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Mountain Province Sees Possible 20 Years of Production at Gahcho Kué

Q & A With Patrick Evans – CEO of Mountain Province Diamonds

Aug 31, 2014 9:02 AM   By Rapaport News
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RAPAPORT... Mountain Province Diamonds owns a 49 percent stake in the Gahcho Kué diamond project in Canada's Northwest Territories. Patrick Evans is a former South African diplomat and mining company executive who has served as Mountain Province CEO since 2005. In an interview with Rapaport News, Evans discusses what distinguishes Gahcho Kué from other diamond mining projects in development and what he has learned during his career in the mining industry. 

Rapaport News: You started your career as a South African diplomat. How did you end up as the chief executive of a Canadian diamond mining company?

PE: My mining career started with the Vancouver-based gold company Placer Dome, which was the second largest gold company in Canada at the time.

While I was working with Placer Dome, I served as a non-executive director of Southern Era Resources, a diamond exploration company active in Africa. Southern Era discovered the Marsfontein and Klipspringer diamond mines in South Africa, which introduced me to the diamond industry. 

Rapaport News: Based on your experiences in mining development in South Africa and Canada, how important is government and local community support in setting up a mine?

PE: Community relations are a very important aspect of developing a mine. Irrespective of where you do business, it is vitally important that the affected communities feel that they are partners in your business.

Developing a mine like Gahcho Kué can have a big impact on local communities. Ultimately, you will draw much of your labor and suppliers from the local communities. We are currently providing training and employment to members of Gahcho Kué’s local communities. We also have a preferential procurement policy to acquire goods and services from businesses operated by members of these communities.

The local communities in Canada’s Northwest Territories have benefited enormously from the development of the other diamond mines and they will benefit from the development of Gahcho Kué as well.

You also have to take into account the impact developing a mine has on the environment. It would be naive to assume that developing a mine the size of Gacho Kué would not have an impact on the environment but it is critical to minimize the impact.

Rapaport News: There were some contradictory reports earlier this year pasting regarding construction delays. What is the development timeline for Gahcho Kué?

PE: Our first construction permits were approved in October 2013, and we started the 24-month construction program in December. The construction period for the mine is 24 months. At the end of July, we had completed 36 percent of the construction work. In August, we received approval for a final land-use permit and the final water license was granted by the water board and sent to the federal government for approval. This means that our construction can now proceed to completion, and the development of the project is on schedule.

After construction is completed at the end of 2015, we will start commissioning the processing plant during the first half of 2016. We expect to see production begin in the second half of 2016. Our current target is to reach full commercial production in January 2017.

Rapaport News: De Beers is the the mine’s operator. What was your motivation to partner with De Beers on this project?

PE: We have actually been in a joint venture with De Beers since 1997. We signed a revised joint-venture agreement with De Beers in 2009, whereby we regained the right to independently market our share of the diamonds recovered at Gahcho Kué. Specifically, we will market 49 percent of the mine’s production, and in return, we agreed to fund 49 percent of the mine’s construction costs. We are funding our share of the mine independently of De Beers and they are not assisting us in arranging the debt and equity for our share of the capital.

In a sense, De Beers and Mountain Province are equal partners in Gahcho Kué, as all material decisions, plans and budgets require the agreement of both partners. Although De Beers has a 51 percent interest in the joint venture, it cannot exercise a majority vote regarding plans or budgets without our consent.

The joint venture has agreed to make De Beers the mine operator as there are obvious benefits to utilizing De Beers vast experience in building and operating mines.

Rapaport News: How does Mountain Province plan to sell its share of diamond production?

PE: We expect our share will be around 3 million carats per year during the first four to five years of production. It will then drop to between 2 million and 2.5 million carats per year during the following seven years.

We still have two years until our first sale. Mountain Province has devoted the next 10 to 12 months to reviewing what our peer group of medium-sized mining companies do in terms of marketing.

Based on their experiences, we will decide how to market our share of production in order to achieve the highest price for our shareholders. We will then have an additional 10 to 12 months to implement our marketing mechanism.

Regarding the sale location, we are examining all possibilities. The key is to get as many eyes on our diamonds as possible. It is important that the market gets to know the Gacho Kué diamonds in the early stage of production.

Antwerp is typically very successful in this regard and has its obvious benefits, but we are also considering Gaborone or Tel Aviv. Our marketing strategy is very simple. We will sell our diamonds in the most cost-efficient way to maximize revenue for our shareholders.

Rapaport News: What kind of diamonds will Gahcho Kué produce? Is there any potential for colored or large diamonds?

Like most Canadian diamond mines, Gahcho Kué contains primarily white diamonds. WWW International Diamond Consultants conducted an independent valuation for us in February 2014 and estimated an average diamond value of $174 per carat, which is in line with typical production from Canadian mines.

Over nearly 20 years of exploration at Gahcho Kué, we have recovered 8,300 carats in the bulk sample. Within that parcel, we have a good, representative range of the diamonds contained in the kimberlite.

Notably, from that sample, we recovered two large diamonds of very high quality and value. The largest diamond that we recovered in the exploration stage was a 25-carat diamond, which has been valued at about $20,000 per carat. The second largest diamond was a 10-carat stone valued at $22,000 per carat.

If one of the large diamonds that we had recovered was of low quality then it would have raised the concern that we may have large diamonds but not of a high quality. Because both large diamonds were high quality, the consensus is that the chances are very good there will be more such diamonds.

Rapaport News: Does Gahcho Kué’s production resemble that of any of the other Canadian mines, and how would you compare it with the Renard project?

I think Gahcho Kué will be very similar to the Ekati mine in terms of the size of the diamond resource and the production rate. The only similarity between Gahcho Kué and Renard, and I emphasize only, is the age of the kimberlites.

The most distinguishing difference between Renard and Gahcho KuéKué is their ore grades. Gahcho Kué has a grade of 1.57 carats per tonne whereas Renard has a grade of 0.75 carats per tonne. Ore grade is the single-most important thing in an ore body, and Gahcho Kué has the highest ore grade of any new diamond mine being built in the world.

Gahcho Kue's higher grade means we have a much larger resource, with a reserve of 55.5 million carats compared to Renard's 18 million carats.

Gahcho Kué will have higher operating costs than Renard at about $73 per tonne, compared with $60 per tonne at Renard. But due to the ore grade, the operating margin at Gahcho Kué will be about $200 per tonne while at Renard it will be around $50 per tonne.

Rapaport News: What are your long term plans for Mountain Province?

PE: We discovered Gahcho Kué 20 years ago, and Mountain Province has been funded by shareholders without any financial return for even longer. The primary reason that Mountain Province exists as a public company is to pay back our shareholders for their support.

The most important consideration for us when we reach commercial production is to ensure that we can pay our shareholders a dividend. It will be modest to start as we repay our debt, but once the debt has been repaid, we will have an annual dividend of at least $1 per share, with about 130M shares outstanding.

We don't anticipate making any acquisitions. Gahcho Kué has all the potential for growth that our investors would require. The mine is based on a reserve of 55.5 million carats and a life of 12 years. We also have an additional resource of nearly 20 million carats, which would entail deepening the pits at the site's three kimberlites, thereby extending the life of mine to nearly 17 years.

We have also been drilling at Tuzo Deep, our Phase 3 development, which would extend the development of the massive Tuzo kimberlite below the current resource. Tuzo Deep has the potential to add another 10 million to 12 million carats to the resource, which would further extend the life of mine to approximately 20 years.

Rapaport News: Your son works with you at Mountain Province; what advice did you give him before he entered the industry?

PE: Diamond mining is a business that requires immense patience and perseverance, but the rewards are second to none. We discovered Gahcho Kué 20 years ago, and it will be another two to three years before it reaches commercial production. I think for a young person who is 23 to 24 years old to imagine they are going to embark on a business venture that will require an investment of 23 or 24 years before seeing a return is something quite profound.

On the other hand, diamond mines are among the highest margin businesses in the world. There is no better way to create value and a higher return for shareholders than through successful diamond exploration and mining.

Equally important, and I have impressed this upon him, are the benefits to the communities, to the Northwest Territories and to Canada. Mountain Province will create employment for up to 700 people during the construction phase and approximately 400 people during production in an area of the world where there are very few employment opportunities. The impact that you can have on people's lives through mining and exploration is extraordinary and rewarding.
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Tags: Gahcho Kue, Kennady Diamonds, mining projects, Mountain Province Diamonds, northwest territories, Patrick Evan, Rapaport News
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