Tahera expands its mine plan
2004-10-12 12:05 ET - Street Wire
by Will Purcell
Tahera Diamond Corp. has taken a new look at its plans for Jericho, slated to become the first diamond mine in Nunavut. The company has tentative plans for a larger mine that would recover a greater proportion of the diamonds in the Jericho pipe. That could improve the economics of the project. Meanwhile, a deal with Tiffany & Co. gave Tahera and its Jericho project another big boost, as the luxury retailer agreed to provide about half of the cash needed to build the mine.
The Tiffany deal
The Tiffany arrangement is not a big surprise. Tahera has been shopping for cash for some time and the company was dangling the prospects of a diamond deal as an enticement. Tahera's president, Peter Gillin, said that Tahera had discussions with various potential marketing partners. Mr. Gillin declined to reveal the other suitors, but he said they represented quite a range of parties.
Mr. Gillin termed the attention "very flattering." He added that the current tightness in diamond supply prompted the interest in Tahera's project, as the deal would provide access to a significant supply of gems. In the end, Tiffany produced the best offer, Mr. Gillin said.
Through the arrangement, Tiffany will receive all the Jericho diamonds and keep a significant proportion of the production for its manufacturing needs. Tiffany will sell the additional diamonds for Tahera, for a fee. Tahera will deliver its production to Tiffany in Yellowknife, and that relieves Tahera of the added costs associated with the care, transport and marketing of the diamonds.
The best news for Tahera is that Tiffany will provide a $35-million loan to cover a big portion of the construction costs of the Jericho mine. The loan is conditional on Tahera completing an equity financing that will provide the remaining cash needed to build the mine. Tahera now pegs the full capital cost of the Jericho mine at about $75-million.
The Tahera arrangement is not the first time that Tiffany has dealt directly with a Canadian diamond company. In a 1999 deal with Aber Diamond Corp., the company agreed to buy a substantial proportion of Aber's share of the diamonds from the Diavik mine.
As well, Tiffany bought $104-million of Aber's shares, a stake that was worth more than $400-million at one point early this year. Aber's deal with Tiffany was a major help when the company went looking for a big bank loan to cover the remaining portion of the cost of building Diavik.
The Tiffany agreement should give Tahera a comparable boost when the company goes to the market to complete its equity financing. The luxury retailer's interest in the future production of Jericho suggests that a healthy proportion of the diamonds are quality stones. That should provide a promotional boost to Tahera when it starts shopping its new shares around.
The new mine plan
Tahera completed a feasibility study on Jericho in 2000. The company formally revised the plan once since then, and a new revision now seems certain, based on the latest review. The company hopes to capitalize on the buoyant diamond market by processing the lower-grade kimberlite at a faster pace, rather than stockpiling the material until the last stages of the mine.
That will require a larger processing plant. The tentative new plan calls for about 5.5 million tonnes of kimberlite to be processed over a nine-year period, a rate of roughly 2,000 tonnes per day. The original feasibility study called for a Jericho mine to process just over 2.5 million tonnes of kimberlite over eight years, a rate of about 1,000 tonnes per day. There were no significant revisions to that plan in the 2003 revision to the study.
Doubling the amount of kimberlite will result in a lower average grade. The tentative new plan will see Jericho produce 4.7 million carats, implying an average grade of 0.85 carat per tonne. The earlier plan called for Jericho to deliver 3.1 million carats, for a grade of nearly 1.2 carats per tonne. Based on that, the added 2.9 million tonnes of kimberlite included in the new plan would deliver 1.6 million carats. That suggests an average grade of 0.55 carat per tonne for the added material.
Doubling the production rate will not have a major impact on the capital costs of Jericho. The 2003 revision pegged the total costs of building the mine at about $65-million, and that figure will jump by just $10-million. As well, the bigger mine will not result in a major change in operating costs. Tahera thinks that Jericho will run at about $70 per tonne, while the 2003 study assumed operating costs would be about $67 per tonne.
Tahera's 2003 plan used two potential diamond values. WWW International Diamond Consultants Ltd. produced an estimate of $92 (U.S.) per carat for the Jericho gems, while SRK Consulting Ltd. came up with a value of $81 (U.S.) per carat.
For its latest calculations, Tahera dropped the lower figure and based its estimates on just the rosier WWW appraisal. As well, the company assumes that diamond prices will increase by about 3 per cent yearly. As a result, Tahera believes its diamonds will be worth an average of about $95 (U.S.) per carat in 2006. Further, the company used an average value of nearly $106 (U.S.) per carat for its expected revenues over the life of the mine.
Based on those rosier figures, there is at least some economic benefit to including the lower-grade material in a new mine plan. Using the projected diamond values, including the 1.6 million extra carats in a new mine plan would fetch an added $210-million in revenues. Meanwhile, the operating costs of processing the extra 2.9 million tonnes of kimberlite would be around $200-million.
That difference between gross revenue and operating costs is marginal, and that adds to the importance of producing a formal revision to the Jericho feasibility study. Tahera commissioned SRK Consulting to prepare an assessment report based on Tahera's new plan. That report will be preliminary, as Tahera's evaluation included a significant amount of Jericho's inferred mineral resource, and that material can not be called a reserve.
SRK believes the economic results of Tahera's evaluation are optimistic. The more hopeful diamond valuation is one reason for that assessment, as is the inclusion of the inferred mineral resource in the calculations. As well, SRK has some technical concerns. Tahera's new plan calls for steeper pit walls and Tahera's consultants also think that reclamation and closure costs could be higher than the company's latest estimates. As a result, the company plans additional engineering and geotechnical work to refine the plan over the coming months.
The healthy Canadian dollar seems an added uncertainty. Tahera assumed an exchange rate of 73 U.S. cents to one Canadian dollar when it prepared its latest economic assessment, but it currently takes nearly 80 U.S. pennies to buy a Canadian dollar. In theory, that would result in a 10-per-cent drop in revenues when expressed in Canadian dollars.
Things are not that simple. A surging Canadian dollar would theoretically result in lowered operating costs, as a significant portion of the consumables required by a mine are tied at least indirectly to the U.S. dollar. As well, the capital costs of a Jericho mine would likely be lower as well.
Although it will take a closer look to determine the feasibility of including the additional carats in Jericho's mine plan, there is little doubt about the merits of the core part of the project. Tahera now estimates there are roughly two million tonnes of kimberlite in the central part of the pipe and that rock has an average grade of 1.4 carats per tonne.
That works out to nearly 2.9 million carats with an assumed value of about $420-million. Meanwhile, it will cost Tahera just $145-million to recover those diamonds, based on the operating cost estimate of $70 per tonne.
Tahera believes the core zone of Jericho would support a profitable mine, even if its revenue calculations prove to be far too optimistic. With a drop of nearly 20 per cent in the average diamond value, the new mine plan would still support an internal rate of return of about 15 per cent. If Tahera's projection of the rough diamond market proves accurate, the company will achieve a rate of return of about 30 per cent.
Although Tahera will process the lower-grade rock from Jericho as it is mined, the revised Jericho plan still assumes the better production grades will come in the early stages. Mr. Gillin said the plan called for grades to be a bit better than one carat per tonne in the first few years, dropping to about 0.94 carat per tonne by 2010 and falling to about 0.85 carat per tonne in the later years.
Mr. Gillin said that things are on schedule. The water board accepted the company's application for a Class A water licence and hearings are scheduled for early December in Kugluktuk. The water board would then make its recommendation known to the Canadian government, which would then have 45 days to decide.
Tahera seems optimistic that it will receive its required permits in time to start construction early next year and place the mine into production by 2006. Mr. Gillin said that Tahera planned to ship its material on the winter road early next year and start land preparation when the ground starts to thaw.