The recent tumble in the price of Aber has been a real mystery to me.My analysis supports a much higher value and I would appreciate any feedback
>>>>>>>>Diavick Project
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>>>>>>>>The Diavick Project is a joint venture between the project operator, Diavik Diamond Mines(60%),a subsiduary of Rio Tinto and Aber Resources(40%).It is located in the Lac de Gras area of the Northwest Territories,300 km northeast of Yellowknife,Canada.It is located next to the Diamond mine BHP/Dia-Met are currently building.
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>>>>>>>>To date,50 kimberlite pipes have been discovered on the property of which 20 are known to contain diamonds.In August/97,the Diavik project commissioned an airborne survey to help define magnetic and electromagnetic anomalies for future drilling.It is possible that more kimberlite pipes will be discovered.
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>>>>>>>>Of the 20 kimberlite pipes known to contain diamonds,4 kimberlite pipes are currently part of a pre-fesability study,with at least 6 other kimberlite pipes waranting additional work.Current resource estimates are as follows:
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>>>>>>>>Pipe Name Million tonnes Carats/tonne Value/Caret Classification Classification
>>>>>>>>---------- -------------- ---------- ---------- -------------- --------------
>>>>>>>>A-418 8.9 3.8 U.S.$60 measured
>>>>>>>>A-154 South 11.4 4.6 U.S.$63 measured
>>>>>>>>A-154 North 11.5 1.9 indicated
>>>>>>>>A-21 5.5 2.7 indicated
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>>>>>>>>The above resource figures are to mean sea level,a depth of 400m.Below this depth there is an additional inferred resource of an additional 10% for each of the A-418 and A-154 North pipes.
>>>>>>>>Their is considerble potential for current resource estimates to increase.The deepest hole drilled to date was in pipe A-154 South which bottomed in mineralization at 532m.Currently their are no inferred resources for Pipe A-154 South below the 400m level.Pipe A-21 has the least surface area defined,with additional potential on surface as well as at depth.Their has also been some speculation that pipes A-154 South and A-154 North may merge at depth.While additional drilling is required to fully define resources,should mineralization extend to 600-650m,the tonnage increase will be substantial.Additional potential may come from other pipes currently being evaluated or that may be discovered.With the large number of World Class pipes discovered by Aber/Dia-Met in the Lac de Gras area,it must be reguarded as the most prospective area for new economic discoveries.
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>>>>>>>>Economics
>>>>>>>>With an indicated value of $290 and $228 per tonne for pipes A-154 South and A-418,they are the most valuable pipes in the world.In the upper part of pipe A-418 is approximately 1.4 million tonnes grading 5.6 carets per tonne at a value of U.S.$73 per carat(value of $409 per tonne).As this will be the first material mined,it will generate sufficient profits to repay mine costs in as little as 6 months.We are currently awaiting Aber's valuation for diamonds from pipes A-154 North and A-21.
>>>>>>>>As previosly mentioned,a prefesability study will soon be completed and a formal fesability started.Speculation as to the economics of this project remain very much a speculation with even the pre-fesability study open to revision as resources become better defined.
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>>>>>>>>In projecting project economics,I have relied on fesability work completed by BHP/Dia-Met.As compiled by Yorkton Securities and reported on Canada Stockwatch on June3,1997,project economics inU.S.dollars for this joint-venture are as follows:
>>>>>>>>Mine Capital Costs $500,000,000
>>>>>>>>Mining Rate 9000 tonnes/day or about 3,240,000 per year
>>>>>>>>Average Value PER Tonne 1.09ct/tonne * $84/ct =$91.56
>>>>>>>>Mining Costs $28/tonne
>>>>>>>>Total Mine Profit(annual)
>>>>>>>> $296,654,400 - $90,720,000 = $205,934,400
>>>>>>>>Value of Dia-Met's 29% share $59,720,976
>>>>>>>>Dia-Met pre-tax profit/share $59,720,976/32,400,000(shares fully diluted)=$1.84
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>>>>>>>>In compiling a similar analysis for Aber/Rio Tinto,we are currently lacking many details so various assumptions must be made.To simplify things,I consider the mining of pipes A-154 South and A-418 which will be mined first and for which we have more compete infortmation.
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>>>>>>>>Mine Capital Costs $600,000,000
>>>>>>>>Mining Rate 9000 tonnes/day or about 3,240,000 per year
>>>>>>>>Average value per tonne ($290+$228)/2 = $259
>>>>>>>>Mining Costs $35/tonne
>>>>>>>>Total Mine Profit(annual) $839,160,000 -$113,400,000 =$725,760,000
>>>>>>>>Value of Aber's 40% share $290,304,000
>>>>>>>>Aber's pre-tax profit/share $290,304,000/40,700,000(shares fully diluted) =$7.13
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>>>>>>>>It should be mentioned that the above analysis does not make allowance for a 2% royalty on the Aber/Rio Tinto property and assumes 100% recovery of diamonds.
>>>>>>>>However,the diamond recovery plant is not 100% efficient and is not recovering all of the diamonds in the sample.Also,infortmation reported by Rio Tinto may be be somewhat conservative.Rio-Tinto certainly has not been anxious to inform anyone that this mine could earn pre-tax profits of $725 million and that it's 60% share would ammount to $435 million representing 25% of it's 1996 world wide pre-tax profit of $1731 million.
>>>>>>To compare this mine to a gold mine,to generate a profit of $725 million,a gold mine with cash costs of $200 per ounce would have to mine 6,300,000 onces per year(assuming a gold price of $315).Considering it would likely take several times the capital investment required to build the mine then Diavik will cost,even this gold mine would fall far short of the investment return that Diavik will provide.
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>>>>>>>>Recent media reports,indicate that mining may be at a lower prodution rate,possibly 2,000,000 to 2,500,000 tonnes per year.I would argue against a lower mining rate based on the following:
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>>>>>>>>1) Just mining pipes A-154-South and A418 based on reported resources,the project appears to have a higher net present value mined at 9000 tonnes/day as compared to 7000 or 5500.
>>>>>>>>2) This is only enhanced by the following:
>>>>>>>> --- a large part of the extra mine construction cost for a larger mine will be paid by income tax savings due to accelerated income tax depreciation rates.
>>>>>>>> --- Resources for pipes A-154 South and A-418 will ultimately be substantially higher than reported (as indicated mineralization in pipe A-154 South extends to at least 532 meters)
>>>>>>>> --- The project net present value will be increased the sooner pipes A-154 North and A-21 are mined,which happens sooner with a higher production rate.
>>>>>>>> --- Should additional discoveries be made,project net present value will be increased with a higher production rate.
>>>>>>>> --- Based on mining the initial 1,400,000 tonnes from pipe A-418,It would appear that mine payback costs would be completed faster at a higher production rate.Consider the profit generated over the first 156 days at various production rates(value $409/tonne - $35/tonne costs)
>>>>>>>> 9000 tonnes/day $525,096,000
>>>>>>>> 7000 tonnes/day $408,408,000
>>>>>>>> 5500 tonnes/day $320,892,000
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>>>>>>>>Based on potential pre-tax earnings of $7.13 per shares,Aber's present price of $11.5(U.S.) per share appears to be somewhat undervalued.Compared to Dia-Met which is now trading at $22(U.S.) per share,Aber would have to increase to $85(U.S.) per share to trade at a comparable earns ratio.Decreasing mining rates to 7000 tonne per day(2,500,000 per year),pre-tax earnings would be $5.50 per share implying a share price of $66(U.S.) per share to trade at comparable earnings to Dia-met.Additional discoveries could add substantially to projected valuations
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>>>>>>>>Perhaps managements greatest challange will be to ward off any take-overs until production starts in 2000 or 2001 and the stock is trading at a value that more accurately reflects earnings as well as exploration potential. Once the investment community realises that Diavik will be the most profitable mine in the world,and is cabable of supplying 15% of the world diamond output at very low cost,the share price of Aber should be significantly higher.
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>>>>>>>>In closing,it should be mentioned that in addition to a 40% interest in the Diavik Project,Aber has an interest in parcels of land surrounding the Diavik project,other prospective areas of the North West Territories, and Greenland.
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