Thursday, September 8, 2016

post PEA

It has been a couple of months since the PEA (preliminary economic assessment) results have been out.

A lot has changed over the last 2 months....but in reality, a lot has changed over the last 6 months.
Why 6 months? If you read the PEA in detail, you will find out what point in time they used for the valuation of the diamond parcels. That valuation was obtained in late February or early March.

The front cover of the technical report states:


NI-43101 guidelines create the obligation to put an effective date and a report date.
The effective date is a bit like a snapshot in time of what values and assumptions are used.

If a mining truck on July 7th was worth this amount and then 6 months later, the price of that truck goes up 1000%, a person reading this report in 12 months can understand in what context the PEA was created and whether the PEA is still valid based on the events over the last 12 months.

Diamonds are a bit peculiar in the pricing side of the equation. They are very specific to the parcel of diamonds and studies tend to use a point in time of the latest valuation...unless there is a material difference and then maybe the parcel gets a valuation update. Because the valuation is a key input in designing the optimum pit, it does need to be firmed up early on in the PEA process and not changed.

This scenario clearly is laid out with Chidliak's PEA.

With the knowledge that the valuation was obtained in early March, the reader can now go out to the market and see what the current conditions are. Looking at the various sources of information, one can find that the average rough diamond price since early March to end of August has changed roughly 10 to 11% to the upside.

With the PEA in hand and that knowledge, one can now adjust the numbers (if they want) to see what it really means for the economics.

Here is a pre-tax cash flow analysis  that shows the original PEA results, an 11% adjustment in revenue and a third section where the 15% contingency is taken out.

Anyone can and should look at the numbers in the PEA and adjust as they see fit. The equations to calculate NPV or IRR in any spreadsheet software are quite easy to use.

In this analysis, one can clearly see a significant improvement in pre-tax IRR (40 to 46%) and a change in pre-tax NPV (7.5%) of an additional CAD$160 million (to CAD$870 million).

Peregrine Diamonds sits at roughly CAD$75 million. Since the PEA was released, the company has done no field work, nothing material and yet the pre-tax valuation of Chidliak has gone up more then 2 x Market cap of the company.

Taking out the contingency just to see what the raw economics would be and you see the NPV goes up to CAD$922 million and the IRR hits 51%.

These are two obvious area's (revenue and contingency) that are easy to adjust and see what the picture looks like). These do not include the significant area's of improvement that could occur on the revenue side because of more parcels and more refined modelling. These do not include the significant area's of improvement on the operating cost side that could occur because of more realistic pit stope angles and possible annual production increase (reduction in most costs) as more resources get brought into the plan.

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