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New diamond producers weighed down by weak prices, lackluster demand

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


New diamond producers weighed down by weak prices, lackluster demand

Rough diamond prices have fallen sharply since 2014, driven by a combination of a midstream liquidity crisis in 2015 and demonetization in India in 2016, along with current lackluster demand for rough diamonds on the back of robust restocking in the first half of 2017.

These factors, as well as negative impacts on individual mine production, are weighing on sentiment and share prices of three new diamond producers entering the market.

RBC Capital Markets analysts believe that the challenges of realized price discounts for the three new producers — Firestone Diamonds Plc, Stornoway Diamond Corp. and Mountain Province Diamonds Inc. — are likely to continue until around 2021, which is expected to keep pressure on their margins and cash flow generation.

"Further, prices for individual new mine production has been impacted by varying degrees of price discovery discounts, fluorescence, breakage and mix," RBC said in an Oct. 12 note.

This year was expected to be an exciting one for the diamond industry, with three new mines reaching commercial production within months of each other after years of exploration, fundraising and development. The RBC analysts noted that the last new diamond mine was PJSC Alrosa's Karpinskaya-1 operation in 2014.

While the mines did come online, hopes and expectations for a smooth ramp-up did not bear out; weak prices, operational challenges and balance sheet concerns have combined to drive new producer share prices lower since first production.

RBC downgraded Firestone Diamonds to "sector perform" from "outperform" on the back of lower grades, lower value mining areas and weak market prices due to an elevated level of small stones.

The company's near-term cash flows are looking tight versus scheduled debt repayments in RBC's view, due to the resulting tightening balance sheet along with a proposal to revise the mine plan at Liqhobong, which RBC believes aims to bring the waste strip forward.

"We believe that until it provides the market some clarity around expected base case prices (guided lower than before), rerating potential is capped," RBC said.

RBC set a target price of 19 British pence per share for Firestone Diamonds, down from its current share price of 23 pence, with potentially negative implied return.

RBC also downgraded Stornoway Diamond to "underperform" from "sector perform," citing a breakage problem, which is impacting the company's realized prices and could also impact its balance sheet.

Stornoway plans to address the issue with ore sorting to separate waste, with additional plant equipment scheduled to be fully integrated by the first quarter of its fiscal 2018.

"In the interim, we see limited improvement in breakage (and thus sustained discounts)," the RBC analysts wrote. "This draws our attention to the balance sheet, where we see available liquidity deteriorating and potential covenant issues."

The bank pegged a target price of 60 Canadian cents per share for Stornoway, compared to the company's current share price of 75 cents.

The main challenges faced by Mountain Province Diamonds are mix and fluorescence, which are impacting realized prices, partly offset by better recovered grades at its 5034 unit. The 5034 unit forms part of the Gahcho Kue joint venture in Canada's Northwest Territories with Anglo American Plc subsidiary De Beers SA.

"We find that if Mountain Province is able to access the cash held in its reserve accounts, it can withstand pricing pressure until a 10% structural reduction in prices," RBC said. "If we assume that the current 35% mix discount remains, we see the company moving into negative liquidity in 2019," RBC said.

RBC noted that the company needs to restructure its debt repayment profile to de-risk its balance sheet.

The analysts maintained a "sector perform" rating for Mountain Province with a target price of C$4.40 per share, outlining 11% of upside potential.

Elsewhere, S&P Global Ratings lowered its long-term corporate credit rating on Petra Diamonds Ltd. to B from B+ on weaker credit metrics, with a stable outlook.

Since reporting fiscal 2017 results, the South African rough diamond miner has been facing challenges including a stronger South African rand versus the U.S. dollar, labor strikes at three of its mines in South Africa and escalating risk in Tanzania, including a diamond valuation dispute with the government.

The S&P Global Ratings analysts' lower earnings estimate for Petra reflects higher costs and somewhat lower production, prompting Petra to warn that it is likely to breach a key condition of its banking agreements related to a core earnings ratio for the fiscal year that ended June 30.

"We now expect funds from operations to debt of 20% to 30% over the coming two years," S&P Global Ratings said Oct. 13. "This follows from an FFO-to-debt ratio of 11% in fiscal 2017, which fell short of expectations and led us to revise the outlook on Petra to negative [in early August]."

In the fiscal year that ended June 30, Petra reported weaker-than-expected metrics as its profitability fell due to the strong rand and its debt level increased following a US$650 million bond issue. Additionally, production volumes fell short of guidance as the Cullinan processing plant and Finsch sub-level cave reported delays in ramp-up during the year.

In the gold space, RBC revised its target price for Polymetal International Plc from £8.40 to £8.60 per share, compared to its Oct. 11 share price of £8.62.

The gold miner recently increased reserves at the Komar deposit in Kazakhstan by 57% in terms of contained gold and discovered additional mineralization along strike in the northern part of the deposit.

Accordingly, Polymetal plans to mine and process about 2 million tonnes of ore per year from Komar at the Varvara processing plant, increasing from the 1 Mt/y ore production rate forecast at the time of its acquisition.

This will also help replace lower-grade Varvara material to increase production, lower costs and extend the mine life at Varvara by three years to 2032.

While RBC believes that Regis Resources Ltd. stock is fully priced at current levels, it raised its target price for the company to A$3.75 from A$3.50 per share and maintained a "sector perform" rating.

This follows a strong production report from the company for its first quarter of fiscal 2018, with 91,921 ounces of gold and lower all-in sustaining costs of A$861/oz, compared to RBC's estimate of 85,800 ounces and all-in sustaining costs of A$955/oz.

The Duketon Southern Operations in Western Australia produced 61,150 ounces in the three-month period, a 2% quarter-over-quarter increase on the back of marginal improvements in throughput and grade, while the Duketon Northern Operations produced 30,771 ounces.

Citi analyst Trent Allen also raised the price target for Regis stock to A$3.70 per share, up from A$3.60 per share, with a "sell" recommendation.

Allen noted that the company's strong production in the quarter is expected to weaken later in the fiscal year, in line with guidance, and positive exploration results are needed to sustain Duketon, and especially Duketon Northern Operations, beyond fiscal 2021.

Regis' gold production of 91,921 ounces was 3% higher than Citi estimates, while all-in sustaining costs were 1% below its forecast.

S&P Global Market Intelligence and S&P Global Ratings are owned by S&P Global Inc.