May see some buying pressure as a result of this, and other revisions by RBC Cap, Paridigm, Canaccord, bmo and maybe some new coverage
SWY: Renard Diamond Prices Sparkle on New Study
Event
This morning, SWY announced revised modeled diamond price estimates for its
100%-owned, Renard project in northern Quebec. We will be attending a site
visit to Renard on Jun-22-11.
Action
We recommend buying SWY on recovering diamond prices and de-risking of an
increasingly recognized world class diamond development project.
Analysis
? Independent Valuation Complete. Over 7,000 carats combined from the
Renard 2, 3 and 4 (R2, R3, R4) kimberlite pipes were analyzed and priced
by five independent diamond companies (during May 9-13, 2011). One of
these, WWW International Diamond Consultants Ltd (WWW) oversaw the
process and analyzed the data to produce a “modeled price” (taking into
account a higher large-diamond component, potential lower diamond
breakage, etc upon commercial production). Pricing data will be
incorporated into a feasibility study (expected in 3Q11E, by Sep-30-11).
? Prices Much Higher. WWW updated base case modeled price estimates
are US$182/ct at R2 and R3, +56% vs. WWW’s US$117/ct valuation in Sep-
09 (and +44% vs. our modeled US$126/ct); R4 was US$112/ct, +49% vs.
US$75/ct in Sep-09 (and -11% vs. our US$126/ct). Given prices are the
average of the valuations WWW believes base case prices are 10% lower
than what might actually be fetched in the current market.
? R4 likely Upgraded. R4 prices are lower than R2/R3 due to finer
distribution, however, this was previously found to result from poor
processing (high breakage) – not lower quality ore. As such, SWY believes
R4 will likely be priced at US$182 (in-line with R2 and R3) for the feasibility.
? Model Changes. Incorporating $170/ct long-term price for R2, R3 and R4
increases our NPV (8%) by 141% to C$688 mln from C$286 mln. To be
more conservative, however, we have used this opportunity to revisit our
assumptions, increasing LOM opex to C$51/t (from C$39/t, as per PA dated
May-2010). This drops our NPV to C$533 mln (up 86% from previous).
Valuation
We are maintaining our Outperform rating and raising our target to $3.80