Renard Running "Flat Out"
Issue 132, July 2015
Limited growth options for the diamond industry mean it is entering a sweet-spot of free cash flow and dividends, says Stornoway Diamond's chief executive Matt Manson.
A wave of companies are currently building their first diamond mines, including Stornoway, Firestone and Mountain Province, with each due for production in the next 2 years, but with no new discoveries and limited M&A, companies will be short of new assets once those mines are built-out.
“It's hard to do M&A in the diamond business,” Manson says. “It's a very small club, everybody knows everybody else very well, some of the personalities aren't necessarily compatible, so it doesn't happen very often.”
Stornoway, which is widely believed to have bid for BHP Billiton's Ekati diamond mine in Canada, is currently building its Renard mine, the first diamond mine in Quebec. Last year, Manson closed the diamond industry's largest ever single mine financing, raising C$944m ($865m) for Renard, nearly eight times the company's market cap at the time.
The deal included debt, equity and a $250m streaming agreement. "Everybody wanted to be the last one in, says Manson, a Glasgow-born geologist who was sucked into Canada's mining scene after completing his PhD at the University of Toronto in the 1990s.
The financing was clearly a huge milestone for Manson personally. “12 months ago today exactly we closed our project financing deal,” he wrote on his Twitter account this week, alongside photos of Renard's mine buildings taking shape.
30 per cent complete, Renard is due to produce 1.6m carats per annum over an initial 11-year mine life. It is “on schedule and on budget,” Manson says. “There are certain advantages to raising all the money upfront, because you can just go flat out.”
Diamond prices have wobbled in the last 6 months, but because they have held up better than the industry's core commodities, including coal, copper and iron ore, construction costs have fallen with the wider industry.
“We're a development company building our first project, so people are going to say there's going to be speed-bumps, but timing is everything in the mining business and this is a very good market to be building in.”
Stornoway is also enjoying a massive currency uplift. Half its cash was raised in US dollars, whilst its build-costs and two thirds of its debt are denominated in Canadian dollars. Its outgoings have therefore fallen, whilst its balance sheet has strengthened as the Canadian dollar has devalued. Manson closed the financing at 92 cents to the US dollar, but based on current exchange rates, Stornoway is heading towards a potential $40m currency gain.
Shares have rocketed 57 per cent this year to C$0.83 and are trading at a 32 per cent discount to NAV, according to analysts at Scotiabank. “Everything comes down to the price,” one broker and shareholder says, “and at these prices I'm quite excited.”
A resource update from Renard is due this summer.
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