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Stornoway Sees Potential for Large Diamonds At Renard Mine
Q & A With Matt Manson – CEO of Stornoway Diamond Corp.
Jul 27, 2014 2:36 AM
By Rapaport News
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RAPAPORT... Stornoway Diamond Corporation recently closed a $886 million financing deal that will enable it to build its Renard mine in Quebec - one of a handful of new diamond mines that will commence production in the next few years. In an interview with Rapaport News, Matt Manson, Stornoway’s CEO, outlines the company’s plans for Renard's development and explains what elements set the mine apart from other major Canadian diamond mines.
 Rapaport News: What is your background and how did you come to Stornoway?
MM: I did my PhD in Toronto and I've worked in the diamond sector since the mid-1990s. I was the vice president of marketing at the Aber Corporation, which is now called Dominion Diamond Corporation, from 1997 to 2004. I was with them through the process of financing and setting up the Diavik mine. When I left Aber, I was hired by a gold mining company called Agnico Eagle that was principally focused on Quebec.
At Agnico Eagle, I ran a subsidiary named Contact Diamonds – a junior Canadian diamond miner. Contact Diamonds partnered with the original Stornoway and the two companies jointly acquired Ashton Mining of Canada, which held a 50 percent stake in the Renard diamond project in Quebec. Through this three-way corporate combination, we held half of the Renard asset in 2006. The other half was owned by the Quebec government until we bought it out in 2010.
Rapaport News: What is your timeline for developing the Renard mine?
MM: We broke ground in the beginning of July and expect to develop the mine within two and a half years. The first ore should reach the processing plant in the second half of 2016 and the goal is to achieve commercial production by the second quarter of 2017.
The ramp-up to full capacity should be quite fast and we should achieve production of 1.5 million to 2 million carats per year during the 11 years of the mine reserve’s life. We hope to eventually extend the life of mine beyond 20 years.
We think peak production will be just over 2 million carats per year and we believe we can maintain that production profile for a reasonable amount of time. The diamonds at Renard are worth about $200 per carat, which means the mine could potentially produce $400 million a year in revenue.
Rapaport News: Is there any potential to recover either colored or large diamonds at Renard?
MM: We don't believe there is the potential for colored diamonds. We do know that the potential for big stones exists. Our prediction is that we will recover between three and six stones weighing between 50 carats and 100 carats and one to two stones weighing between 100 carats and 200 carats for every 100,000 carats produced.
The big stones recovered from Renard during sampling were good quality. So Renard does have big stone potential, but the value of those big stones is not in our base case valuation or revenue numbers. These stones will be a bonus.
We are building the plant to be able to recover those big stones from the start. Every diamond miner talks about the potential for big and exceptional stones. The big Canadian mines generally don’t produce large gem-quality diamonds, but Renard could change that. Moreover, Lucara Diamond Corp. has done everyone a favor by demonstrating just how these diamonds can impact a mining company’s bottom line.
Rapaport News: What are the pricing assumptions you used in your development plans for Renard?
MM: We used the same methodology for sampling and valuation that was used at all the other Canadian diamond projects over the years. We collected 10,000 carats of diamonds from various sampling programs at Renard that were distributed between different kimberlite bodies. We sent those samples to Antwerp to be valued and assessed by diamantaires. The same methodology was used at Aber for Diavik and by BHP Billiton at Ekati.
We were a junior mining company with a $150 million market cap raising almost $1 billion to build a greenfield diamond project. That meant that all of the project’s risks were closely examined by a wide range of people, including financing partners and lenders. We have done a huge amount of due diligence and we based our projection on the conservative industry baseline.
Rapaport News: What impact do you foresee Renard having on the global diamond market?
MM: Even though Renard is a large project, it will only account for 2 percent to 3 percent of world supply in value terms during its best years. By itself, it will not impact the supply and demand dynamics in the market.
We subscribe to the universal view of supply and demand for diamonds. Since 2003, when De Beers was sold to Anglo American and liquidated most of its diamond stockpile, we have seen an 8 percent compound annual growth rate (CAGR) in rough diamond prices on a nominal basis. Excluding inflation that means that prices rose about 5 percent a year. Our research suggests that diamond production will remain flat or decline after 2016, while demand in the major diamond consumption countries will continue to grow at a steady pace.
In mining, we don't base decisions on a short-term outlook, so I really couldn't tell you what rough diamond prices will be six months from now. However, in the next five to 10 years, we expect rough prices to rise at the same modest pace that we’ve observed in the past decade. For our own planning, we conservatively estimated rough prices will rise 2.5 percent per year in real terms over a 10-year period, but we also made sure that the project is viable even without price growth.
Rapaport News: How do you plan to sell the diamonds you recover at Renard?
MM: We will use a registered sales agent in Antwerp and we are not going to invest in a large marketing infrastructure.
At Aber we had a very different strategy because we weren't the operators of the project. We were the 40 percent junior partner in Diavik and only received the diamonds after they were mined. Our view was that if we wanted to improve the bottom line of the company we had to get very good at marketing the diamonds. This meant that the company made a big investment in its marketing team and the rough assortments we made.
At Stornoway, the best way we can improve our bottom line is to focus on how we run the mine because we are the mine operators. We are making the conscious choice of handling our diamond sales with a very light touch. We are talking about agency sales in Antwerp, probably through a tender-based system with some flexibility to go to longer-term contract sales if that is feasible.
We have no plans to partner with other companies. The strategy of this company has always been to own 100 percent of the project and to run it ourselves.
Rapaport News: That differs from other Canadian mines, such as Diavik and Gahcho Kué, which are joint-venture projects. What was the rationale behind your decision?
MM: There are many advantages for a mine operator to have 100 percent ownership. We want to be fully responsible for the project’s success. The downside to full ownership is during the financing stage of the project, but the benefits come immediately afterward.
In a joint-venture you must negotiate how the mine is run or you are told by your senior partner how it will be managed, which is not necessarily the best thing for your bottom line. They may have some other agenda or a different operating standard. They may have costs that they want to unload onto the project from other parts of their business. Since we are fully responsible for the mine’s operation, if there are efficiencies that could improve the bottom line we can implement them.
Rapaport News: How then did the Quebec government receive a 25 percent stake in Stornoway and why do you think they chose to invest in your company?
MM: The primary reason is that the provincial government was involved in this project from the start. The original discovery in 2001 was made by Ashton in a joint-venture with a company called SOQUEM, which is the Quebec government's exploration company. SOQUEM spends a few million dollars every year on basic grassroots exploration in Quebec to try to catalyze projects.
One of their exploration projects resulted in the discovery of Renard, so Quebec has had a 50 percent ownership of this discovery since the beginning. They didn't come to us and say ‘we want to invest in your project. They had ownership rights from the beginning.
We bought them out in 2010, principally by making them a big shareholder of Stornoway. They got a royalty as well. The Quebec government is now a 25 percent shareholder in the company and they put 25 percent of the capital into Renard, which is an ideal situation if you are a mine developer. They did exactly what was expected of them as a shareholder.
It’s not a model that necessarily would be followed in other mining situations in Canada or Quebec, but here the government was involved from the discovery stage. But they didn't think it was their job to own the asset, so they were happy to sell their half to us and take an ownership position in Stornoway.
That and their decision to carry their share of the burden in financing the project was, frankly, what allowed us to do the financing. My 25 percent shareholder was willing to put in the money and that opened doors for us.
Rapaport News: How do you envision Stornoway evolving in the next 10 years?
MM: Renard will be fully operational and the company’s main focus. Our debt will be paid off and the mine will be producing a lot of cash flow, which we will use to expand the company through other projects. Alternatively, we will have participated in a consolidation of the Canadian diamond business. Basically, either we will consolidate or be consolidated. That is the future of any mining company.
Mining companies must build their mines, but once they are up and running and cash flow is being generated, it is always about what's next. In that respect, we will be no different from any other traditional Canadian mining company.
The bottom line always has to be about what is in the best interest of our shareholders.
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