Mine construction last big hurdle for Stornoway.
Stornoway Diamond Corp. (TSX: T.SWY, Stock Forum) saw a 24.14% jump in stock price on July 16, up seven cents to 36 cents per share. The rise followed the resumption of trading after a halt due to a financing-related news release. SWY reported that it had received $22 million from a private placement of 24,444,444 common shares at 90 cents a share. This is a premium of 195% on top of the opening price of $0.305 that day. The participants in the private placement are Agnico-Eagle Mines Ltd. (TSX: T.AEM, Stock Forum) and Lorito Holdings Ltd. This $22 million will go to pay off debt in the form of debentures held by AEM and Lorito. AEM is already a significant shareholder of SWY, and with this transaction it will hold 17.6% of the outstanding shares. After the completion of this transaction, SWY will be debt-free.
This transaction is something of a coup in the current market. Juniors have been struggling to obtain funds to develop their projects and pay off debts. The credit market has been mostly deaf and blind to the woes of these companies as many lenders are themselves finding it a struggle to remain solvent. For a mining and exploration junior to pull off a private placement at a pre-subprime crisis share price is something of a shock (albeit a pleasant one) to investors and analysts who have become used to seeing the market cap of companies such as SWY slide by 50% to 80%. By offering equity to pay off its debts, SWY has managed to find a creative alternative to solving its cash problems in a bear market. The main upside here is that the dilution of the stock is one third of that if SWY were to issue stock at market price.
Now with balanced books, SWY faces only one major and immediate hurdle – to finance the construction of a diamond mine on their Foxtrot property in Quebec. This project, focusing mainly on the Renard kimberlite pipes, but also the Lynx and Hibou kimberlite dykes nearby, is joint owned 50/50 with SOQUEM and is fully described in an earlier article. SWY’s share of the mine construction costs will likely be over $100 million. The actual numbers are due out in September with the pre-feasibility study. The report was initially due this summer, but similar projects submitted earlier by Peregrine (TSX: T.PGD, Stock Forum) and Shore Gold (TSX: T.SGF, Stock Forum) tied up AMEC, the company contracted to conduct the study, until recently. Should the report be positive, as the geology and current diamond prices suggest, a significant amount of capital investment must be made to bring in the needed infrastructure for a mine. SWY will have to carry at least 50% of these costs.
One of the immediate costs is road access. Renard will not be an arctic diamond mine, dependent on airlifts and unpredictable ice roads for supply, but rather a site accessible by land year-round. SWY is in talks with Western Troy Capital Resources Inc. (TSX: V.WRY, Stock Forum), Strateco Resources Inc. (TSX: T.RSC, Stock Forum), and Eastmain Resources Inc. (TSX: T.ER, Stock Forum) – other mineral/metal exploration companies with projects in the Otish Mountains that are working with local communities and the Quebec government to build the “Route Monts Otish.” This partnership would provide strong benefits for all parties involved because the cost of construction would be shared. SWY will need to bring September’s report to the table when the parties decide who pays what share of the road costs. It is also possible that the construction will bring in electricity service as well, further reducing the large bill SWY faces.
After September, SWY will have to come to a decision on how to fund the mine. Even if the Quebec government pays its full 50% share and the aforementioned road plan comes through, the cost to SWY will be well into the tens of millions of dollars. The company has a number of options to consider in obtaining the cash necessary to build the mine:
(1) They can go the traditional route and get financing from credit institutions. If the credit market simmers down by the winter this may be a possibility. Factors that would attract a lender are that the company has settled its accounts, the Foxtrot property has high and fairly well established diamond potential, and the company has many other promising secondary properties such as Aviat and Churchill (the latter a JV with Shear Minerals (TSX: V.SRM, Stock Forum)).
(2) Future private placements can be made. This will dilute the stock, but by how much is dependent on how the share price is doing at the time of issue. If today’s rise in share price is any indication, a positive report in September may be the catalyst investors need to return the company to the ~$1.00 level. In addition, management has established that they possess some expertise in brokering strong deals with large investment players (Rio Tinto (NYSE: RTP, Stock Forum) is another major shareholder, with ~11% of the company).
(3) The company may bring in a third party to purchase a portion of its share in exchange for funding most of SWY’s costs a la the Franco-Nevada strategy.
(4) Interested parties could be sold secondary assets in exchange for cash to fund the mine. In addition to the aforementioned Aviat and Churchill projects, SWY holds promising advanced- and reconnaissance-stage projects in Nunavut, Ontario, the Northwest Territories, Alberta and Saskatchewan.
It is likely the company will use a mix involving one, some, or even all of the above options to in order to proceed with construction.
Given that Quebec is regularly acclaimed as one of the top mining-friendly provinces in Canada, and that the province has a direct stake in the project, there seems to be fewer speedbumps on the road to Renard. Management with have to use every means at their disposal in order to navigate markets wracked with investor apathy towards diamond players.
Disclaimer: The author holds 2000 shares of SWY. This article is based on the personal opinion and experience of the author. Please do your own due diligence when investing.
This article was written by a member of the Stockhouse community.
