Mr. Matt Manson reports
STORNOWAY ANNOUNCES POSITIVE RENARD FEASIBILITY STUDY
Stornoway Diamond Corp. has released the results of the feasibility study for the Renard diamond project located in north-central Quebec. The FS outlines a combined open-pit and underground mine plan, and was prepared by SNC Lavalin Inc. with contributions from AMEC Americas Ltd. for the design of the underground mine and diamond processing plant, and G Mining Services Inc. for open-pit mine design and cash flow analysis. Additional technical elements of the study have been written by Roche Ltd., Golder Associates Ltd. and Itasca Consulting Canada Inc. A mineral reserve has been declared by AMEC and G Mining based on the National Instrument 43-101-compliant mineral resource written by GeoStrat Consulting Inc. and published by Stornoway on Jan. 24, 2011, and a diamond valuation conducted by WWW International Diamond Consultants Ltd. and published by Stornoway on June 13, 2011. Highlights of the study are as follows:
-
Base case estimates of net present value of $672-million at a
7-per-cent discount rate and internal rate of return of 18.7 per cent before
taxes and mining duties, and $376-million and 14.9 per cent after taxes and
mining duties;
- Probable mineral reserves of 18.0 million carats representing 23.0 million tonnes at an average grade of 78 carats per hundred tonnes, after allowance for mining dilution and ore recovery, and at a
weighted average diamond valuation of $180 (U.S.) per carat;
- 11-year reserve-based mine life with maximum diamond production peaking
at 2.1 million carats per year, and averaging 1.7-million-carat-per-year life
of mine;
- Gross revenue, in real terms, of $4.112-billion and operating cash flow
of $2.677-billion;
- Initial estimated capital cost of $802-million, including
contingencies;
- An estimated operating cost averaging $54.71 per tonne ($70.27 per carat) life
of mine, and yielding an operating margin of 68 per cent.
Matt Manson, president and chief executive officer, commented: "Today's announcement is a significant milestone on the road towards Quebec's first diamond mine. This feasibility study presents a project with strong cash flow, a low-risk operating profile and robust margins. Our estimates for each capital, operating and revenue parameter are blue chip and realistic. We foresee healthy project economics on the basis of the first 11 years of reserve-based mining alone. However, our long-term business plan, which forms the basis of our mine permitting, allows for a significantly longer mine life based on the project's total NI 43-101 mineral resources. Looking beyond the formal mineral resources, we have already identified a large quantity of exploration upside and each kimberlite is open at depth. As of today's release, Renard is a diamond project with a positive feasibility study, a long and highly accretive resource tail, and clear-path permitting in one of the world's best mining jurisdictions."
Stornoway's board of directors has approved the Renard FS for release and authorized proceeding to detailed engineering and project financing phases. A formal production decision is expected to be made following, among other things, the receipt of certificates of authorization from the relevant Quebec and federal government regulatory authorities. In approving the release of the Renard FS, the board of directors noted the project's key strengths as follows:
-
Positive base-case economics based on industry-standard assumptions for
U.S. dollar exchange rate, diamond pricing, fuel costing and discount
rate;
- Strong cash flow and an operating margin well positioned on the diamond
industry cost curve;
- Rigorous operating and capital cost estimation;
- A detailed mine design validated by multiple levels of peer review;
- Robust valuation sensitivities;
- Well understood risks in each operating, geotechnical and environmental
parameter, and an all-season road for project construction and
operation;
- Pro-mining jurisdiction and strong social acceptance;
- Highly accretive long-term business plan based on an additional 17
million carats of inferred mineral resources within the scope of the FS
mine infrastructure but outside its economic scope in accordance with National Instrument 43-101;
- Extensive exploration upside at depth;
- Grade and value upside through diamond breakage estimates and large
diamond recovery forecasts not incorporated in the National Instrument 43-101 mineral
resource estimate or cash flow analysis;
- Positive long-term diamond market fundamentals.
Stornoway will host a conference call on the Renard FS on Wednesday, Nov. 16, 2011, at 11 a.m. Eastern Standard Time. To participate in the call, dial 416-695-6616 or 800-766-6630 within North America, 00-800-4222-8835 within the United Kingdom, 001-800-4222-8835 within Hong Kong and 800-4222-8835 internationally. A playback will be made available after the call by dialling 1-800-408-3053 (local access 905-694-9451) with the access code 4675200.
Feasibility study
Mine plan
The Renard FS outlines a combined open-pit and underground mine based on a mineral reserve contained within the Renard 2, 3 and 4 kimberlite pipes. During years one and two production will be derived predominantly from an open pit at Renard 2 and 3 developed to a maximum depth of 113 metres and with a strip ratio of 5:1. Starting in year two, production will be derived from an underground mine using a 5.5-metre diameter shaft to 740 metres depth and access ramp. Underground mining of Renard 2 and 3 to a maximum depth of 610 metres will be by blast-hole shrink stoping with waste backfill placed from surface. Underground mining of Renard 4, which will commence in year eight, will be by blast-hole shrink stoping with waste backfill under a crown pillar. Nameplate ore processing capacity will be 6,000 tonnes per day (2.2 million tonnes per year) with maximum annual carat production exceeding two million carats per year. Over all, 83 per cent of diamond production will be from Renard 2, 8 per cent from Renard 3 and 9 per cent from Renard 4.
RENARD FEASIBILITY STUDY RESULTS AND KEY ASSUMPTIONS
Mining parameters Reserve carats (M) 18.0
Tonnes processed (M) 23.0
Recovered grade (cpht) 78
Average ore recovery (%) 83.5%
Average mining dilution (%) 13.5%
Dilution grade (cpht) 0
Processing rate (mtpy) 2.2
Mine life (years) 11
Cost parameters Preproduction capex ($M) $802
LOM capex ($M) $994
Oil price (U.S.$/barrel) $90
LOM opex ($/tonne) $54.71
LOM opex ($/carat) $70.27
Revenue parameters Gross revenue ($M) $4,112
Marketing costs 2.7%
Diaquem royalty 2.0%
Cash operating margin ($M) $2,677
% operating margin 68%
Total taxes and mining duties ($M) $571
After-tax net cash flow ($M) $1,151
Diamond price parameters Renard 2 and Renard 3 (U.S.$/carat) $182
Renard 4 (U.S.$/carat) $164
Diamond price escalation 2.5%
Exchange rate $1 to $1 (U.S.)
Schedule parameters Effective date for NPV calculation Jan. 1, 2012
Construction mobilization July 1, 2013
Plant commissioning commences July 1, 2015
Commercial production declared Jan. 1. 2016
Valuation parameters Pretax NPV7% ($M) $672
Pretax IRR 18.7%
After-tax NPV7% ($M) $376
After-tax IRR 14.9%
Processed kimberlite management will be by way of a "dry-stack" disposal facility which may be progressively closed. Metal leach tests indicate that negligible metal concentrations will be released, thus no liner will be placed beneath the processed kimberlite containment facility. In addition, the operation of the processed kimberlite containment facility and waste disposal facilities will not impact fish habitats.
The project development schedule assumes first vehicle access for construction mobilization by July, 2013, based on the construction schedule for the Route 167 extension project, a $332-million road development project sponsored by the Quebec Ministry of Transportation under the auspices of the "Plan Nord," to which Stornoway has agreed to contribute an amount of $44-million (subject to certain conditions). Plant production is currently anticipated to commence in July, 2015, with a two-month commission followed by a six-month ramp-up period. On-site power requirements are expected to average 10 megawatts during operations and be provided by on-site diesel power generation. A separate feasibility study written by Hydro-Quebec on a 161-kilovolt power line connecting Renard to the nearby Laforge 1 hydroelectric power station is still continuing. This power line would add capital cost to the project but offers a substantial operating cost savings over diesel-generated power. The power line feasibility study is due to be completed later in 2012, and its impact on the Renard FS will be assessed at that time.
Long-term business plan
Stornoway has also developed a long-term business plan based on the total indicated and inferred mineral resources to a depth of 700 metres, all of which are within the scope of the FS mine infrastructure. These include 6.1 million carats of high-grade inferred mineral resources between 600 and 700 metres depth in Renard 2. The LTBP also contemplates an increased production rate within the scope of the process plant's design parameters, which allows for expansion up to 7,000 tonnes per day (2.6 million tonnes per year). Expansion mill feed is expected to be derived from an open pit on the Renard 65 kimberlite. Renard 65 is a large and lower-grade deposit currently classified as inferred mineral resource, but with diamond characteristics similar to the Renard 2 and 3 kimberlites. A pit at Renard 65 to a depth of 65 metres is included within the Renard FS as a borrow pit for backfill waste and for water management, and inferred mineralization recovered is stockpiled and excluded from the production schedule. Within the LTBP, the Renard 65 material will supplement higher-grade ore from the Renard 2 and 3 underground mine. Although expected to be accretive to the Renard FS, the project's inferred mineral resources are not included in the FS economic analysis in accordance with National Instrument 43-101. The LTBP is the basis of the Renard mine permit application, and as such will form part of the project's public disclosure in connection with the environmental assessment regulatory process under applicable federal and provincial legislation.
Economic analysis, sensitivities and diamond price assumptions
The base case financial model assumes a parity Canadian-U.S.-dollar exchange rate and diamond price models derived from an open-market valuation exercise undertaken by WWW between May 9 and 13, 2011. Diamond prices are escalated at 2.5 per cent per year in real terms between the third quarter of 2011 and the fourth quarter of 2025. Capital costs are escalated at between 1 per cent and 4 per cent per year, item dependent. Operating costs, deferred capital and sustaining capital are escalated at 2 per cent per year. Net cash flows are then de-escalated for the calculation of rate of return and net present value on a real-terms basis. Pretax NPV and IRR are calculated as of Jan. 1, 2012, on net cash flow after operating costs, marketing costs and a 2-per-cent royalty payable to Diaquem Inc. After-tax NPV and IRR reflects the deduction of federal and Quebec income taxes and applicable mining duties. Payback is estimated, after tax, at 4.8 years.
PROJECT VALUATION AND PAYBACK
(dollar amounts in millions)
Pretax After tax
NPV5% $899 $534
NPV7% (base case) $672 $376
NPV9% $490 $248
IRR 18.7% 14.9%
Payback (years) 4.65 4.80
Assuming an efficient execution of the project outlined in the Renard FS, the financial model shows a steep increase in NPV over the four-year preproduction period between Jan. 1, 2012, and the current target date of commercial production on Jan. 1, 2016.
The project is most sensitive to estimated revenue parameters (diamond price, exchange rate and grade) and least sensitive to estimated operating cost metrics. The project also shows strong sensitivity to future diamond price growth. Stornoway's use of a 2.5-per-cent real-terms growth factor is consistent with well constrained rough diamond supply and demand forecasts and industry best practice.
SENSITIVITY ANALYSIS ON PRETAX NPV7%
(in millions of dollars)
-20% -10% 0% +10% +20%
Operating cost $809 $740 $672 $603 $535
Capital cost $830 $751 $672 $593 $514
Revenue(1) $236 $454 $672 $890 $1,108
0% +2.5% +5%
Diamond price escalation $227 $672 $1,228
(1) Includes diamond price, exchange rate and grade
SENSITIVITY ANALYSIS ON AFTER-TAX NPV7%
(in millions of dollars)
-20% -10% 0% +10% +20%
Operating cost $464 $420 $376 $332 $287
Capital cost $489 $432 $376 $319 $261
Revenue(1) $95 $236 $376 $514 $651
0% +2.5% +5%
Diamond price escalation $93 $376 $724
(1) Includes diamond price, exchange rate and grade
The base case diamond price models determined by WWW in May, 2011, were $182 (U.S.) per carat for Renard 2 and 3 and $112 (U.S.) per carat for Renard 4. The feasibility study base case diamond price models are derived from a value modelling approach that assumes a single diamond size distribution exists across the three kimberlites. This yields a higher diamond price model of $164 (U.S.) per carat for Renard 4. The alternative interpretation, that each kimberlite's diamond population is unique and is correctly represented by its diamond sample, yields diamond price models of $208 (U.S.) per carat for Renard 2, $165 (U.S.) per carat for Renard 3 and $112 (U.S.) per carat for Renard 4. This alternative diamond price model is highly accretive to the project's valuation given the dominance of Renard 2 in the mine plan. The interpretation of similarity in the diamond populations is the more conservative approach.
In establishing its diamond price models, WWW determined high and minimum sensitivities on the base case diamond price based on alternative interpretations of diamond quality and size distribution. The WWW sensitivity limits are set such that, in the opinion of WWW, it is highly unlikely that an actual diamond price achieved for each kimberlite body upon production would fall below the minimum sensitivity, but it is possible that the actual diamond price achieved may be higher than the high sensitivity, which is not a maximum price. Sensitivities on NPV7 per cent and IRR have been generated for each of the WWW minimum and high price scenarios, which are $163 (U.S.) per carat to $236 (U.S.) per carat for Renard 2, $153 (U.S.) per carat to $205 (U.S.) per carat for Renard 3 and $105 (U.S.) per carat to $185 (U.S.) per carat for Renard 4.
DIAMOND PRICE SENSITIVITIES ON PRETAX NPV7%
(dollar amounts in millions)
Pretax NPV7% IRR Payback
WWW minimum model $397 14.6% 5.34
Base case model $672 18.7% 4.65
Alternative model $871 21.8% 4.07
WWW high model $1,261 26.5% 3.49
DIAMOND PRICE SENSITIVITIES ON AFTER-TAX NPV7%
(dollar amounts in millions)
After-tax NPV7% IRR Payback
WWW minimum model $199 11.5% 5.46
Base case model $376 14.9% 4.80
Alternative model $502 17.4% 4.20
WWW high model $747 21.4% 3.90
Capital and operating costs
Initial capital costs are estimated at $801.8-million, including a contingency of $74.3-million. Capital cost is estimated at an accuracy of minus 13 per cent and plus 17 per cent. Life-of-mine capital cost, including escalation, sustaining and deferred capital, and provisions for preproduction revenue and salvage value, are estimated at $994.4-million.
ESTIMATE OF CAPITAL COSTS(1)
(in millions of dollars)
Site preparation and general $ 22.9
Mining $ 236.9
Mineral processing plant $ 168.4
On-site utilities and infrastructures $ 102.4
Owner's cost $ 86.2
Spares, fills, tools $ 10.2
EPCM services $ 45.0
Field indirect costs, vendor representatives $ 22.5
Construction camp and catering $ 25.0
Freight and duties $ 8.1
Contingency $ 74.3
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Total preproduction capital $ 801.8
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Escalation allowance on initial capital $ 57.3
Preproduction (revenue) $ (24.6)
Deferred and sustaining capital(3) $ 138.8
Deferred capital (Route 167 extension) $ 44.0
Salvage (value)(2,3) $ (22.9)
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Total life-of-mine capital, after contingency, escalation, deferred
and sustaining capital $ 994.4
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(1) Totals may not add due to rounding.
(2) Calculated by Stornoway
(3) After escalation
Life-of-mine operating cost is estimated at $54.71 per tonne ($70.27 per carat) in second-quarter 2011 terms. The majority of open-pit costs at Renard 2 and 3 occur before Jan. 1, 2016, and are contained within the capital cost estimates. On a non-capitalized basis, open-pit mining cost is estimated at $19.99 per tonne of ore in second-quarter 2011 terms.
ESTIMATE OF OPERATING COSTS(1)
Unit cost Unit cost
$millions $/tonne $/carat
Open-pit mine(2) $ 6 $ 0.27 $ 0.34
Underground mine $ 556 $ 24.45 $ 31.41
Processing $ 344 $ 15.13 $ 19.43
General and administrative $ 338 $ 14.86 $ 19.09
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Total life-of-mine operating costs $ 1,244 $ 54.71 $ 70.27
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Note: All figures in second-quarter 2011 dollars.
(1) Totals may not add due to rounding.
(2) Not including pit costs capitalized prior to Jan. 1, 2016
Mineral reserves and mineral resources
The mineral reserve estimate, prepared by AMEC and G Mining, was derived from the National Instrument 43-101-compliant indicated mineral resource estimate announced by Stornoway on Jan. 24, 2011, and dated Feb. 3, 2011. The mineral reserve estimate incorporates estimates for internal dilution (representing the quantity of non-resource material contained within the pit and stope design), mining recovery within the pits and stopes, and external dilution from adjacent country rock. Mining recovery estimates are 96 per cent in the open pits and 82.4 per cent in the underground mine. External dilution estimates are 7 to 11 per cent in the open pits and 14 per cent in the underground mine. Assumed dilution grade is zero carats per hundred tonnes.
MINERAL RESERVE ESTIMATE (1, 2), PROBABLE RESERVE
Kimberlite Grade Tonnes Contained carats
(cpht) (3, 4) (millions) (millions)
Renard 2 OP 95 1.31 1.24
Renard 2 UG 84 16.30 13.66
Renard 3 OP 93 0.72 0.67
Renard 3 UG 84 1.00 0.84
Renard 4 UG 42 3.72 1.58
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Total probable 78 23.06 18.00
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(1) Reserve categories are compliant with the "CIM Definition Standards on
Mineral Resources and Reserves."
(2) Totals may not add due to rounding.
(3) Carats per hundred tonnes
(4) Estimated at a plus-one DTC sieve size cut-off
The National Instrument 43-101-compliant inferred mineral resources comprise an additional 17.5 million carats representing 31.1 million tonnes at an average grade of 56 carats per hundred tonnes. In addition to these mineral resources, GeoStrat estimated the quantity of an exploration target (previously referred to by Stornoway as a potential mineral deposit) to be 23.5 million to 48.5 million carats (55.1 million to 75.5 million tonnes at grades ranging from 23 to 188 carats per hundred tonnes). This exploration target within the Renard kimberlite pipes has been determined by projecting kimberlite volumes from the base of the inferred resource to a depth of approximately 775 metres below surface, representing the base of current drilling as established at Renard 4. Readers are cautioned that the potential quantity and grade of any such exploration target are conceptual in nature, there has been insufficient exploration to define a mineral resource, and it is uncertain if further exploration will result in the target being delineated as a mineral resource. Readers are referred to the National Instrument 43-101-compliant technical report dated Feb. 3, 2011, filed by Stornoway on SEDAR with respect to the disclosure of mineral resources for the Renard diamond project.
NATIONAL INSTRUMENT 43-101 INFERRED MINERAL RESOURCE ESTIMATE(1, 2),
INFERRED RESOURCE
Kimberlite Grade Tonnes Contained carats
(cpht) (3, 4) (millions) (millions)
Renard 2 118 5.21 6.14
Renard 3 118 0.54 0.64
Renard 4 44 4.76 2.09
Renard 9 47 5.70 2.69
Renard 65 29 12.93 3.72
Lynx 107 1.80 1.92
Hibou 144 0.18 0.26
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Total inferred 56 31.12 17.45
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(1) Resource categories are compliant with the "CIM Definition Standards
on Mineral Resources and Reserves." Mineral resources that are not
mineral reserves do not have demonstrated economic viability.
(2) Totals may not add due to rounding.
(3) Carats per hundred tonnes
(4) Estimated at a plus-one DTC sieve size cut-off
Permitting
The Renard diamond project falls under the environmental protection regimes of the James Bay and Northern Quebec Agreement and the Canadian Environmental Assessment Act. Stornoway expects to file the project's environmental and social impact assessment shortly and, subject to a schedule to be established by the review committee of the JBNQA and the Canadian Environmental Assessment Agency, it is currently expected that public hearings will be held in the first half of 2012. Upon the satisfaction of all regulatory requirements, it is currently anticipated that the project will be eligible for the receipt of both Quebec and federal certificates of authorization by the middle of 2012. Once the provincial and federal administrators have issued authorizations for project development, final mine permits will be sought from the Quebec Ministere du Developpement durable, de l'Environnement et des Parcs, the Ministere des Ressources Naturelles et de la Faune, and all relevant federal authorities.
Community relations
In collaboration with the Crees of the James Bay region, Stornoway undertakes regular consultations with local communities, including public open houses and individual stakeholder meetings. Since the beginning of this year the Renard environmental exchange group has met in the Cree community of Mistissini six times, giving a forum for the exchange of environmental and traditional knowledge, and interaction in the project design. Stornoway also is currently in negotiations with Mistissini and the Grand Council of the Crees (Eeyou Istchee) with the aim of concluding an impact and benefits agreement. This agreement is expected to provide mine related employment and contracting opportunities, as well as foster environmental and social protection. This negotiation process follows the successful execution of a predevelopment agreement between the parties in July, 2010, and the establishment of a project business development office in the community of Mistissini in January of this year. The financial impact of the impact and benefits agreement has not been incorporated into the FS or the revenues and cost estimates presented in this press release.
Qualified persons
Ab Kroon, PEng, of SNC Lavalin, is the independent qualified person responsible for infrastructure design, the operating and capital cost estimate, and risk management.
Dr. Lynton Gormely, PEng, of AMEC, is the independent qualified person responsible for process plant design.
Gary Taylor, PEng, of AMEC, is the independent qualified person responsible for underground mine design and mineral reserves.
Louis-Pierre Gignac, Eng, of G Mining Services, is the independent qualified person responsible for open-pit design and mineral reserves, and financial analysis.
Martin Magnan, Eng, of Roche, is the independent qualified person responsible for permitting, and environmental and social considerations.
Paul Bedell, PEng, of Golder Associates, is the independent qualified person responsible for geotechnical, water management and processed kimberlite containment facility design.
Valerie Bertrand, Geo, of Golder Associates, is the independent qualified person responsible for geochemical classification.
Richard Brummer, PEng, of Itasca Consulting Canada, is the independent qualified person responsible for geomechanical and hydrogeological considerations.
David Farrow, PGeo (B.C.), of GeoStrat Consulting, is the independent qualified person responsible for the preparation of the mineral resource estimate for the Renard diamond project.
Stornoway's diamond exploration programs are conducted under the direction of Robin Hopkins, PGeo (NWT/Nunavut), vice-president, exploration, a qualified person under National Instrument 43-101.
All of these qualified persons have reviewed and approved the contents of this press release for which they are responsible.
Stornoway will file a National Instrument 43-101-compliant technical report on the Renard FS within 45 days.
We seek Safe Harbor.
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