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TABLE OF CONTENTS Jun 23 - 29, 2014 Volume 100 Number 19 - 0 comments

'Peak diamonds' on the horizon?

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2014-06-18

The fracking boom in North America may have made “peak oil” somewhat of a dated phrase, but could “peak diamonds” take its place as the catchphrase for resource investors?

Perhaps not, but De Beers CEO Philippe Mellier nonetheless thinks it’s appropriate.

Mellier told the German press that diamond output will peak in 2017, after which time it will begin a steady decline. That looming supply constraint could meet with more demand if the trend continues. The world diamond market is forecast to grow by 4–4.5% this year alone, with the U.S., China and India being the key demand drivers.

But the shift in fundamentals hasn’t made much of an impact on diamond prices, as traced by the Diamond Price Index. While the index sustained a strong bull run from 2006 until late 2011, it has been trending sideways through last year and into this year.

But if Mellier is right and constrained supply meets with rising demand, the price going forward could be welcome news to emerging Canadian diamond miners such as Lucara Diamond (TSX: LUC; TSXV: LUC; US-OTC: LUCRF) and developers Stornoway (TSX: SWY; US-OTC: SWYDF) and Mountain Province Diamonds (TSX: MPV; NYSE-MKT: MDM). The latter two may be reflecting those improving fundamentals with their recent success in raising capital in the equities market.

Lucara’s story, however, is more about production. The company is ahead of Stornoway and Mountain Province, as it has already brought new diamond production to the market with its Karowe diamond mine in Botswana.

Recently the company announced that, since the beginning of the second quarter, it has already mined 13 stones that are over 100 carats. These include eight gem-quality stones — two of which are over 200 carats.

With these finds, BMO Capital Markets analyst Edward Sterck expects big things from a Lucara diamond tender on July 18.

“If all of the large stones recovered in the second quarter are included in the upcoming tender, it could be the best portfolio of diamonds in terms of size so far,” he wrote in a research note. “The previous best tender from a size perspective contained five stones in excess of 100 carats.”

The company generated US$50 million from its last tender this year, but Sterck cautions that realized prices are dependent on the colour, clarity and cutting, and polishing characteristics of the individual stones.

Still, the impressive haul has Sterck believing Lucara may have three special diamond tenders this year as opposed to two, and he has boosted his revenue forecast to US$95 million from a previous US$67 million.

“Reflecting the increased special diamond revenue estimate, the 2014 earnings forecast has increased to US25¢ per share from US20¢ per share,” he wrote.

Stornoway is next in line in terms of development, as it recently wrapped up a financing deal that should bring its Renard diamond project in Quebec to production in late 2016.

The company finished a $374-million equity offering, with $132 million coming from a public offering and a $242 million coming by way of a private placement.

“Although the pricing of the equity issue appears dilutive for existing holders, the project is now de-risked and should allow Renard to move into the development stage,” Sterck wrote in a research note on the company.

As for Mountain Province the company recently filed a feasibility study for its 49% joint-venture Gahcho Kué diamond project in the Northwest Territories. De Beers holds the other 51% of the project that is under construction, which is ahead of its mid-2016 start-up schedule.

Mountain Province announced a non-brokered private placement that will raise $35 million to cover its share of pre-development capex at Gahcho Kué. The company already has $46 million in the bank.

But with $450 million needed to fund its development costs, another bigger financing is expected in the near future.

“We believe that the current equity issue is more likely to be followed by a full project financing package including a public offering in the region of $100 million,” Sterck wrote.

Sterck rates Mountain Province as “outperform,” with at $6.15 price target. He rates both Stornoway and Lucara as “market perform.”



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