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Stornoway Diamond Corp (2)
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Stornoway loses $329.35-million in 2018

2019-03-28 09:06 ET - News Release

Mr. Patrick Godin reports


Stornoway Diamond Corp. has released financial and operating results for the quarter and year ended Dec. 31, 2018.

Quarter and year ended Dec. 31, 2018, highlights:

  • For the year ended Dec. 31, 2018, Stornoway reported net loss $329.4-million ((39 cents) per share on a basic and fully diluted basis), compared with net loss of $114.2-million in 2017 ((14 cents) per share basic and fully diluted). Included in 2018 results is (i) a non-cash impairment charge of $83.2-million, (ii) a deferred income tax expense of $77.4-million and (iii) costs of goods sold of $227.1-million, $58.1-million of which is a writedown on inventory to bring it to its net realizable value, all reflecting lower diamond price environment than was originally forecasted by the corporation. Adjusted net loss for the fourth quarter was $28.6-million and $133.8-million for the year.
  • Mining in the Renard 65 open pit in the fourth quarter comprised 581,763 tonnes, with 102,333 tonnes of ore extracted. For the full year, mining in the Renard 2-3 and Renard 65 open pits stood at 2,265,895 tonnes, with 623,065 tonnes of ore extracted.
  • A total of 485,616 carats were recovered in the fourth quarter from the processing of 605,960 tonnes of ore at a grade of 80 carats per hundred tonnes (c/ht). For the full year, a total of 1,324,123 carats were recovered from 2,328,300 tonnes of ore at 57 c/ht.
  • Run-of-mine diamond sales of 253,929 carats were completed in the fourth quarter with gross proceeds of $31-million at an average price of $92 (U.S.) per carat ($122 per carat). For the full year, Stornoway sold 1,038,967 run-of-mine carats for gross proceeds of $141-million at an average price of $105 (U.S.) per carat ($136 per carat). The company sold an additional 164,322 carats of supplemental diamonds for gross proceeds of $3.5-million at an average price of $16 (U.S.) per carat ($21 per carat).
  • In the fourth quarter, cash operating costs per tonne processed were $60.1 per tonne ($74.9 per carat recovered) and capital expenditures were $14.8-million. For the full year, cash operating costs per tonne processed were $57.1 per tonne ($100.4 per carat) and capital expenditures were $88.2-million.
  • The corporation reported adjusted earnings before interest, taxes, depreciation and amortization of $2.9-million in the fourth quarter, or 8.9 per cent of revenues, and $(7.9)-million, or (5.4) per cent of revenues, for the full year ended Dec. 31, 2018.
  • At year-end, cash and cash equivalents stood at $35.8-million.

Patrick Godin, president and chief executive officer, commented: "Two thousand eighteen, the second year of commercial production for Stornoway's Renard diamond mine, was one of transition from open pit mining to primarily underground production. This transition proved to be challenging, but our team overcame the difficulties we faced, safely and successfully completing the ramp-up of the underground mine in August. The low diamond pricing environment in which Renard began operating persisted in 2018. This, along with the delays and initially lower than expected grades mined underground, prompted discussions with key stakeholders that led to the financing agreements announced in the fourth quarter. These transactions illustrate the strong support Stornoway has from its stakeholders, and is a strong testament to the quality of the Renard asset and our team. As the lowest-cost diamond mine in Canada, Stornoway possesses unique leverage to take full advantage of an upswing in rough diamond prices. In 2019, we will be focused on efficiency, striving to maximize value generation in every aspect of our business. We will continue exploration and resource development on the Renard property, aiming to extend mine life and grasp strategic opportunities."

                                                     For the three months ended,           For the year ended,        
                                                        Dec. 31,        Dec. 31,       Dec. 31,       Dec. 31,
                                                           2018            2017           2018           2017

Operational highlights
Lost time incidents rate (LTI)                              1.7             Nil            1.7            0.4
Average daily manpower (workers)                            306             324            306            318
Ore tonnes mined (open pit and underground)             706,066         490,237      2,115,522      2,228,273
Tonnes processed (tonnes)                               605,960         518,817      2,328,300      1,956,436
Carats recovered (carats)                               485,616         398,267      1,324,123      1,642,934
Carats sold (carats)                                    312,242         486,633      1,203,289      1,701,561
Capital expenditures                                     14,753          47,641         88,185        126,928
Underground development (metres)                          1,365           1,227          4,585          4,871
Cash operating cost per tonne processed                    60.1            45.0           57.1           42.1
Cash operating cost per carat recovered                    74.9            53.6          100.4           54.9

Financial highlights
Revenues                                                $23,271         $55,483       $165,487       $196,502
Cost of goods sold                                       54,091          43,251        227,144        149,235
Impairment charge                                        83,197         171,000         83,197        171,000
Selling, general and administrative expenses              3,433           4,237         18,123         17,841
Exploration expenses                                       (294)            335          3,194          2,095
Financial expenses (income)                              22,309           3,103         82,202          7,994
Foreign exchange loss (gain)                              5,996             529          9,712         (8,332)
Net (loss) income before tax                           (145,461)       (166,972)      (258,085)      (142,931)
Income tax (recovery) expense                            99,402         (48,526)        71,267        (28,711)
Net (loss)                                             (244,863)       (118,446)      (329,352)      (114,220)
(Loss) per share -- basic and diluted                     (0.29)          (0.14)         (0.39)         (0.14)
Adjusted net (loss) income                              (28,604)          6,864       (133,791)        (4,858)
Adjusted EBITDA                                           2,922          25,224         (7,854)        85,002
Adjusted EBITDA margin (%)                                 8.9%             46%          -5.4%          43.3%

Financial summary

Revenues during the fourth quarter of 2018 were $23.3-million and $165.5-million for the full year 2018. Revenues include amortization recognized from contract liabilities related to the upfront proceeds received under the Renard stream agreement in consideration for future commitments to deliver diamonds at contracted prices.

Stornoway reported a fiscal 2018 adjusted EBITDA of $(7.9)-million or (5.4) per cent of revenues. The corporation incurred a non-cash impairment charge of $83.2-million at Dec. 31, 2018, on the carrying value of the corporation's property, plant and equipment. These are mostly attributable to a downward revision of expected diamond pricing. On Oct. 2, 2018, and Dec. 7, 2018, Stornoway announced a series of financing transactions with lenders and key stakeholders designed to provide the corporation greater financial and operational flexibility. In total, these transactions represented additional consideration and liquidity for the corporation of $129-million by of:

  • The deferral of certain loan principal repayments for a 24-month period, representing debt service cost deferral of more than $53.7-million;
  • Amendments to the Renard diamond streaming agreement comprising a supplementary upfront deposit of the United States-dollar equivalent of $45-million in cash and certain sales and pricing changes;
  • A private placement of units consisting of common shares and warrants for approximately $30-million, subscribed by existing shareholders.

As at Dec. 31, 2018, cash and cash equivalents stood at $35.8-million. This amount excludes $13.7-million of restricted cash deposits related to debt service reserve accounts. The corporation acknowledges that continued downward pressure on rough diamond prices may inhibit its ability to generate positive free cash flow in 2019, and is mindful of all opportunities at hand to preserve liquidity.

Operational summary

Environment, health, safety and communities

Five lost time injury (LTI) incidents were recorded during the quarter, for a year-to-date LTI rate of 2.8 for contractors and 1.2 for Stornoway employees. No incidents of environmental non-compliance were recorded during the quarter or for the fiscal year. Daily manpower at the site averaged 306 workers, of which 13 per cent were Crees of the Eeyou Istchee, 21 per cent were from Chibougamau and Chapais, and 66 per cent were from outside the region. The number of Stornoway employees stood at 585 as at Dec. 31, 2018.

Mining and processing

During the quarter ended Dec. 31, 2018, 581,763 tonnes were mined from the Renard 65 open pit, with 102,333 tonnes of ore extracted. Tonnes of ore totalling 603,733 were extracted from the underground mine. Tonnes of ore totalling 605,960 were processed with a diamond recovery of 485,616 carats at an attributable grade of 80 c/ht. The processed ore was derived from underground production at the Renard 2 kimberlite, underground development at the Renard 3 kimberlite and open pit production at the Renard 65 kimberlite.

For the year ended Dec. 31, 2018, 251,179 tonnes of ore were mined in the Renard 2-3 open pit and 371,886 tonnes of ore from the Renard 65 open pit. Tonnes of ore totalling 1,492,457 were mined through underground operations. Tonnes of ore totalling 2,328,300 were processed with a diamond recovery of 1,324,123 carats at an attributable grade of 57 c/ht, compared with a revised guidance of 2.35 million to 2.40 million tonnes processed and 1.35 million to 1.40 million carats recovered at an attributable grade of 54 to 56 c/ht.

Carat recoveries in 2018 were affected by delays in the ramp-up of the Renard 2 underground mine, which was mainly caused by delays in mobile equipment deliveries and a competitive specialized labour market for underground workers. Other contributing factors were the processing of low-grade stockpiles to curtail the shortfall in mined tonnes during the transition from open pit to underground operations, and the mining of lower than expected grades at the margin of the orebody during the initial phase of the underground ramp-up. To a lesser extent, they were also affected by a forest fire that resulted in a three-day suspension of operations at the Renard mine in July. By the end of the third quarter, the ramp-up of underground production at Renard 2 was completed, and a steady feed was achieved from underground operations. Recovered grade improved by 39 per cent and 45 per cent in the third and fourth quarters, respectively, compared with the previous quarters. Carat recoveries improved by 47 per cent in both the third and fourth quarters. Carat recoveries missed the bottom end of the guidance range due to the process plant performing at lower than nameplate capacity in the second half of November and in December, due to technical issues with the front end of the process plant. These issues are related to the coarser size distribution of head feed to the primary crusher that resulted from the transition in underground mining methods and are currently being addressed with improvements to rock-breaking capacity at the crusher pad.

Mining in the Renard 2-3 open pit was completed in April, 2018. In 2018, underground development work focused on completing the excavations required for the 290-metre mining horizon of Renard 2, extending the main access ramp toward the 470-metre mining horizon and developing the access drifts to the 290-metre mining horizon of Renard 3. The development of an assisted block cave as the principal mining method in the underground mine continued, and the completion of draw-point construction and caving initiation at the 290-metre mining horizon is expected to be completed in early 2019. The first mining panels opened up at the margin of the orebody at the 290-metre mining horizon were composed of highly diluted, lower-grade ore, which impacted carat production in the early stages of the underground mine. As expected, however, grades have increased as additional panels have been opened in less diluted ore within the main body of the kimberlite, which were the focus of mining activities in the fourth quarter and will continue to be throughout 2019.

Diamond sales

Two tender sales were completed during the fourth quarter. In total, 253,929 carats of run-of-mine production were sold, representing recoveries between July 21, 2018, and Oct. 5, 2018. Gross proceeds were $31-million at an average price of $92 (U.S.) per carat ($122 per carat). On a segmented basis, 190,187 carats of plus seven DTC sieve size diamonds were sold at an average price of $118 (U.S.) per carat ($157 per carat), and 63,742 carats of negative seven DTC sieve size diamonds were sold at an average price of $15 (U.S.) per carat ($20 per carat).

In addition to the sale of run-of-mine production, an additional 58,313 carats of supplemental diamonds smaller than the negative seven DTC sieve size were sold in an out of tender contract sale for gross proceeds of $830,000 at an average price of $14 (U.S.) per carat ($19 per carat). The supplemental diamond production represents recoveries of small diamonds produced between July 21 and Oct. 5 that are in excess of that expected from the Renard mineral resource.

Capital projects

Capital expenditures in the fourth quarter were $14.8-million, primarily related to the development of the underground mine, the processed kimberlite containment area and mobile equipment purchases. For the year ended Dec. 31, 2018, capital expenditures were $88.2-million, compared with a revised guidance of $90-million to $95-million.

Development of the underground mine in the fourth quarter focused on developing the main ramp toward the next mining horizon of the Renard 2 kimberlite, as well as developing the three levels that are to be used in the first mining horizon of the Renard 3 kimberlite. The company achieved 1,365 metres of lateral development in the quarter. For the full year, 4,585 metres of lateral development were realized. In the first quarter of 2019, lateral development will be focused on accesses and infrastructure for future production levels at Renard 2, as well as on preparing the first underground mucking level of Renard 3. The initiation of production at Renard 3 is expected toward the beginning of the third quarter of 2019. No mobile equipment purchases are expected in 2019.

Mineral reserves update

Mineral reserves as of Dec. 31, 2018, have been updated based on mining depletion, changes to the mineral resource and changes to the modifying factors based on the latest information available. At Dec. 31, 2018, proven and probable mineral reserves for the Renard diamond mine were 25.6 million tonnes at a grade of 71.5 carats per hundred tonnes for 18.3 million attributable carats.

Exclusive of the mineral reserves, the Renard diamond mine includes additional indicated mineral resources of 3.7 million carats (8.7 million tonnes at 42.3 c/ht), inferred mineral resources of 13.0 million carats (23.4 million tonnes at 55.8 c/ht) and 32.8 to 71.3 million carats of non-resource exploration upside (76.2 million to 113.2 million tonnes at grades ranging from 20 to 168 c/ht). Readers are cautioned that the potential quantity and grade of any such exploration target is 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. All kimberlites remain open at depth. The 2018 updated mineral resource incorporates geological data on kimberlite contacts and internal geology as revealed by production, development and drilling activities.

Management change

Effective Jan. 1, 2019, Matt Manson stepped down as president and chief executive officer of the corporation and was succeeded by Patrick Godin. Mr. Godin was the corporation's chief operating officer and has served in this role since 2010.

On Jan. 28, 2019, Patrick Sevigny, previously the corporation's manager, mining operations, was appointed to the position of vice-president, operations. In his new role, Mr. Sevigny oversees all aspects of the Renard mine, including both mining and processing operations.

On Feb. 28, 2019, Ian Holl, who held the position of vice-president, processing, announced his departure from the corporation.

Annual shareholder meeting

At the next annual shareholders meeting of the corporation, announced to be on May 14, 2019, management of the corporation will propose to nominate each of the following persons for election as director: Mr. Godin, current CEO of the corporation; Michele S. Darling, Hume Kyle, Hubert T. Lacroix, Angelina Mehta, Gaston Morin and Marie-Anne Tawil, all of whom are current directors of the corporation, as well as John Hadjigeorgiou.

Four current directors, Eberhart Scherkus, Mr. Manson, Peter B. Nixon and John LeBoutillier, will not be standing for re-election. The corporation wishes to express its thanks to each of these directors for their many years of valuable service and contribution.

Conference call and webcast

Stornoway will host a conference call for analysts and investors on March 28, 2019, at 11 a.m. ET. This call may be accessed by calling 1-844-215-3287 toll-free in North America, or 1-209-905-5939 from international locations, with conference ID: 6795086. A live webcast of the conference call will also be available on-line. A recording of the conference call will be made available on Stornoway's website.

About the Renard diamond mine

The Renard diamond mine is Quebec's first producing diamond mine and Canada's sixth. It is located approximately 250 kilometres north of the Cree community of Mistissini and 350 km north of Chibougamau in the James Bay region of north-central Quebec. Construction on the project commenced on July 10, 2014, and commercial production was declared on Jan. 1, 2017. Average annual diamond production is forecast at 1.8 million carats per annum over the first 10 years of mining. Readers are referred to the technical report dated Jan. 11, 2016, in respect of the September, 2015, mineral resource estimate, and the technical report dated March 30, 2016, in respect of the March, 2016, updated mine plan and mineral reserve estimate for further details and assumptions relating to the project.

Qualified person

Disclosure of a scientific or technical nature in this press release was prepared under the supervision of Patrick Sevigny, PEng (Quebec), vice-president, operations, and Robin Hopkins, PGeol (NT/NU), vice-president, exploration, both qualified persons under National Instrument 43-101.

About Stornoway Diamond Corp.

Stornoway is a leading Canadian diamond exploration and production company listed on the Toronto Stock Exchange under the symbol SWY and headquartered in Montreal. A growth-oriented company, Stornoway owns a 100-per-cent interest in the world-class Renard mine, Quebec's first diamond mine.

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