By: Matthew Hill
24th August 2011
Updated 23 minutes ago
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TORONTO (miningweekly.com) – Mountain Province Diamonds, which has a joint-venture with De Beers in Canada's Northwest Territories, has received interest from companies interested in buying the TSX-listed firm out, but has decided to go it alone for now, CEOPatrick Evans said on Wednesday.
Earlier, Mountain Province said “unsolicited expressions of interest”, sending its shares up by nearly 4%.
“The interest we received was generally of a takeover nature – companies interested in acquiring control of Mountain Province,” Evans told Mining Weekly Online, declining to name them, only saying that they were current diamond producers.
He added that the company had been in talks with “a number of parties” for the last six to eight months.
“The discussions were of an advanced nature...the board of Mountain Province is of the view that these approaches are premature,” Evans said.
The company believes it still has value to add by doing further exploration at the Gahcho Kué joint-venture with De Beers, the world’s biggest diamond miner, as well as progress to be made on the permitting side.
The two exploration programmes should be complete by year end.
“It’s important for us to know what we have before we start entering into any negotiations that may involve a sale of the asset or the company,” noted Evans.
WHAT’S NEXT
National Bank Financial analyst Paolo Lostritto said it was possible that the companies interested in buying Mountain Province had made offers that the target thought were too low, and that the company was effectively telling them to increase the amount or back off.
“I would tend to agree that that’s exactly the strategy,” he said.
The most likely suitor is De Beers, which owns 51% of Gahcho Kué, with Mountain Province owning the rest.
Salman Partners analyst Ray Goldie agreed that De Beers would be the "natural choice".
According to Lostritto, Toronto-based Harry Winston is another possible candidate, along with BHP Billiton and Rio Tinto.
Goldie said Harry Winston would be interested, in particular, because its "reserves disappear in the next decade".
De Beers was not immediately available for comment, and a Harry Winston spokesperson said it was compny policy not to comment on rumours and speculation. The Toronto-based firm said earlier this year it was interested in acquiring diamond mines.
BIG RABBITS
Gahcho Kué, which is Chipewyan for ‘a place where big rabbits are found’, is located 280 km northeast of Yellowknife and 80 km east of De Beers’ existing Snap Lake mine.
Evans said in a phone interview that his company would prefer it if it didn’t receive an unsolicited bid, but that it would ultimately be a decision for shareholders to consider were one to transpire.
“We really don’t want to be dragged into negotiations...If third party were to decide to make firm bid to our shareholders, then it would be our duty as the board to consider it and to seek an independent fairness opinion and make a recommendation to our shareholders.”
In the meanwhile, Mountain Province will continue with its exploration efforts, as well as financing for its portion of the mine’s anticipated $600-million price tag.
Evans said that the firm had started talks with a top-three Canadian bank to finance the debt that his firm will need to raise to fund the development. He didn’t want to say which one, as the there was no formal agreement in place yet, though this was expected in October.
According to Goldie, the most likely bank is CIBC, which was also involved in the funding of the Diavik mine that Harry Winston and Rio Tinto own.
According to Evans, he had expected to have to raise 50% in debt and 50% in equity to fund Mountain Provinces share of the project, but that the bank had indicated the debt portion could go higher than 70%, because of Gahcho Kué’s solid economics.
A feasibility study pegged the internal rate of return (IRR) at 34%, and that was using diamond prices from April last year.
Gem prices have soared over 50% since, and Evans said using today’s prices, the IRR jumps to over 50%.
Lostritto is quick to point out that cost inflation has also shot up since.
“You can move the one lever, but there has been cost inflation experienced by some development projects over the past six months,” he said.
“That being said, over the last six weeks the exact opposite has been true”, with prices for input materials such as oil and steel having come down in price.
Lostritto has a $7 target price for Mountain Province shares, which rose 7% to $4.92 apiece by late afternoon in Toronto.
“If things transpire the way I expect them to, the stock should trade north of $15 a share” once Gahcho Kué starts producing, he said.
The permitting process for the mine, the largest and highest grade diamond development project globally, is expected to reach completion around the end of next year, with first production in about four years.
It will produce about 4.5-million carats yearly.