seems over-simplified and it is to a point...but if one can start unraveling each step, one by one, the shareholders investors confidence in PGD will grow and grow.
Thursday, July 21, 2016
Monday, July 18, 2016
Metal anomalies
Chidliak is all about Diamonds...but what about other minerals?
Now that the recent PEA (Preliminary Economic Assessment) is robust enough to migrate all of Chidliak from a Greenfield exploration site to a brownfield exploration site, a lot of previous work done at Chidliak needs to be revisited.
Beyond the 2 kimberlite pipes (CH6 and CH7), there are 72 other known kimberlites and several more kimberlite type anomalies that have yet to be drilled off.
But, what about other minerals? Has there been any indication at Chidliak for other minerals?
With the transition of greenfield exploration to brownfield exploration, the value potential of any other anomaly will have gone up. Sure, they probably will not be able to use the same mill (diamond processing), but the infrastructure and roadwork will be in place and paid for by the diamond mining.
One needs to go back to 2007/2008 when a lot of till sampling was done throughout the property and not completely restricted to KIMs (kimberlite indicator minerals).
Here is the press release with other mineral potential -- News release 2008-02-28_nr
Key Quotes from press release (see more detail in excerpts below)
"The Chidliak Sperrylite Anomaly is the strongest we have seen from an exploration survey and is similar to an anomaly obtained from an orientation test at Sudbury"
"Mr. Averill stated “This is one of the strongest gahnite anomalies we have seen.”"
"One sample contained 320 chalcopyrite grains which is considered to be highly anomalous. "
Excerpts from that news release:
Sperrylite Anomaly
"The Sperrylite Anomaly occurs over a broad area measuring approximately 10 km by 10 km. Of the 44 samples collected in this area, 17 contiguous samples contained anomalous sperrylite grain counts. Several samples outside of the Sperrylite Anomaly area also contain sperrylite including one sample with 60 sperrylite grains and 10% by weight of the mineral goethite. Goethite is present in gossans, which consist of iron-bearing weathered material that can overlie sulphide-associated deposits. Additionally, adjacent samples contained the minerals pyroxene and olivine. Pyroxene and olivine are associated with ultramafic rocks, the dominant source rocks for platinum/palladium and nickel mineralization. "
"Sperrylite is a platinum-bearing mineral that is often associated with rocks that contain platinum, palladium and nickel. Stuart Averill, President of ODM stated “Similar sperrylite grains recovered from till elsewhere in Canada were invariably found within a few hundred metres of their bedrock sources. The Chidliak Sperrylite Anomaly is the strongest we have seen from an exploration survey and is similar to an anomaly obtained from an orientation test at Sudbury”. Sudbury, Ontario is Canada’s most prolific nickel producing region."
Gahnite Anomaly
The Gahnite Anomaly is approximately 2 km by 2.5 km in size and nine of ten samples collected within the area contained highly anomalous concentrations of gahnite ranging from 47 to approximately 1,600 grains. Gahnite is a primary indicator mineral for metamorphosed massive sulphide lead-zinc-silver-copper deposits like the famous Broken Hill deposit in Australia. Mr. Averill stated “This is one of the strongest gahnite anomalies we have seen.”
Chalcopyrite Anomaly
The Chalcopyrite Anomaly measures approximately 15 km by 20 km in size and eight of the 15 samples collected within the area contained chalcopyrite grains. One sample contained 320 chalcopyrite grains which is considered to be highly anomalous. Chalcopyrite is a very common mineral in copper deposits but usually only a small proportion of the grains survive in weathered glacial till.
Peregrine diamonds has many diamond related anomalies to explore...but also have potential non-diamond mineral anomalies that have only had the surface scratched with a few samples taken. Now that there is an economic plan for infrastructure and all weather roads, these anomalies should be taken up a notch.
Now that the recent PEA (Preliminary Economic Assessment) is robust enough to migrate all of Chidliak from a Greenfield exploration site to a brownfield exploration site, a lot of previous work done at Chidliak needs to be revisited.
Beyond the 2 kimberlite pipes (CH6 and CH7), there are 72 other known kimberlites and several more kimberlite type anomalies that have yet to be drilled off.
But, what about other minerals? Has there been any indication at Chidliak for other minerals?
With the transition of greenfield exploration to brownfield exploration, the value potential of any other anomaly will have gone up. Sure, they probably will not be able to use the same mill (diamond processing), but the infrastructure and roadwork will be in place and paid for by the diamond mining.
One needs to go back to 2007/2008 when a lot of till sampling was done throughout the property and not completely restricted to KIMs (kimberlite indicator minerals).
Here is the press release with other mineral potential -- News release 2008-02-28_nr
Key Quotes from press release (see more detail in excerpts below)
"The Chidliak Sperrylite Anomaly is the strongest we have seen from an exploration survey and is similar to an anomaly obtained from an orientation test at Sudbury"
"Mr. Averill stated “This is one of the strongest gahnite anomalies we have seen.”"
"One sample contained 320 chalcopyrite grains which is considered to be highly anomalous. "
Excerpts from that news release:
Sperrylite Anomaly
"The Sperrylite Anomaly occurs over a broad area measuring approximately 10 km by 10 km. Of the 44 samples collected in this area, 17 contiguous samples contained anomalous sperrylite grain counts. Several samples outside of the Sperrylite Anomaly area also contain sperrylite including one sample with 60 sperrylite grains and 10% by weight of the mineral goethite. Goethite is present in gossans, which consist of iron-bearing weathered material that can overlie sulphide-associated deposits. Additionally, adjacent samples contained the minerals pyroxene and olivine. Pyroxene and olivine are associated with ultramafic rocks, the dominant source rocks for platinum/palladium and nickel mineralization. "
"Sperrylite is a platinum-bearing mineral that is often associated with rocks that contain platinum, palladium and nickel. Stuart Averill, President of ODM stated “Similar sperrylite grains recovered from till elsewhere in Canada were invariably found within a few hundred metres of their bedrock sources. The Chidliak Sperrylite Anomaly is the strongest we have seen from an exploration survey and is similar to an anomaly obtained from an orientation test at Sudbury”. Sudbury, Ontario is Canada’s most prolific nickel producing region."
Gahnite Anomaly
The Gahnite Anomaly is approximately 2 km by 2.5 km in size and nine of ten samples collected within the area contained highly anomalous concentrations of gahnite ranging from 47 to approximately 1,600 grains. Gahnite is a primary indicator mineral for metamorphosed massive sulphide lead-zinc-silver-copper deposits like the famous Broken Hill deposit in Australia. Mr. Averill stated “This is one of the strongest gahnite anomalies we have seen.”
Chalcopyrite Anomaly
The Chalcopyrite Anomaly measures approximately 15 km by 20 km in size and eight of the 15 samples collected within the area contained chalcopyrite grains. One sample contained 320 chalcopyrite grains which is considered to be highly anomalous. Chalcopyrite is a very common mineral in copper deposits but usually only a small proportion of the grains survive in weathered glacial till.
Peregrine diamonds has many diamond related anomalies to explore...but also have potential non-diamond mineral anomalies that have only had the surface scratched with a few samples taken. Now that there is an economic plan for infrastructure and all weather roads, these anomalies should be taken up a notch.
Sunday, July 17, 2016
Numbers don't lie
Chidliak has all been about numbers and data sets and a string of events (some unfortunate, some fortunate).
Some might think the development of Chidliak has been based on the movie --
First off...numbers don't lie. The PEA results are preliminary in nature, but are based on very conservative numbers (some assumed, some inherited) and subsequent work has significant probability of increasing the numbers to even better then what is currently stated.
Here are those numbers:
pre-construction capital costs
- CAD $95 million (all-weather road to site from Iqaluit)
- CAD $283.2 million (site specific costs)
- CAD $56.7 million (contingency)
pre-tax (@7.5% discount)
- NPV - CAD$743.7 million
- IRR - 38.1%
after-tax (@7.5% discount)
- NPV - CAD$471.2 million
- IRR - 29.8%
- Payback - 2 years
Those numbers are extremely positive for a Phase 1 development that has plenty of upside in the tank.
But...what did it take to get to those numbers and what has happened since and what will happen in the future? History, past and present. Starting to sound like an excerpt from A Christmas Carol.
History:
Company was created and was a majority owner of DO-27 in Lac De Gras.
Money was spent and there were some positive results out of DO-27 work, but not enough to progress it any further. The story of DO-27 is not complete...now it sounds like The Neverending Story.
Initially money was raised at $5 per share and the market did a nice gradual downdraft.
At $2 or more per share...the thought of a better market ahead was suspected and a share buyback occurred.
Didn't happen and subsequent to that, the company raised money at a lower price (unfortunate event).
Signed up with BHP and a special airplane based system to try and locate a new diamond field. This was very successful and managed to find a few potential projects. One of these being Chidliak. (fortunate event).
Some preliminary work was done on Chidliak and at the same time, a merger was being looked at between Peregrine Diamonds and its sister company Peregrine Metals.
Once CH-1 kimberlite was found and a nice 2.01 carat was found, the merger was off as a pure diamond company going forward in a new diamond field seemed to be the answer.
A discounted rights offering was completed at around 30 to 35 cents with attached warrants @ $1 and further extended for a $1.50 if not exercised.
Then CH-6 results hit the press and BHP signed up for the first option to spend x $$'s for about half the project. Many of the $1 warrants were exercised and the stock went up. A financing at higher prices took place as well. (fortunate event). Salman Partners and Raymond Goldie become a key institutional player in the marketplace for PGD. Dundee and Ned Goodman also were getting interested.
The next summer, several new kimberlites were discovered in a program that used 2 core drill rigs and an heli RC rig and was paid for by BHP as part of the option agreement. Part of that money went to PGD mgmt as they were still in charge of operations and execution of the program (fortunate event).
Some very promising kimberlite pipes were found, but nothing that replicated the CH-6 pipe. The price of PGD drifted down to a $1 and the company executed another rights offering at around 80 cents. Expectation was to have this fully exercised as things were still positive and the 30 cent rights offering made a lot of shareholders very, very happy.
Before the rights offering concluded, BHP came out to the press and announced they were NOT continuing with diamond mines/projects and all assets in that field were officially for sale. (very unfortunate event).
This was a double whammy for Peregrine Diamonds as they just lost a partner, had to figure out where the half ownership was going to go, and the rights offering was in question as the stock price dipped much below 60 cents.
The market rebounded a bit and a good chunk of the rights offering was completed..but not all.
There was some money in the bank, but an uncertain future.
Peregrine metals (sister company) was sold out to Stillwater mining at a steep premium. Fortunate for those shareholders...but unfortunate for Peregrine Diamonds. PGD now had to pay for full rent on their office premises and some of the shared salaries with its sister company was no longer an option. (unfortunate event).
Peregrine Diamonds was able to buy back the other half of Chidliak at a cost of a 2% royalty and a few annual $2.5 million payments to BHP. (fortunate to get Chidliak back...unfortunate that an overhang of $2.5 million was to last for a few years)
Company was getting close to running out of money and they had to do something. They portrayed having three options (Plan A, B, and C). Plan A was an option agreement with De Beers Canada and the other 2 options have never been disclosed. De Beers did a private placement with PGD at a premium and also paid for one of the BHP payments as well as paying for some work on site, including a desktop study. (fortunate event). Gravity surveys become new to Chidliak and helped add a tool (expensive tool) that could be used for future exploration.
Subsequent to the De Beers initial option commitment, Robert Friedland entered the picture via a private placement at around 40 cents. (fortunate event)
There was a steep commitment to get the next phase of the option with De Beers and the timing of it was such that the first significant stones coming out of a CH-6 bulk sample would not be available for viewing until after the option expired. That option was for about $50 million over a few years.
As that option was coming due...Anglo managed to purchase a big chunk of De Beers from the original family and immediately started closing the purse strings with De Beers and also its other entities.
With that big brother mentally of Anglo, De Beers Canada was speculated to not have the permission to exercise that option (unfortunate event). It has been mentioned in the press that De Beers Canada technical staff saw this move as a big missed opportunity.
De Beers has left, but gave some reprieve to PGD by way of an at-cost expense to process the remaining CH-6 bulk sample material at its sudbury lab before heading to the SRC (Saskatchewan Research Centre) for final recovery.
What was next? A bulk sample of CH-7 was required. Dundee was still in the game and Salman Partners hadn't said a peep for a couple of years. Money needed to be raised.
A very large discounted offering at 21 cents per share was completed and backed by Robert Friedland, Eric Friedland and Ned Goodman. This bulk sample program was needed and money was going to be raised. All shareholders had an option to participate with the three backstops.
The offering was completed and the bulk sample program was well on its way.
CH-7 bulk sample deserves its own movie of unfortunate events.
Here is a whole blog on the journey of that bulk sample -- Journey of 558 tonnes
Mother nature was not going to give up that data set easily at all.
Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.
Subsequent to the offering and may be a continuation before that, but Dundee continually sold off their positions. Dundee had problems and later on sold half (liquidated) of their assets to a new entry into the market. Selling off those PGD shares were probably more of a symptom of the business model of Dundee and the market itself as opposed to the fundamentals of Chidliak.
Salman Partners also came to the press recently and announced they were closing their business.
Both Ned Goodman and Ray Goldie have now had the business they work for or built part of...go into serious downsizing. These guys have both been around for a long time and are not the future of the institutional market anymore. That is the last big institutional influence that PGD has had and it has now been put to rest. (unfortunate).
The 2% royalty that BHP still had was tried to be transferred to the South32 entity that was being spun off of BHP. PGD did catch sight of this and tried to enact the first right of refusal. It ended up in the courts for many months and the final result was a settlement that BHP sells that royalty to PGD for a small sum and PGD was able to cancel the royalty. (turned out to be a very fortunate event that may not have occurred if the spin off of South32 didn't happen).
Another rights offering was completed at a discounted 10 cents to get the results of the CH-7 bulk sample, together with CH-6 through to PEA level and have some money still left in the bank.
PEA results get released to the market in summertime and the numbers don't lie. They are robust and have significant upside to grow. A lot of fortunate and unfortunate events were taken to get here..but they weren't over yet.
Conference call on the PEA results were scheduled and with the lacking of institutional following, this was one opportunity to get together with analysts and shareholders for a debrief of the PEA and a subsequent Q&A. The presentation was strong and at the end, the operator opened up the questions and stated verbally to the Tom Peregoodoff that there were no Questions in the queue. This was factually wrong as there were a lot of questions in the queue, but the operator missed something. A lot of times, the operator can be contracted out by the teleconference company and be set at a home office with a headset, and a computer application that links into all the features to host the call. Human error or computer problems could easily be blamed here. Tom Peregoodoff ended up closing the call, not knowing the queue did exist...but emphasized that questions could be submitted to Peregrine or Tom or Eric and they will be answered. The market took the lack of Q&A as a bad sign and gave it as a signal to sell the stock.
Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.
If past is any sign of the future, how does one actually contemplate an investment in Chidliak?
The background noise with PGD is off the charts and shareholders alike have lost any sort of context between the true fundamentals and what could possibly hit Chidliak next.
Those PEA numbers do not lie and if all those fortunate and unfortunate events were needed to get to this point, so be it. Now it is up to the investment community to decipher the numbers and try to look past the noise. Acknowledging the true fact that most of those unfortunate vents were completely external and out of the control to PGD itself.
Without these unfortunate events, there may not have been a way for a junior explorer to own 100% of all rights to a project that has a PEA of close to half billion CAD $$'s and at the same time own all the claims in the vicinity of the PEA kimberlites and the associated 74 kimberlites and undisclosed number of drilling targets. A junior company owning just 20% of this might have the same market capitalization that PGD has today...but in that case, the other 80% would be the one bearing the fortunate/unfortunate event stigma and not PGD.
Some might think the development of Chidliak has been based on the movie --
Lemony Snicket's A Series of Unfortunate Events
..maybe a very boring version of that...but unfortunate events have been endowed to the project over the years.First off...numbers don't lie. The PEA results are preliminary in nature, but are based on very conservative numbers (some assumed, some inherited) and subsequent work has significant probability of increasing the numbers to even better then what is currently stated.
Here are those numbers:
pre-construction capital costs
- CAD $95 million (all-weather road to site from Iqaluit)
- CAD $283.2 million (site specific costs)
- CAD $56.7 million (contingency)
pre-tax (@7.5% discount)
- NPV - CAD$743.7 million
- IRR - 38.1%
after-tax (@7.5% discount)
- NPV - CAD$471.2 million
- IRR - 29.8%
- Payback - 2 years
Those numbers are extremely positive for a Phase 1 development that has plenty of upside in the tank.
But...what did it take to get to those numbers and what has happened since and what will happen in the future? History, past and present. Starting to sound like an excerpt from A Christmas Carol.
History:
Company was created and was a majority owner of DO-27 in Lac De Gras.
Money was spent and there were some positive results out of DO-27 work, but not enough to progress it any further. The story of DO-27 is not complete...now it sounds like The Neverending Story.
Initially money was raised at $5 per share and the market did a nice gradual downdraft.
At $2 or more per share...the thought of a better market ahead was suspected and a share buyback occurred.
Didn't happen and subsequent to that, the company raised money at a lower price (unfortunate event).
Signed up with BHP and a special airplane based system to try and locate a new diamond field. This was very successful and managed to find a few potential projects. One of these being Chidliak. (fortunate event).
Some preliminary work was done on Chidliak and at the same time, a merger was being looked at between Peregrine Diamonds and its sister company Peregrine Metals.
Once CH-1 kimberlite was found and a nice 2.01 carat was found, the merger was off as a pure diamond company going forward in a new diamond field seemed to be the answer.
A discounted rights offering was completed at around 30 to 35 cents with attached warrants @ $1 and further extended for a $1.50 if not exercised.
Then CH-6 results hit the press and BHP signed up for the first option to spend x $$'s for about half the project. Many of the $1 warrants were exercised and the stock went up. A financing at higher prices took place as well. (fortunate event). Salman Partners and Raymond Goldie become a key institutional player in the marketplace for PGD. Dundee and Ned Goodman also were getting interested.
The next summer, several new kimberlites were discovered in a program that used 2 core drill rigs and an heli RC rig and was paid for by BHP as part of the option agreement. Part of that money went to PGD mgmt as they were still in charge of operations and execution of the program (fortunate event).
Some very promising kimberlite pipes were found, but nothing that replicated the CH-6 pipe. The price of PGD drifted down to a $1 and the company executed another rights offering at around 80 cents. Expectation was to have this fully exercised as things were still positive and the 30 cent rights offering made a lot of shareholders very, very happy.
Before the rights offering concluded, BHP came out to the press and announced they were NOT continuing with diamond mines/projects and all assets in that field were officially for sale. (very unfortunate event).
This was a double whammy for Peregrine Diamonds as they just lost a partner, had to figure out where the half ownership was going to go, and the rights offering was in question as the stock price dipped much below 60 cents.
The market rebounded a bit and a good chunk of the rights offering was completed..but not all.
There was some money in the bank, but an uncertain future.
Peregrine metals (sister company) was sold out to Stillwater mining at a steep premium. Fortunate for those shareholders...but unfortunate for Peregrine Diamonds. PGD now had to pay for full rent on their office premises and some of the shared salaries with its sister company was no longer an option. (unfortunate event).
Peregrine Diamonds was able to buy back the other half of Chidliak at a cost of a 2% royalty and a few annual $2.5 million payments to BHP. (fortunate to get Chidliak back...unfortunate that an overhang of $2.5 million was to last for a few years)
Company was getting close to running out of money and they had to do something. They portrayed having three options (Plan A, B, and C). Plan A was an option agreement with De Beers Canada and the other 2 options have never been disclosed. De Beers did a private placement with PGD at a premium and also paid for one of the BHP payments as well as paying for some work on site, including a desktop study. (fortunate event). Gravity surveys become new to Chidliak and helped add a tool (expensive tool) that could be used for future exploration.
Subsequent to the De Beers initial option commitment, Robert Friedland entered the picture via a private placement at around 40 cents. (fortunate event)
There was a steep commitment to get the next phase of the option with De Beers and the timing of it was such that the first significant stones coming out of a CH-6 bulk sample would not be available for viewing until after the option expired. That option was for about $50 million over a few years.
As that option was coming due...Anglo managed to purchase a big chunk of De Beers from the original family and immediately started closing the purse strings with De Beers and also its other entities.
With that big brother mentally of Anglo, De Beers Canada was speculated to not have the permission to exercise that option (unfortunate event). It has been mentioned in the press that De Beers Canada technical staff saw this move as a big missed opportunity.
De Beers has left, but gave some reprieve to PGD by way of an at-cost expense to process the remaining CH-6 bulk sample material at its sudbury lab before heading to the SRC (Saskatchewan Research Centre) for final recovery.
What was next? A bulk sample of CH-7 was required. Dundee was still in the game and Salman Partners hadn't said a peep for a couple of years. Money needed to be raised.
A very large discounted offering at 21 cents per share was completed and backed by Robert Friedland, Eric Friedland and Ned Goodman. This bulk sample program was needed and money was going to be raised. All shareholders had an option to participate with the three backstops.
The offering was completed and the bulk sample program was well on its way.
CH-7 bulk sample deserves its own movie of unfortunate events.
Here is a whole blog on the journey of that bulk sample -- Journey of 558 tonnes
Mother nature was not going to give up that data set easily at all.
Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.
Subsequent to the offering and may be a continuation before that, but Dundee continually sold off their positions. Dundee had problems and later on sold half (liquidated) of their assets to a new entry into the market. Selling off those PGD shares were probably more of a symptom of the business model of Dundee and the market itself as opposed to the fundamentals of Chidliak.
Salman Partners also came to the press recently and announced they were closing their business.
Both Ned Goodman and Ray Goldie have now had the business they work for or built part of...go into serious downsizing. These guys have both been around for a long time and are not the future of the institutional market anymore. That is the last big institutional influence that PGD has had and it has now been put to rest. (unfortunate).
The 2% royalty that BHP still had was tried to be transferred to the South32 entity that was being spun off of BHP. PGD did catch sight of this and tried to enact the first right of refusal. It ended up in the courts for many months and the final result was a settlement that BHP sells that royalty to PGD for a small sum and PGD was able to cancel the royalty. (turned out to be a very fortunate event that may not have occurred if the spin off of South32 didn't happen).
Another rights offering was completed at a discounted 10 cents to get the results of the CH-7 bulk sample, together with CH-6 through to PEA level and have some money still left in the bank.
PEA results get released to the market in summertime and the numbers don't lie. They are robust and have significant upside to grow. A lot of fortunate and unfortunate events were taken to get here..but they weren't over yet.
Conference call on the PEA results were scheduled and with the lacking of institutional following, this was one opportunity to get together with analysts and shareholders for a debrief of the PEA and a subsequent Q&A. The presentation was strong and at the end, the operator opened up the questions and stated verbally to the Tom Peregoodoff that there were no Questions in the queue. This was factually wrong as there were a lot of questions in the queue, but the operator missed something. A lot of times, the operator can be contracted out by the teleconference company and be set at a home office with a headset, and a computer application that links into all the features to host the call. Human error or computer problems could easily be blamed here. Tom Peregoodoff ended up closing the call, not knowing the queue did exist...but emphasized that questions could be submitted to Peregrine or Tom or Eric and they will be answered. The market took the lack of Q&A as a bad sign and gave it as a signal to sell the stock.
Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.
If past is any sign of the future, how does one actually contemplate an investment in Chidliak?
The background noise with PGD is off the charts and shareholders alike have lost any sort of context between the true fundamentals and what could possibly hit Chidliak next.
Those PEA numbers do not lie and if all those fortunate and unfortunate events were needed to get to this point, so be it. Now it is up to the investment community to decipher the numbers and try to look past the noise. Acknowledging the true fact that most of those unfortunate vents were completely external and out of the control to PGD itself.
Without these unfortunate events, there may not have been a way for a junior explorer to own 100% of all rights to a project that has a PEA of close to half billion CAD $$'s and at the same time own all the claims in the vicinity of the PEA kimberlites and the associated 74 kimberlites and undisclosed number of drilling targets. A junior company owning just 20% of this might have the same market capitalization that PGD has today...but in that case, the other 80% would be the one bearing the fortunate/unfortunate event stigma and not PGD.
Saturday, July 16, 2016
Core Drilling
Core drilling has been used at Chidliak regularly and the next work programme should at least contain a big component of core drilling. Greenfield exploration is now completed. Chidliak will be considered brownfield for any exploration work on it.
Taking a step back, one should look at all the various drilling techniques and focus on what will be next.
Types of drilling:
Rotary Air Blast (RAB) - This has not been used at Chidliak, but has been used in Botswana for Peregrine Diamonds. It is basically a very inexpensive technique and the main goal is to get some results that possibly confirm kimberlite and/or more kimberlite indicator minerals (KIMS). It is not necessarily for getting any sort of diamond content. Diamonds in the micro class usually need some caustic processing. KIMS are usually much larger in comparison to diamonds and can be sampled from the RAB material to determine if further work is necessary on the property and if more detailed drilling techniques are needed.
Heli - RC - Reverse circulation drilling - The heli part of this equation is a helicopter based drill. The equipment itself is light enough to be able to hook up to a helicopter to move from target to target in a very timely fashion. At Chidliak, they were drilling up to 1 target each day. The RC drill itself is a drilling unit that has a cylindrical tube in the centre of drill that is used to suck up or vacuum up any of the RC Chips. The chipped material is created by friction on the bit to the ground at the end of the bit. The mineralized kimberlite gets broken up into these chips and gets sucked up the tube. The diamonds in the material themselves could get significantly broken. The point of the RC drilling is really 3 fold. The first one is to determine if it is kimberlite. The second is to determine if there are diamonds contained in the pipe (broken or not). The third is to determine if there are good number of diamond stones just as an indicator for potential grade. Chidliak used an heli-rc rig to basically eliminate as many anomalies as possible. The surprise was that many of the anomalies turned out to be kimberlite and also turned out to be diamond-bearing. The depth of an heli-rc rig can only drill close to 30 metres down. It is basically a tease of the kimberlite and can easily miss multi-phase or complex kimberlite pipes.
LDD - RC - LDD means Large Diameter Drill. Same concept as a heli-rc rig...just at a much bigger level. A big 22 to 26 inch pipe is used to suck up the broken chips. At the bottom of the drill is usually a tri-cone bit. The unit and set up is quite large and moving it from target to target is very cumbersome and needs to be planned ahead. In the north, it is best and usually restricted to moving by ice only. This is why LDD RC drilling occurs in the cold of winter (Feb/Mar/Apr). The unit will create some breakage of stones..but the purpose is still get a good sample of macro diamonds to confirm both grade and a valuation model created. A breakage report is usually standard when doing LDD RC drilling.
HQ Core drilling - HQ is just a standard that is used in Core drilling. There are other standards as well. Core drilling is basically what it says. It will try and bring up core in tact and the resulting core is placed in those core trays located in core shacks. This gives both the geologist, geophysicist and geotechnical engineer access to a data set that represents a 3D point in space within the mineralized body. The geologist can look at all the geological features within the core, including kimberlite intersections, nodules, etc. The geologist can also get samples processed for mineral content. The geophysicist can look at the magnetism/gravity and other physics related features of the material. The geotechnical engineer can look at the quality of the material...whether it is all broken up, intact and also can do further testing on strength (compressive, etc.). The results can help the geotechnical engineer determine pit wall slope angle and for underground, the maximum stope size. This type of drilling gives the best detail...but lacks huge tonnage which is needed to find enough carats to get a parcel worthy of a valuation model.
Now, taking a step forward, where does Chidliak sit?
The latest technical report recommended a few things:
1 - Geotechnical drilling of the CH6 and CH7 country rock surrounding the pipes to help with pit slope angle calculations. This requires core drilling.
2 - Deep piece points (can be done in conjunction with #1) and aims to find the boundary of the kimberlite pipe at depth. This requires core drilling.
3 - Further internal drilling of the pipe. Specific to the high grade cylindrical core at CH6 and the new R and S regions at CH7. This basically will try to align the correct tonnage/volume with the associated value and grade per carat. R and S are currently assigned to the lowest CH7 values (Domain 2) and that could change in the future with this type of drilling. A bit of caustic and micro population curve analysis on the results will also be useful. This requires core drilling.
4 - Internal deep drilling. This is basically used to try and extend the depth of the known pipe further into the earth. This requires core drilling.
5 - Converting material to the indicated category - More diamond parcels from CH6 and CH7 are needed for a more refined valuation model. CH6 also needs to confirm macro grade at depth. This requires LDD RC drilling and possibly some trenching at surface (gets more parcels for the valuation model).
The latest conference call on the PEA recommended:
1 - Brownfield drilling is now in play now that the PEA has confirmed that the top portions of CH6 and CH7 can pay for a mine. With this in mind, you can now go to some of those other pipes that may have complex phases that wasn't found during the initial drilling and explore some more. Many of the kimberlites are not at a stage to do a bulk sample and need more core drilling done before any further decisions can be made. Some of these pipes have only had a 20 metres of heli-rc drilling completed on them. Core drilling is the next logical step for the potentially economic kimberlites and a handful of pipes that just don't have enough information to quantify them as potentially economic. Every single pipe will get looked at in detail. CH-61 is a clear example of a pipe that hasn't had any drilling at all and has had some very interesting kimberlite float material that was compelling enough to do some gravity measurements over the pipe.
Next steps:
The project could look at doing some serious bulk sampling work to progress it to a feasibility (PFS or FS) type stage.
The project could look at some serious core drilling (geotechnical, deep, internal definition and brownfield exploration).
The project could look at doing both of these tasks.
The critical path toward a mine is basically the construction of the 160 km all weather road. That requires a more defined detailed study (FS level) for the road itself and the arduous journey of permitting that same road. These tasks probably have already started and will continue until they are completed and construction of the road itself can start.
Results of any brownfield drilling could create some permutations as to the last 20 km's of that all weather road. That may put brownfield drilling up the priority list for this very reason.
The final next step may be to actually get 2 Core drill rigs going for the next winter program (Feb/Mar/Apr/May) and focus on the many tasks that the core drill rig can accomplish. Without doing any bulk sampling, the results of the geotech drilling, internal definition drilling and deep drilling could material increase the NPV and IRR of the project through another PEA.
Once a road is built, a DMS unit is set up, the cost of bulk sampling many of these pipes to obtain parcels of macro diamonds goes way down. Shipping 500 to 5000 tonnes of material all the way to the SRC in Saskatchewan for DMS processing and diamond recovery versus creating a concentrate onsite and shipping a resulting 50 to 100 tonnes of concentrate material to the SRC for final diamond recovery is quite a significant difference.
Taking a step back, one should look at all the various drilling techniques and focus on what will be next.
Types of drilling:
Rotary Air Blast (RAB) - This has not been used at Chidliak, but has been used in Botswana for Peregrine Diamonds. It is basically a very inexpensive technique and the main goal is to get some results that possibly confirm kimberlite and/or more kimberlite indicator minerals (KIMS). It is not necessarily for getting any sort of diamond content. Diamonds in the micro class usually need some caustic processing. KIMS are usually much larger in comparison to diamonds and can be sampled from the RAB material to determine if further work is necessary on the property and if more detailed drilling techniques are needed.
Heli - RC - Reverse circulation drilling - The heli part of this equation is a helicopter based drill. The equipment itself is light enough to be able to hook up to a helicopter to move from target to target in a very timely fashion. At Chidliak, they were drilling up to 1 target each day. The RC drill itself is a drilling unit that has a cylindrical tube in the centre of drill that is used to suck up or vacuum up any of the RC Chips. The chipped material is created by friction on the bit to the ground at the end of the bit. The mineralized kimberlite gets broken up into these chips and gets sucked up the tube. The diamonds in the material themselves could get significantly broken. The point of the RC drilling is really 3 fold. The first one is to determine if it is kimberlite. The second is to determine if there are diamonds contained in the pipe (broken or not). The third is to determine if there are good number of diamond stones just as an indicator for potential grade. Chidliak used an heli-rc rig to basically eliminate as many anomalies as possible. The surprise was that many of the anomalies turned out to be kimberlite and also turned out to be diamond-bearing. The depth of an heli-rc rig can only drill close to 30 metres down. It is basically a tease of the kimberlite and can easily miss multi-phase or complex kimberlite pipes.
LDD - RC - LDD means Large Diameter Drill. Same concept as a heli-rc rig...just at a much bigger level. A big 22 to 26 inch pipe is used to suck up the broken chips. At the bottom of the drill is usually a tri-cone bit. The unit and set up is quite large and moving it from target to target is very cumbersome and needs to be planned ahead. In the north, it is best and usually restricted to moving by ice only. This is why LDD RC drilling occurs in the cold of winter (Feb/Mar/Apr). The unit will create some breakage of stones..but the purpose is still get a good sample of macro diamonds to confirm both grade and a valuation model created. A breakage report is usually standard when doing LDD RC drilling.
HQ Core drilling - HQ is just a standard that is used in Core drilling. There are other standards as well. Core drilling is basically what it says. It will try and bring up core in tact and the resulting core is placed in those core trays located in core shacks. This gives both the geologist, geophysicist and geotechnical engineer access to a data set that represents a 3D point in space within the mineralized body. The geologist can look at all the geological features within the core, including kimberlite intersections, nodules, etc. The geologist can also get samples processed for mineral content. The geophysicist can look at the magnetism/gravity and other physics related features of the material. The geotechnical engineer can look at the quality of the material...whether it is all broken up, intact and also can do further testing on strength (compressive, etc.). The results can help the geotechnical engineer determine pit wall slope angle and for underground, the maximum stope size. This type of drilling gives the best detail...but lacks huge tonnage which is needed to find enough carats to get a parcel worthy of a valuation model.
Now, taking a step forward, where does Chidliak sit?
The latest technical report recommended a few things:
1 - Geotechnical drilling of the CH6 and CH7 country rock surrounding the pipes to help with pit slope angle calculations. This requires core drilling.
2 - Deep piece points (can be done in conjunction with #1) and aims to find the boundary of the kimberlite pipe at depth. This requires core drilling.
3 - Further internal drilling of the pipe. Specific to the high grade cylindrical core at CH6 and the new R and S regions at CH7. This basically will try to align the correct tonnage/volume with the associated value and grade per carat. R and S are currently assigned to the lowest CH7 values (Domain 2) and that could change in the future with this type of drilling. A bit of caustic and micro population curve analysis on the results will also be useful. This requires core drilling.
4 - Internal deep drilling. This is basically used to try and extend the depth of the known pipe further into the earth. This requires core drilling.
5 - Converting material to the indicated category - More diamond parcels from CH6 and CH7 are needed for a more refined valuation model. CH6 also needs to confirm macro grade at depth. This requires LDD RC drilling and possibly some trenching at surface (gets more parcels for the valuation model).
The latest conference call on the PEA recommended:
1 - Brownfield drilling is now in play now that the PEA has confirmed that the top portions of CH6 and CH7 can pay for a mine. With this in mind, you can now go to some of those other pipes that may have complex phases that wasn't found during the initial drilling and explore some more. Many of the kimberlites are not at a stage to do a bulk sample and need more core drilling done before any further decisions can be made. Some of these pipes have only had a 20 metres of heli-rc drilling completed on them. Core drilling is the next logical step for the potentially economic kimberlites and a handful of pipes that just don't have enough information to quantify them as potentially economic. Every single pipe will get looked at in detail. CH-61 is a clear example of a pipe that hasn't had any drilling at all and has had some very interesting kimberlite float material that was compelling enough to do some gravity measurements over the pipe.
Next steps:
The project could look at doing some serious bulk sampling work to progress it to a feasibility (PFS or FS) type stage.
The project could look at some serious core drilling (geotechnical, deep, internal definition and brownfield exploration).
The project could look at doing both of these tasks.
The critical path toward a mine is basically the construction of the 160 km all weather road. That requires a more defined detailed study (FS level) for the road itself and the arduous journey of permitting that same road. These tasks probably have already started and will continue until they are completed and construction of the road itself can start.
Results of any brownfield drilling could create some permutations as to the last 20 km's of that all weather road. That may put brownfield drilling up the priority list for this very reason.
The final next step may be to actually get 2 Core drill rigs going for the next winter program (Feb/Mar/Apr/May) and focus on the many tasks that the core drill rig can accomplish. Without doing any bulk sampling, the results of the geotech drilling, internal definition drilling and deep drilling could material increase the NPV and IRR of the project through another PEA.
Once a road is built, a DMS unit is set up, the cost of bulk sampling many of these pipes to obtain parcels of macro diamonds goes way down. Shipping 500 to 5000 tonnes of material all the way to the SRC in Saskatchewan for DMS processing and diamond recovery versus creating a concentrate onsite and shipping a resulting 50 to 100 tonnes of concentrate material to the SRC for final diamond recovery is quite a significant difference.
Friday, July 15, 2016
Government Funding
The federal government of Canada contributes to a lot of infrastructure related projects.
Is there room for some of that at Chidliak as the CEO of Peregrine Diamonds indicated as a possibility in the recent PEA (preliminary economic assessment) conference call?
First off, existing commitments have already made there way to the economics of the current PEA.
This commitment is the construction and operation of a new deep water port in Iqaluit (operational 2020) and a beefed up sea lift as well. Both of these would be utilized for the construction and operation of a Chidliak mine.
An all weather road is the current plan for access to Chidliak from Iqaluit. This is about a 160 km road and the cost of it is approximately CAD$95 million to construct. There will probably be a couple of bridges involved and a few culverts...but most of the terrain will be shaping of the existing tundra.
Can and should the federal government look to contribute and fund part of this road?
To answer that question, one must look at the payback from the government's perspective.
Where exactly does the government receive revenue from Chidliak?
They receive taxes directly off the profits from Chidliak. Direct from the ownership of the mine.
Where else do they receive revenue?
A lot of money would be spent over the life of the mine. The employees who work at the mine pay a nice steep personal income tax of between 25 to 40%. Employees who work at companies that supply equipment and services to the mine also pay personal income tax. Those suppliers and other companies also pay taxes on profits to the government as well.
There is an obvious calculation that can be done and with the PEA in hand, this is just a number crunching exercise. Previous to the PEA, there were too many unknowns.
Other benefits?
The road can be used by other entities besides the mine....and after the mine closes in 1 or 2 or 3 decades, the road can still be used for other things.
The equation of $1 spent by the government will generate $X in return is absolutely a reality here.
Risk? The project has to be shown to make a profit. If it is marginal and turns out to be failure, not only does the government not get payback..but they may end up with a bankrupt company to deal with. That is why robust studies do need to be done.
A bankable feasibility study is a study that is well detailed and refined and solid that a bank could step up and finance the entire project at a negotiated rate of x+prime %.
Government's do not need that level of detail and specifically if contribution to the road...kickstarts the project and makes the economics more lucarative, why not look at a government funding earlier as opposed to later.
There are also a lot of government jobs in Iqaluit and a road to Chidliak and a long mine operation would overall benefit Iqaluit (reduce costs for locals) and probably save money to the government from that perspective.
Yellowknife has enjoyed the last 2 decades by being a conduit to the Lac De Gras mines and all the benefits they create. Iqaluit would benefit tremendously just as Yellowknife has.
Obtaining funding for mine development and also get government infrastructure funding are probably not mutually exclusive. The government would want to see some firm financial commitment to the project. On the flip-side, it may be easier to get that firm financial commitment knowing that government funding was on its way.
The PEA, with its IRR and NPV clearly show that government funding is not needed to make this project very profitable...however showing economics and building an actual mine are two different things.
Is there room for some of that at Chidliak as the CEO of Peregrine Diamonds indicated as a possibility in the recent PEA (preliminary economic assessment) conference call?
First off, existing commitments have already made there way to the economics of the current PEA.
This commitment is the construction and operation of a new deep water port in Iqaluit (operational 2020) and a beefed up sea lift as well. Both of these would be utilized for the construction and operation of a Chidliak mine.
An all weather road is the current plan for access to Chidliak from Iqaluit. This is about a 160 km road and the cost of it is approximately CAD$95 million to construct. There will probably be a couple of bridges involved and a few culverts...but most of the terrain will be shaping of the existing tundra.
Can and should the federal government look to contribute and fund part of this road?
To answer that question, one must look at the payback from the government's perspective.
Where exactly does the government receive revenue from Chidliak?
They receive taxes directly off the profits from Chidliak. Direct from the ownership of the mine.
Where else do they receive revenue?
A lot of money would be spent over the life of the mine. The employees who work at the mine pay a nice steep personal income tax of between 25 to 40%. Employees who work at companies that supply equipment and services to the mine also pay personal income tax. Those suppliers and other companies also pay taxes on profits to the government as well.
There is an obvious calculation that can be done and with the PEA in hand, this is just a number crunching exercise. Previous to the PEA, there were too many unknowns.
Other benefits?
The road can be used by other entities besides the mine....and after the mine closes in 1 or 2 or 3 decades, the road can still be used for other things.
The equation of $1 spent by the government will generate $X in return is absolutely a reality here.
Risk? The project has to be shown to make a profit. If it is marginal and turns out to be failure, not only does the government not get payback..but they may end up with a bankrupt company to deal with. That is why robust studies do need to be done.
A bankable feasibility study is a study that is well detailed and refined and solid that a bank could step up and finance the entire project at a negotiated rate of x+prime %.
Government's do not need that level of detail and specifically if contribution to the road...kickstarts the project and makes the economics more lucarative, why not look at a government funding earlier as opposed to later.
There are also a lot of government jobs in Iqaluit and a road to Chidliak and a long mine operation would overall benefit Iqaluit (reduce costs for locals) and probably save money to the government from that perspective.
Yellowknife has enjoyed the last 2 decades by being a conduit to the Lac De Gras mines and all the benefits they create. Iqaluit would benefit tremendously just as Yellowknife has.
Obtaining funding for mine development and also get government infrastructure funding are probably not mutually exclusive. The government would want to see some firm financial commitment to the project. On the flip-side, it may be easier to get that firm financial commitment knowing that government funding was on its way.
The PEA, with its IRR and NPV clearly show that government funding is not needed to make this project very profitable...however showing economics and building an actual mine are two different things.
Tuesday, July 12, 2016
PEA conference call
The post PEA conference call is now complete.
Here is a link to the archived webcast -- Webcast replay
Here is a link to the presentation -- July 12 2016 presentation
There were a lot of details given that were based on the PEA press release that went out...but there were also some details and talk that went beyond the PEA press release. What were those details?
1 - They left a few million carats in the ground that were not included in the PEA. Why?
On slide 29 in the presentation, it references a pit angle of between 35 degrees and 48 degrees as an input parameter into the Pit shell creations. This is a portrayed as a conservative parameter and may be a symptom of a lack of geotech information in the country rock surrounding the kimberlite pipes.
The reality is that the CH-6 and CH-7 pipes are high value, but low foot print pipes. Pit wall angle subsequent strip ratio can have a material effect on the amount of waste needed to be removed.
Here is the blog post on strip ratio -- Strip Ratio - CH6 and CH7
The charts themselves go from between 45 degrees to 70 degrees of pit angle and it can be clearly seen when you head toward 45 degrees, that the strip ratio goes significantly higher...especially at 260 metres depth for CH-6.
Result - Geotechnical drilling should be able to move the pit slope angle higher, it is just a question of how much higher. This will have a material effect on the waste movement and strip ratio and the NPV as well. It also highlights that are you going even deeper, the strip ratio does get higher and higher. An underground mine design of the pipe(s) must be considered at some point as this strip ratio gets too high.
2 - All weather road was clearly detailed as to why it is the best option at Chidliak. What else was new on the call.
a - The Nunavut Land group already have a proposed (draft) transport corridor along this all weather road route. This was started in 2014 and was probably set up with intent that Chidliak will become a mine. What wasn't mentioned was that Nunavut also requested and now has an official diamond valuator of diamonds. This was done a few years ago as well.
b - 100% of the capital cost of this road is included in the capital cost for this PEA (~30% of total capital cost). There were options of synergies on the call that wasn't mentioned before. The first one potential access to federal infrastructure funding. The federal government may chip in some $$'s to help pay for the road. The second one is the sharing of the road by a potential Hydro Electric plant from the Energy corporation. There is a potential hydro site ~15 km's away from Chidliak and if that were to be developed...access to an all weather road would be used and the costs of developing that road could potentially be shared.
3 - Greenfield versus Brownfield -- Article on the difference
- Each kimberlite at Chidliak has been looked at as something that needs to pay back capital, pay for a mill, pay for infrastructure, etc. Now that they have a portion of CH-6 and CH-7 has having the ability to payback all these costs and generate a profit, all other kimberlites can be examined as an incremental resource. They need to be able to pay for themselves and generate a profit...they don't have to pay for a mill, they don't have to pay to build a road, etc. This was highlighted throughout the call. The upside is significant.
4 - Permitting - It was highlighted that permitting of the all weather road is a must to get started on as the other construction efforts will require that road to be built before proceeding. Not mentioned in the call, is that when the road gets built...it opens up significant savings to do some serious exploration around the site.
5 - Other material not in the PEA or potential upside of material.
A reference of the KIM-C material was highlighted in the PEA pit as being kimberlite material with diamonds in them...but not enough information to categorize it as a resource. This is about 250K tonnes that is treated as net cost to the project (waste material to be moved)...when in reality, it will be fed through the mill and TBD generate a certain amount of profit.
The effect of the LDD RC drilling and the associated breakage was highlighted on the CH-7 results. It was implied that value and volume (grade) will go up from here ("Quietly confident")
Two of the newer zones (R and S) out of CH-7 was also highlighted as being conservatively assigned to Domain 2 grades/values...when they might actually be more like one of the other higher grade, higher value domains within CH-7. More work is needed.
6 - No questions asked during the end of the call.
It appears there were questions that wanted to be asked...but for some reason, they didn't get through.
Anyone with questions should email Peregrine directly at info@pdiam.com and hopefully Peregrine will relay the questions and answers to the press.
Here is a link to the archived webcast -- Webcast replay
Here is a link to the presentation -- July 12 2016 presentation
There were a lot of details given that were based on the PEA press release that went out...but there were also some details and talk that went beyond the PEA press release. What were those details?
1 - They left a few million carats in the ground that were not included in the PEA. Why?
On slide 29 in the presentation, it references a pit angle of between 35 degrees and 48 degrees as an input parameter into the Pit shell creations. This is a portrayed as a conservative parameter and may be a symptom of a lack of geotech information in the country rock surrounding the kimberlite pipes.
The reality is that the CH-6 and CH-7 pipes are high value, but low foot print pipes. Pit wall angle subsequent strip ratio can have a material effect on the amount of waste needed to be removed.
Here is the blog post on strip ratio -- Strip Ratio - CH6 and CH7
The charts themselves go from between 45 degrees to 70 degrees of pit angle and it can be clearly seen when you head toward 45 degrees, that the strip ratio goes significantly higher...especially at 260 metres depth for CH-6.
Result - Geotechnical drilling should be able to move the pit slope angle higher, it is just a question of how much higher. This will have a material effect on the waste movement and strip ratio and the NPV as well. It also highlights that are you going even deeper, the strip ratio does get higher and higher. An underground mine design of the pipe(s) must be considered at some point as this strip ratio gets too high.
2 - All weather road was clearly detailed as to why it is the best option at Chidliak. What else was new on the call.
a - The Nunavut Land group already have a proposed (draft) transport corridor along this all weather road route. This was started in 2014 and was probably set up with intent that Chidliak will become a mine. What wasn't mentioned was that Nunavut also requested and now has an official diamond valuator of diamonds. This was done a few years ago as well.
b - 100% of the capital cost of this road is included in the capital cost for this PEA (~30% of total capital cost). There were options of synergies on the call that wasn't mentioned before. The first one potential access to federal infrastructure funding. The federal government may chip in some $$'s to help pay for the road. The second one is the sharing of the road by a potential Hydro Electric plant from the Energy corporation. There is a potential hydro site ~15 km's away from Chidliak and if that were to be developed...access to an all weather road would be used and the costs of developing that road could potentially be shared.
3 - Greenfield versus Brownfield -- Article on the difference
- Each kimberlite at Chidliak has been looked at as something that needs to pay back capital, pay for a mill, pay for infrastructure, etc. Now that they have a portion of CH-6 and CH-7 has having the ability to payback all these costs and generate a profit, all other kimberlites can be examined as an incremental resource. They need to be able to pay for themselves and generate a profit...they don't have to pay for a mill, they don't have to pay to build a road, etc. This was highlighted throughout the call. The upside is significant.
4 - Permitting - It was highlighted that permitting of the all weather road is a must to get started on as the other construction efforts will require that road to be built before proceeding. Not mentioned in the call, is that when the road gets built...it opens up significant savings to do some serious exploration around the site.
5 - Other material not in the PEA or potential upside of material.
A reference of the KIM-C material was highlighted in the PEA pit as being kimberlite material with diamonds in them...but not enough information to categorize it as a resource. This is about 250K tonnes that is treated as net cost to the project (waste material to be moved)...when in reality, it will be fed through the mill and TBD generate a certain amount of profit.
The effect of the LDD RC drilling and the associated breakage was highlighted on the CH-7 results. It was implied that value and volume (grade) will go up from here ("Quietly confident")
Two of the newer zones (R and S) out of CH-7 was also highlighted as being conservatively assigned to Domain 2 grades/values...when they might actually be more like one of the other higher grade, higher value domains within CH-7. More work is needed.
6 - No questions asked during the end of the call.
It appears there were questions that wanted to be asked...but for some reason, they didn't get through.
Anyone with questions should email Peregrine directly at info@pdiam.com and hopefully Peregrine will relay the questions and answers to the press.
Monday, July 11, 2016
Risk Reward V
Risk Reward Part V
There have been several milestones met along the way to the development of the first mine at Chidliak and each one of these milestones de-risks the project that much more.
The latest milestone being the first ever PEA (Preliminary Economic Assessment) that came out last week.
It shows an NPV after tax at a discount rate of 7.5% of nearly CAD Half billion and a significant IRR of 30%.
How does this de-risk the project?
1 - It clearly shows a Phase 1 development of a mine can occur with significant profitability.
2 - Conservative assumptions were used to come up with the NPV. This involves many facets of the project...not just one assumption. Going from conservative to more realistic values, as more information is obtained, could add significant NPV value to the project.
3 - The project clearly shows significant upside beyond the PEA inputs.
What is a project worth an NPV (after tax @ 7.5% discount) of CAD$471.2 million with significant upside actually worth in the market today?
The current price of Peregrine Diamond's shares sit at 27 cents. With 340 million shares outstanding, that equates to a value of CAD$91.8 million.
Let's look at a plausible scenario for a 50% partner with deep pockets.
In exchange for 50% of Chidliak, what would Peregrine want?
1 - The new partner to fund the project up to pre-construction phase at cost to the new partner.
2 - The new partner to fund all capital requirements and Peregrine to repay the capital out of future cash flow for its 50% share.
In the past, previous option deals have been similar to these requirements. Commit to spend $50+ million on the project plus pay for the capital for the construction of the mine.
At this point in the project, $50 million may not even be needed to get to construction of the project.
With the PEA, Peregrine might even demand more.
So, a deal might look something like this:
1 - Peregrine gets a commitment of $60 million from the new partner to spend on tasks required up to the point of construction for a mine.
2 - Any left over amount of the $60 million not spent yet, will go towards Peregrine's 50% share of the capital cost.
3 - The new partner will fund the remaining portion of Peregrine's capital requirement and Peregrine will pay this back with it's share of cashflow.
Is this plausible? Based on previous structured option deals, this is completely plausible.
One of the recent take-outs in the industry (not diamonds) was that of Kaminak's Coffee project.
They did a PEA, then proceeded to a FS and then were taken out (100%) by Goldcorp for roughly half billion $$'s. Chidliak's PEA compares more positively than Coffee's PEA and some might say that Chidliak has a lot more upside.
So, with a partner deal as above...one could actually use the 5% discount rate NPV and divide that by 2.
The after tax NPV at 5% equates to CAD$584 million.
That equates to CAD$292 million.
If the partner fast tracks the project, then a discount to present isn't as applicable, but one should still discount by a couple of years to present.
Estimate that at CAD$260 million.
The current market cap is about CAD $90 million and an estimated value using this scenario is CAD$260 million...and this is based on very conservative assumptions and with plenty of upside at Chidliak. That is clearly a 3x upside with some potential growth on top of that.
The risk is getting lower and the reward is still very high.
There have been several milestones met along the way to the development of the first mine at Chidliak and each one of these milestones de-risks the project that much more.
The latest milestone being the first ever PEA (Preliminary Economic Assessment) that came out last week.
It shows an NPV after tax at a discount rate of 7.5% of nearly CAD Half billion and a significant IRR of 30%.
How does this de-risk the project?
1 - It clearly shows a Phase 1 development of a mine can occur with significant profitability.
2 - Conservative assumptions were used to come up with the NPV. This involves many facets of the project...not just one assumption. Going from conservative to more realistic values, as more information is obtained, could add significant NPV value to the project.
3 - The project clearly shows significant upside beyond the PEA inputs.
What is a project worth an NPV (after tax @ 7.5% discount) of CAD$471.2 million with significant upside actually worth in the market today?
The current price of Peregrine Diamond's shares sit at 27 cents. With 340 million shares outstanding, that equates to a value of CAD$91.8 million.
Let's look at a plausible scenario for a 50% partner with deep pockets.
In exchange for 50% of Chidliak, what would Peregrine want?
1 - The new partner to fund the project up to pre-construction phase at cost to the new partner.
2 - The new partner to fund all capital requirements and Peregrine to repay the capital out of future cash flow for its 50% share.
In the past, previous option deals have been similar to these requirements. Commit to spend $50+ million on the project plus pay for the capital for the construction of the mine.
At this point in the project, $50 million may not even be needed to get to construction of the project.
With the PEA, Peregrine might even demand more.
So, a deal might look something like this:
1 - Peregrine gets a commitment of $60 million from the new partner to spend on tasks required up to the point of construction for a mine.
2 - Any left over amount of the $60 million not spent yet, will go towards Peregrine's 50% share of the capital cost.
3 - The new partner will fund the remaining portion of Peregrine's capital requirement and Peregrine will pay this back with it's share of cashflow.
Is this plausible? Based on previous structured option deals, this is completely plausible.
One of the recent take-outs in the industry (not diamonds) was that of Kaminak's Coffee project.
They did a PEA, then proceeded to a FS and then were taken out (100%) by Goldcorp for roughly half billion $$'s. Chidliak's PEA compares more positively than Coffee's PEA and some might say that Chidliak has a lot more upside.
So, with a partner deal as above...one could actually use the 5% discount rate NPV and divide that by 2.
The after tax NPV at 5% equates to CAD$584 million.
That equates to CAD$292 million.
If the partner fast tracks the project, then a discount to present isn't as applicable, but one should still discount by a couple of years to present.
Estimate that at CAD$260 million.
The current market cap is about CAD $90 million and an estimated value using this scenario is CAD$260 million...and this is based on very conservative assumptions and with plenty of upside at Chidliak. That is clearly a 3x upside with some potential growth on top of that.
The risk is getting lower and the reward is still very high.
Sunday, July 10, 2016
Dominion Diamonds
Could Dominion Diamonds be interested in Chidliak?
A recent interview to the CEO of Dominion Diamonds (DDC) had some very telling information on merger and acquisition in the industry.
Here is the full link of the article -- Interview Dominion Diamonds
Ignoring the fact that Dominion diamonds indicated in the interview that they would be logical acquirer, there has been a steady sequence of events to get to the point where they are making this said statement.
History:
Aber Resources was one of the original explorers/developers in the 1990's diamond rush in Lac De Gras.
This company became a major partner in Ekati and Diavik and later this entity (Aber) became Harry Winston Diamonds and it included a big retail arm in the jewellery industry. This arrangement lasted for several years (spanning a couple of decades).
Fast forward to the 2010's and the diamond producer and jewellery company decides it was going to become a pure player in the mining industry.
So, they sold off the Harry Winston jewellery of the business including the name "Harry Winston" to the Swatch group and became a pure player miner named Dominion Diamonds with a wall of cash that came in from the sale of the jewellery group.
They then approached all the various partners and looked at consolidating the industry. They managed to buy out BHP's share of Ekati and one of the minor partners.
This was a couple of years back.
Fast forward to late 2015 and you have some very activist shareholders who want changes to be done and changes were done. This created a shift in the Board and a detailed strategic review of the business.
Fast forward to the conference call last week by DDC and the official acknowledgement of the end of the strategic review.
What became of that review? Some key actions:
1 - Jay pipe is a go, but the starting year and first years of production have been significantly tweaked. Also look for other potential projects within the current foray of Dominion Diamond's lands.
2 - Buy back up to 7.2% of all Dominion Diamond shares. (This was probably a direct impact of those activist shareholders)
3 - Sell a fixed asset - Building property in the Toronto area for 10's of million's of dollars.
4 - Replace CFO with a strategic M&A skilled specialist. New CFO tbd.
5 - Room on the current Board to place strategic board members.
6 - Increase dividends from the 40 cent annual dividend plan at some point in the future.
What is known?
7.2% of current shares for buy back.
85 million shares outstanding.
6.1 million shares possibly available to buy back and cancel.
If that was available at current stock price ($11.70) that could equate to $72 million.
The company itself is worth about CAD$1 billion.
The main goals?
Fund internal capital projects with cash flow.
Fund dividends with cash flow.
Fund buy back of shares with current cash flow.
Buy other projects with ??
Doesn't sound like the company would want to spend actual cash on an acquisition as cash flow is earmarked for several tasks.
That leaves a paper share transaction. X # of DDC shares for X # of company/project.
A lot of times when an all paper share transaction happens, there is a premium on the company been acquired and sometimes there is pressure on the stock of the acquirer (DDC) and the share price can drop.
But, of possible significance, if there is a buy back program to support the share price, this could set up an opportune moment to try to buy some shares on the market as well.
Kind of a mixed bag here, you can issue new issues, at the same time buying and cancelling shares.
You might end up with more shares in the end, but you do end up with a new project to develop.
They also have stated the availability to join the board of directors. There is a chance that any of the projects/companies being acquired could be offered 1 or 2 seats on the board as a selling point.
Assuming Dominion Diamonds does want to acquire a new project, what does the new project have to be able to do?
1 - It needs to be able to raise its own bank financing at reasonable rates. This is significantly helped with DDC backing any loans from the bank.
2 - It needs to generate a significant payback to DDC to, not only generate some nice dividend cash flow for DDC shareholders, but to also make up for the small amount of dilution that occurred from the transaction.
Does a project like Chidliak make this criteria?
With the current PEA, it clearly demonstrates a good return on investment (~30% IRR) and with the right loan backing and the smaller capital $$'s required, a bank loan is a very plausible outcome. There probably needs some extra $$'s spent on the project ($15 to $25 million) upgrade the project detail to bankable financing level, but the project also comes with significant upside that experts at DDC should clearly see and actually be able to try and define what it would mean for them.
Quotes in the interview(s)??
From DDC's CEO:
""We think there are some very encouraging prospects on the horizon potentially," Bell said in an interview."
Speculation --> They are not thinking of internal prospects here...Chidliak could easily be a 'read between the lines' answer to what he is talking about. Other projects could be of interest too.
""We think Dominion Diamonds, the largest publicly traded Canadian diamond player, is the logical acquirer," he said."
Speculation --> This isn't a passive statement...they will be aggressively pursuing this and is a continuation of what they started a few years back with the focus on a pure player. Quite different then what another diamond company said recently when they acknowledged possible M&A opportunities and not necessarily with the diamond industry. DDC is focused on Diamonds.
"Dominion's main focus remains on developing its core internal diamond projects in Canada's Northwest Territories and it was "not desperate to rush in and overpay", Bell said. "
Speculation --> They don't have to acquire any other project as they have a few on the internal pipeline...but they might just be drooling over what they see ("encouraging prospects").
"Dominion was open to purchasing either a project that it would develop into a mine, or a producing mine, he said."
Speculation --> Again, confirming the seriousness of what they want to do. Giving any project in Canada with a phone, to call up Mr. Bell.
""Asked if Dominion would be interested in De Beers' Snap Lake mine, also located in the Northwest Territories, Bell said he was not aware that it was for sale"
Speculation --> Why ask just about Snap Lake? Mr. Bell obviously had an answer with that. One wonders if others were asked and the response was a 'no comment at this time'.
From Peregrine's CEO (a recent interview):
"Mr. Peregoodoff also did nothing to dispel the notion of a possible takeover by, or a joint venture with, a diamond major."
"He says that in mining, every asset is potentially for sale if the price is right, although he hastily adds that, since Mr. Friedland and his older brother, Robert Friedland, own nearly half the company, the "price would have to be right.""
Speculation --> Peregrine is looking at all options to progress the Childiak project as quickly, efficiently and profitably as possible (this is not new). If this includes a possible deal with DDC, now that DDC has officially announced to their shareholders and the public that they are in the mood for an acquisition, then that is a new scenario that may eventually develop some legs. For now, the market can move from speculation to speculation and the speculation of the day/week is that DDC might be seriously looking into Chidliak. It may just be a question how to get in and at what cost....or it may just be some conversations in a back room somewhere that nobody ever hears about and no one is the wiser.
A recent interview to the CEO of Dominion Diamonds (DDC) had some very telling information on merger and acquisition in the industry.
Here is the full link of the article -- Interview Dominion Diamonds
Ignoring the fact that Dominion diamonds indicated in the interview that they would be logical acquirer, there has been a steady sequence of events to get to the point where they are making this said statement.
History:
Aber Resources was one of the original explorers/developers in the 1990's diamond rush in Lac De Gras.
This company became a major partner in Ekati and Diavik and later this entity (Aber) became Harry Winston Diamonds and it included a big retail arm in the jewellery industry. This arrangement lasted for several years (spanning a couple of decades).
Fast forward to the 2010's and the diamond producer and jewellery company decides it was going to become a pure player in the mining industry.
So, they sold off the Harry Winston jewellery of the business including the name "Harry Winston" to the Swatch group and became a pure player miner named Dominion Diamonds with a wall of cash that came in from the sale of the jewellery group.
They then approached all the various partners and looked at consolidating the industry. They managed to buy out BHP's share of Ekati and one of the minor partners.
This was a couple of years back.
Fast forward to late 2015 and you have some very activist shareholders who want changes to be done and changes were done. This created a shift in the Board and a detailed strategic review of the business.
Fast forward to the conference call last week by DDC and the official acknowledgement of the end of the strategic review.
What became of that review? Some key actions:
1 - Jay pipe is a go, but the starting year and first years of production have been significantly tweaked. Also look for other potential projects within the current foray of Dominion Diamond's lands.
2 - Buy back up to 7.2% of all Dominion Diamond shares. (This was probably a direct impact of those activist shareholders)
3 - Sell a fixed asset - Building property in the Toronto area for 10's of million's of dollars.
4 - Replace CFO with a strategic M&A skilled specialist. New CFO tbd.
5 - Room on the current Board to place strategic board members.
6 - Increase dividends from the 40 cent annual dividend plan at some point in the future.
What is known?
7.2% of current shares for buy back.
85 million shares outstanding.
6.1 million shares possibly available to buy back and cancel.
If that was available at current stock price ($11.70) that could equate to $72 million.
The company itself is worth about CAD$1 billion.
The main goals?
Fund internal capital projects with cash flow.
Fund dividends with cash flow.
Fund buy back of shares with current cash flow.
Buy other projects with ??
Doesn't sound like the company would want to spend actual cash on an acquisition as cash flow is earmarked for several tasks.
That leaves a paper share transaction. X # of DDC shares for X # of company/project.
A lot of times when an all paper share transaction happens, there is a premium on the company been acquired and sometimes there is pressure on the stock of the acquirer (DDC) and the share price can drop.
But, of possible significance, if there is a buy back program to support the share price, this could set up an opportune moment to try to buy some shares on the market as well.
Kind of a mixed bag here, you can issue new issues, at the same time buying and cancelling shares.
You might end up with more shares in the end, but you do end up with a new project to develop.
They also have stated the availability to join the board of directors. There is a chance that any of the projects/companies being acquired could be offered 1 or 2 seats on the board as a selling point.
Assuming Dominion Diamonds does want to acquire a new project, what does the new project have to be able to do?
1 - It needs to be able to raise its own bank financing at reasonable rates. This is significantly helped with DDC backing any loans from the bank.
2 - It needs to generate a significant payback to DDC to, not only generate some nice dividend cash flow for DDC shareholders, but to also make up for the small amount of dilution that occurred from the transaction.
Does a project like Chidliak make this criteria?
With the current PEA, it clearly demonstrates a good return on investment (~30% IRR) and with the right loan backing and the smaller capital $$'s required, a bank loan is a very plausible outcome. There probably needs some extra $$'s spent on the project ($15 to $25 million) upgrade the project detail to bankable financing level, but the project also comes with significant upside that experts at DDC should clearly see and actually be able to try and define what it would mean for them.
Quotes in the interview(s)??
From DDC's CEO:
""We think there are some very encouraging prospects on the horizon potentially," Bell said in an interview."
Speculation --> They are not thinking of internal prospects here...Chidliak could easily be a 'read between the lines' answer to what he is talking about. Other projects could be of interest too.
""We think Dominion Diamonds, the largest publicly traded Canadian diamond player, is the logical acquirer," he said."
Speculation --> This isn't a passive statement...they will be aggressively pursuing this and is a continuation of what they started a few years back with the focus on a pure player. Quite different then what another diamond company said recently when they acknowledged possible M&A opportunities and not necessarily with the diamond industry. DDC is focused on Diamonds.
"Dominion's main focus remains on developing its core internal diamond projects in Canada's Northwest Territories and it was "not desperate to rush in and overpay", Bell said. "
Speculation --> They don't have to acquire any other project as they have a few on the internal pipeline...but they might just be drooling over what they see ("encouraging prospects").
"Dominion was open to purchasing either a project that it would develop into a mine, or a producing mine, he said."
Speculation --> Again, confirming the seriousness of what they want to do. Giving any project in Canada with a phone, to call up Mr. Bell.
""Asked if Dominion would be interested in De Beers' Snap Lake mine, also located in the Northwest Territories, Bell said he was not aware that it was for sale"
Speculation --> Why ask just about Snap Lake? Mr. Bell obviously had an answer with that. One wonders if others were asked and the response was a 'no comment at this time'.
From Peregrine's CEO (a recent interview):
"Mr. Peregoodoff also did nothing to dispel the notion of a possible takeover by, or a joint venture with, a diamond major."
"He says that in mining, every asset is potentially for sale if the price is right, although he hastily adds that, since Mr. Friedland and his older brother, Robert Friedland, own nearly half the company, the "price would have to be right.""
Speculation --> Peregrine is looking at all options to progress the Childiak project as quickly, efficiently and profitably as possible (this is not new). If this includes a possible deal with DDC, now that DDC has officially announced to their shareholders and the public that they are in the mood for an acquisition, then that is a new scenario that may eventually develop some legs. For now, the market can move from speculation to speculation and the speculation of the day/week is that DDC might be seriously looking into Chidliak. It may just be a question how to get in and at what cost....or it may just be some conversations in a back room somewhere that nobody ever hears about and no one is the wiser.
Thursday, July 7, 2016
PEA Results out
PEA (preliminary economic assessment) results are just out.
Shows a a very healthy Half billion Canadian after tax NPV at a conservative discount rate of 7.5%.
Here is a link to the news -- PEA results
This is a base case and there is significant upside to be had as the resource is developed.
For now, this confirms the capital of the project can be paid and a healthy return can be generated.
This is great news for Chidliak and will help shape its next steps.
Here are some key highlights from the PEA and a quick interpretation.
Key Excerpts:
1 - "Chidliak Phase One Diamond Development (“CP1D”)"
Meaning --> By defining a phase one, implies the significant potential of a phase two that is not reflected in this PEA.
2 - "The Company also owns all of the diamond marketing and sales rights and there are no non-government royalties or other encumbrances on diamond production."
Meaning --> Every bit of Chidliak and all its diamonds is solely and fully owned by Peregrine Diamonds.
3 - "...producing initially from an open pit at the CH-6 kimberlite pipe with production from an open pit at the CH-7 kimberlite pipe to follow."
Meaning --> CH-6 has the biggest bang for the buck at this time and should be depleted first for highest NPV and highest IRR
4 - "Pre-production capital includes the construction of a 160 kilometre, all-weather road to connect to Iqaluit, the capital of Nunavut. "
Meaning --> An all-weather road justified at this phase 1 level is going to look all the better in future studies. It will be a fixed capital cost and won't go up in cost as more resources are added to the mine plan. Significant infrastructure for future phases.
5 - "As we develop Chidliak further, we expect to identify further upside to the economics of the project through optimization studies of the Phase One mine, including the expansion of the CH-6 resource to depth and through the development of a potential, Phase Two resource expansion from the numerous other kimberlites on the property of which six currently show economic potential.”
Meaning - The margin at CH-6 is so great that deepening the resource will have instant benefit to the NPV of the next study. Six other kimberlites can be looked at seriously now that the initial mill is paid for and the all weather road is paid for by the resources in this maiden PEA.
6 - "Diamond prices for both CH-6 and CH-7 used in the study were based on March, 2016 pricing received from WWW International Diamond Consultants"
Meaning - stamps a time frame on the valuation. Since March, 2016, the price book should be up 2 to 4% higher. This gain is not reflected in this PEA.
7 - "Peregrine’s eligible Canadian Exploration Expense and Canadian Development Expense tax pools were utilized in the post-tax calculations. "
Meaning - Peregrine has significant exploration expenses to date. (over $100 million). This creates a bit of a tax vacation for the first part of the mine plan. The effect between IRR pre-tax and post-tax is probably less than other projects that do not have these same pools.
8 - "Sensitivity Analysis - 3 tables -- Diamond price escalation, US$/C$ exchange rate, Discount Rate"
Meaning - Peregrine wants to give the reader the most tools they have to interpret the results as they see fit. This makes it easier to compare to other PEA's when those PEA's might be at different currency rates or different discount rates...the reader can look up the line item and compare it as direct as possible.
9 - "Mr. Peregoodoff added: “We were intentionally very careful in our selection of base case input parameters. The positive base case economics are based on conservative, industry standard assumptions for all key inputs. We wanted to account for all reasonable, potential and future outcomes."
Meaning - This emphasizes the conservative nature of a PEA where as a PEA is supposed to try and be very optimistic, Peregrine chose to demonstrate to the public that even with conservative parameters, the result is extremely robust. This study also doesn't include some other conservative values, for example, the grade of CH-7 does not include the known missing volume of carats that were created by significant breakage during LDD RC drilling. There has been no adjustment factor as peregrine has no ability to pinpoint that adjustment factor.
10 - "As part of the PEA, JDS completed a rigorous cost-benefit and risk analysis of constructing an all-weather road (AWR) to connect the Chidliak Project to Iqaluit on a year-round basis, compared to using an enhanced-winter road (EWR), which would generally be open for approximately six weeks during late winter. "
Meaning - An all-weather road makes logistics so much easier. The stakeholders involved would really, really want the all-weather road to be put in for logistics and technical reasons. Now the PEA has confirmed there is no economic benefit to going with a winter road. This is why they needed do a rigorous analysis at this point as they really, really wanted to go with the all weather road from the get go.
11 - "The Chidliak 2016 PEA recommends that the Chidliak Project be advanced to a pre-feasibility study level in order to increase confidence in the estimates."
Meaning - the next work on the site needs to focus on converting inferred resource to indicated resource. Based on the planned work programme, the focus will be on converting and deepening the CH-6 resource. The PFS may only include CH-6 material in the next iteration, but an expanded PEA can be completed in parallel at the same time to educate the reader on what the difference is when including the CH-7 inferred resource.
12 - "Peregrine to host conference call for investors and analysts on July 12, 2016 to discuss details of the PEA"
Meaning - Peregrine will be hosting a conference call for investors and analysts. The latter is important as currently zero analysts officially follow Peregrine Diamonds and therefore there are zero buy ratings and zero price targets out in the market place. The retail investor is basically on their own at this point...but that might change after this PEA and after the conference call.
Shows a a very healthy Half billion Canadian after tax NPV at a conservative discount rate of 7.5%.
Here is a link to the news -- PEA results
This is a base case and there is significant upside to be had as the resource is developed.
For now, this confirms the capital of the project can be paid and a healthy return can be generated.
This is great news for Chidliak and will help shape its next steps.
Here are some key highlights from the PEA and a quick interpretation.
Key Excerpts:
1 - "Chidliak Phase One Diamond Development (“CP1D”)"
Meaning --> By defining a phase one, implies the significant potential of a phase two that is not reflected in this PEA.
2 - "The Company also owns all of the diamond marketing and sales rights and there are no non-government royalties or other encumbrances on diamond production."
Meaning --> Every bit of Chidliak and all its diamonds is solely and fully owned by Peregrine Diamonds.
3 - "...producing initially from an open pit at the CH-6 kimberlite pipe with production from an open pit at the CH-7 kimberlite pipe to follow."
Meaning --> CH-6 has the biggest bang for the buck at this time and should be depleted first for highest NPV and highest IRR
4 - "Pre-production capital includes the construction of a 160 kilometre, all-weather road to connect to Iqaluit, the capital of Nunavut. "
Meaning --> An all-weather road justified at this phase 1 level is going to look all the better in future studies. It will be a fixed capital cost and won't go up in cost as more resources are added to the mine plan. Significant infrastructure for future phases.
5 - "As we develop Chidliak further, we expect to identify further upside to the economics of the project through optimization studies of the Phase One mine, including the expansion of the CH-6 resource to depth and through the development of a potential, Phase Two resource expansion from the numerous other kimberlites on the property of which six currently show economic potential.”
Meaning - The margin at CH-6 is so great that deepening the resource will have instant benefit to the NPV of the next study. Six other kimberlites can be looked at seriously now that the initial mill is paid for and the all weather road is paid for by the resources in this maiden PEA.
6 - "Diamond prices for both CH-6 and CH-7 used in the study were based on March, 2016 pricing received from WWW International Diamond Consultants"
Meaning - stamps a time frame on the valuation. Since March, 2016, the price book should be up 2 to 4% higher. This gain is not reflected in this PEA.
7 - "Peregrine’s eligible Canadian Exploration Expense and Canadian Development Expense tax pools were utilized in the post-tax calculations. "
Meaning - Peregrine has significant exploration expenses to date. (over $100 million). This creates a bit of a tax vacation for the first part of the mine plan. The effect between IRR pre-tax and post-tax is probably less than other projects that do not have these same pools.
8 - "Sensitivity Analysis - 3 tables -- Diamond price escalation, US$/C$ exchange rate, Discount Rate"
Meaning - Peregrine wants to give the reader the most tools they have to interpret the results as they see fit. This makes it easier to compare to other PEA's when those PEA's might be at different currency rates or different discount rates...the reader can look up the line item and compare it as direct as possible.
9 - "Mr. Peregoodoff added: “We were intentionally very careful in our selection of base case input parameters. The positive base case economics are based on conservative, industry standard assumptions for all key inputs. We wanted to account for all reasonable, potential and future outcomes."
Meaning - This emphasizes the conservative nature of a PEA where as a PEA is supposed to try and be very optimistic, Peregrine chose to demonstrate to the public that even with conservative parameters, the result is extremely robust. This study also doesn't include some other conservative values, for example, the grade of CH-7 does not include the known missing volume of carats that were created by significant breakage during LDD RC drilling. There has been no adjustment factor as peregrine has no ability to pinpoint that adjustment factor.
10 - "As part of the PEA, JDS completed a rigorous cost-benefit and risk analysis of constructing an all-weather road (AWR) to connect the Chidliak Project to Iqaluit on a year-round basis, compared to using an enhanced-winter road (EWR), which would generally be open for approximately six weeks during late winter. "
Meaning - An all-weather road makes logistics so much easier. The stakeholders involved would really, really want the all-weather road to be put in for logistics and technical reasons. Now the PEA has confirmed there is no economic benefit to going with a winter road. This is why they needed do a rigorous analysis at this point as they really, really wanted to go with the all weather road from the get go.
11 - "The Chidliak 2016 PEA recommends that the Chidliak Project be advanced to a pre-feasibility study level in order to increase confidence in the estimates."
Meaning - the next work on the site needs to focus on converting inferred resource to indicated resource. Based on the planned work programme, the focus will be on converting and deepening the CH-6 resource. The PFS may only include CH-6 material in the next iteration, but an expanded PEA can be completed in parallel at the same time to educate the reader on what the difference is when including the CH-7 inferred resource.
12 - "Peregrine to host conference call for investors and analysts on July 12, 2016 to discuss details of the PEA"
Meaning - Peregrine will be hosting a conference call for investors and analysts. The latter is important as currently zero analysts officially follow Peregrine Diamonds and therefore there are zero buy ratings and zero price targets out in the market place. The retail investor is basically on their own at this point...but that might change after this PEA and after the conference call.
Tuesday, July 5, 2016
Winter 2017 work plan
In the recent technical report there is a section (page 7) on what the proposed next steps should be for the project to advance it even further.
It comes with a steep price tag of CAD$15 million, but also with ambitious goals.
The program is designed by Peregrine's mgmt team, but reviewed by the 3rd party technical expert confirming that it is basically a good idea.
Stated goal -- Advance CH-6 resource to an indicated category and to improve confidence levels for the CH-7 resource.
The detailed budget is broken up into two categories. One is specific to core drilling and the other is specific to the bulk sample program.
Timeline - The execution of this program is aligned with a winter 2017 core drilling. This terminology sometimes is interpreted incorrectly, but basically means Jan/Feb/March/April of the first part of 2017. There is some preliminary work that is usually done in December before that (Dec. 2016).
Permits - All the various tasks in the program have been done in one way or the other in previous programs, so the work should be covered under existing permits or any new permits should be exempt from any further processing and approved.
Details:
Bulk sampling activity
Large Diameter RC Drilling - 2 x 22" holes @ 260 metres depth through KIM-L of CH-6.
--> This will collect about 125 tonnes per hole x 2 = 250 tonnes of CH-6 kimberlite
Bulk sample by Trench - at surface trenching of about 400 tonnes of wKim-L from CH-6
DMS Processing of about 650 tonnes of material.
Resulting parcel --> 650 tonnes x 2.5 cpt --> 1625 carats
Previous parcel --> 1124 carats.
Total parcel for valuation and modelling --> ~ 2750 carats
Core drilling activity
Task #1 -- Pierce point and geotechnical drilling at CH-6 (1,500m HQ)
Interpretation - 4 drillholes from North, South, East, West side of kimberlite body that is drilled through the country rock at a steep angle to the depth of the kimberlite. ~375m per hole. Current TFFE goes down to a depth of 380 metres below surface. These geotechnical holes will help determine the steepest pit wall angle that is tolerable (within a factor of safety) and will have a direct impact on strip ratio. They will be targeted to the deep part of the TFFE (300 to 380 metres) to try and establish some kimberlite pipe boundaries at depth. This will help determine tonnage/volume at depth. A small amount of kimberlite intersection material can be used for caustic testing.
Task #2 - Drill holes for CH-6 caustic samples -- 1,200m HQ.
Interpretation - Deep drilling. Either 3 holes x 400 metres deep or 4 holes x 300 metres deep. May also help with further constraining the irregular high grade cylindrical zone within CH-6. Deep drilling is a relative term as Renard pipe in Quebec goes down to about 1 km down. With the success of this program, further deep drilling beyond 400 metres might be considered if the walls continue to dip steeply at depth.
Task #3 - Pierce point and geotechnical drilling at CH-7 (1,200m HQ)
Intepretation - Similar to above, 4 drillholes done at each side of the ore body at ~300 metres per hole. Similar goal.
Task #4 - Drillholes for CH-7 caustic samples -- 1,000m HQ
Interpretation -- Similar to above. 3 or 4 holes at depth at 250 metres to 330 metres in length.
End goal interpretation:
For CH-6, collecting enough stones to have a reasonable valuation model that can extend into a maiden indicated resource. With the deep drilling, new (high margin) resource, can be obtained and possibly directly put into the indicated resource and skipping the inferred resource altogether as the valuation exercise can apply to the whole pipe. This indicated resource can then be used in a PFS (pre-feasibility study) or an FS (feasibility study) and the resource can be turned into a reserve. Once a PFS and reserve is corrected, further work can start to be capitalized from an accounting point of view.
For CH-7, the goal is to deepen the existing inferred resource a bit more and also constrain the strip ratio to being a bit more aggressive on the pit wall stope angle based on new geotechnical information and hence, more economic. More resource would be added to the inferred category and future work would need more parcel collection done. This parcel collection is not in the scope of this program budget as it stands.
Further studies:
With the indicated resource CH-6, that can be put into a PFS, but without CH-7 as a PFS cannot use an inferred resource.
With the indicated resource at CH-6 and the inferred update at CH-7, a new PEA (preliminary economic study) could be completed.
Technically both studies above could be completed and issued to the public. This was not the case a few years ago, but NI-43-101 made an amendment to allow multiple studies as long as their is a significant difference between the two studies.
The delta deepening of CH-6 in this process could still be worth more (NPV) than the CH-7 open pit because the margin on CH-6 is extremely high.
Real end result???
The deepening of CH-6 could add 3 million tonnes to the resource. @ 2.5 cpt @ US$200 per carat.
That is clearly in the CAD$2 billion in-situ value. That is spending $1 to add $130+ in value.
It comes with a steep price tag of CAD$15 million, but also with ambitious goals.
The program is designed by Peregrine's mgmt team, but reviewed by the 3rd party technical expert confirming that it is basically a good idea.
Stated goal -- Advance CH-6 resource to an indicated category and to improve confidence levels for the CH-7 resource.
The detailed budget is broken up into two categories. One is specific to core drilling and the other is specific to the bulk sample program.
Timeline - The execution of this program is aligned with a winter 2017 core drilling. This terminology sometimes is interpreted incorrectly, but basically means Jan/Feb/March/April of the first part of 2017. There is some preliminary work that is usually done in December before that (Dec. 2016).
Permits - All the various tasks in the program have been done in one way or the other in previous programs, so the work should be covered under existing permits or any new permits should be exempt from any further processing and approved.
Details:
Bulk sampling activity
Large Diameter RC Drilling - 2 x 22" holes @ 260 metres depth through KIM-L of CH-6.
--> This will collect about 125 tonnes per hole x 2 = 250 tonnes of CH-6 kimberlite
Bulk sample by Trench - at surface trenching of about 400 tonnes of wKim-L from CH-6
DMS Processing of about 650 tonnes of material.
Resulting parcel --> 650 tonnes x 2.5 cpt --> 1625 carats
Previous parcel --> 1124 carats.
Total parcel for valuation and modelling --> ~ 2750 carats
Core drilling activity
Task #1 -- Pierce point and geotechnical drilling at CH-6 (1,500m HQ)
Interpretation - 4 drillholes from North, South, East, West side of kimberlite body that is drilled through the country rock at a steep angle to the depth of the kimberlite. ~375m per hole. Current TFFE goes down to a depth of 380 metres below surface. These geotechnical holes will help determine the steepest pit wall angle that is tolerable (within a factor of safety) and will have a direct impact on strip ratio. They will be targeted to the deep part of the TFFE (300 to 380 metres) to try and establish some kimberlite pipe boundaries at depth. This will help determine tonnage/volume at depth. A small amount of kimberlite intersection material can be used for caustic testing.
Task #2 - Drill holes for CH-6 caustic samples -- 1,200m HQ.
Interpretation - Deep drilling. Either 3 holes x 400 metres deep or 4 holes x 300 metres deep. May also help with further constraining the irregular high grade cylindrical zone within CH-6. Deep drilling is a relative term as Renard pipe in Quebec goes down to about 1 km down. With the success of this program, further deep drilling beyond 400 metres might be considered if the walls continue to dip steeply at depth.
Task #3 - Pierce point and geotechnical drilling at CH-7 (1,200m HQ)
Intepretation - Similar to above, 4 drillholes done at each side of the ore body at ~300 metres per hole. Similar goal.
Task #4 - Drillholes for CH-7 caustic samples -- 1,000m HQ
Interpretation -- Similar to above. 3 or 4 holes at depth at 250 metres to 330 metres in length.
End goal interpretation:
For CH-6, collecting enough stones to have a reasonable valuation model that can extend into a maiden indicated resource. With the deep drilling, new (high margin) resource, can be obtained and possibly directly put into the indicated resource and skipping the inferred resource altogether as the valuation exercise can apply to the whole pipe. This indicated resource can then be used in a PFS (pre-feasibility study) or an FS (feasibility study) and the resource can be turned into a reserve. Once a PFS and reserve is corrected, further work can start to be capitalized from an accounting point of view.
For CH-7, the goal is to deepen the existing inferred resource a bit more and also constrain the strip ratio to being a bit more aggressive on the pit wall stope angle based on new geotechnical information and hence, more economic. More resource would be added to the inferred category and future work would need more parcel collection done. This parcel collection is not in the scope of this program budget as it stands.
Further studies:
With the indicated resource CH-6, that can be put into a PFS, but without CH-7 as a PFS cannot use an inferred resource.
With the indicated resource at CH-6 and the inferred update at CH-7, a new PEA (preliminary economic study) could be completed.
Technically both studies above could be completed and issued to the public. This was not the case a few years ago, but NI-43-101 made an amendment to allow multiple studies as long as their is a significant difference between the two studies.
The delta deepening of CH-6 in this process could still be worth more (NPV) than the CH-7 open pit because the margin on CH-6 is extremely high.
Real end result???
The deepening of CH-6 could add 3 million tonnes to the resource. @ 2.5 cpt @ US$200 per carat.
That is clearly in the CAD$2 billion in-situ value. That is spending $1 to add $130+ in value.
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