Impact Positive
The Quebec government has given the green light to the construction of Route
167, the road to Stornoway's Renard diamond project.
First Impression
Opening the way for Renard: Quebec's government announced in yesterday's
2011 Budget that its plan to facilitate the development of northern Quebec
would include a start on Route 167 north of Mistissini this year. This 260km
road will open up the way to Stornoway's Renard Project.
Not vital, but very important: While Stornoway would have been able to
mobilise large equipment to site from the north, Route 167 makes the process
more efficient and more cost effective. With the road and all bridges likely to
be complete by early 2013, delivery of equipment will be able to start on time
to meet Stornoway's time-line.
No changes to model valuation: We do not know what arrangements will be
made in future over private sector contributions to financing the road. The
government has voted C$278m which is sufficient to complete the road and
bridges. Our model has assumed that Stornoway will fund up to C$40m of this
as a charge over the life of the mine. We charged it evenly each year across the
project. We see no reason to change this.
Diamond prices remain firm: While the tragedy in Japan could have a
near-term impact on rough diamond demand and prices, we do not see any real
threat to the prices which Renard should receive when the project ramps up in
2014. It is interesting that this week Gem Diamonds boosted its model
assumptions from 2.5% real annual escalation in rough prices to 4% given the
likely tightness in the market. In our Renard model we used 2.8% per year.
While Gem's Letseng output is unique and may benefit from above-average
price increases, is likely that our 2.8% assumption may prove conservative.
Investment Conclusion
The decision to start building the Route 167 road to Renard this year is a
positive for Stornoway; it supports the company's project time-line and removes
the need to build a route in from the north. This is another building block to a
new mine and supports our recommendation on Stornoway.
regards