Canadian diamonds are coming back into fashion, and analysts at Dundee Capital Markets have noticed, initiating coverage of two diamond developers in Canada and three advanced explorers.
With Canadian diamond projects in the spotlight thanks to Dominion Diamond’s (TSX: DDC; NYSE: DDC) purchase a year ago of the Ekati mine from BHP Billiton (NYSE: BHP; LSE: BLT) and junior Stornoway Diamond (TSX: SWY; US-OTC: SWYDF) recently landing a nearly $1-billion financing deal to build its Renard project in Quebec, Dundee analysts believe it’s time to invest in Canadian diamond stocks.
A report released on May 27 by senior mining analyst Matthew O’Keefe and research associate Erik Bermel notes that diamond companies — at least those with market caps of $30 million or higher — outperformed precious metals equities in 2013.
“Unlike gold equities, the main driver for diamond price growth, as with other luxury goods, is the steady recovery in the global economy,” the report says.
However, this year, there’s been a disconnect between diamond prices and diamond stocks. While polished diamond prices are up 3.8% year-to-date, diamond equities have remained flat in 2014.
“Historically, diamond equities have moved . . . with gold equities, which seems to be the cause of this divergence, which began in February,” the report reads. “We view this as an opportunity for investors, creating attractive valuations in a rising diamond-price environment.”
While Dundee’s list of Canadian developers and explorers is down 5% year-to-date, in line with their peers, the Dundee analysts expect better performance as the companies meet milestones.
These companies include developers Mountain Province Diamonds (TSX: MPV; NYSE-MKT: MDM) and Stornoway Diamond, and advanced explorers Kennady Diamonds (TSXV: KDI; US-OTC: KDIAF), North Arrow Minerals (TSXV: NAR; US-OTC: NHAWF) and Peregrine Diamonds (TSX: PGD). All five stocks are rated a “buy,” with the developers rated as high-risk and the explorers as “speculative.” Dundee has a $9 target price on Mountain Province and $1.60 on Stornoway.
Mountain Province Diamonds’ 49%-owned Gahcho Kué project with De Beers in the Northwest Territories is already under construction — with first production expected in late 2016 — and Stornoway has just completed the first $374 million of a nearly $1-billion financing announced in April to build its Renard diamond project in Quebec.
The advanced explorers on Dundee’s list also have milestones coming up. Kennady Diamonds is conducting a mini-bulk sample at its Kennady North project, adjacent to Gahcho Kué, and expects to have an initial resource estimate before year-end. Peregrine, which announced a first resource for its Chidliak project in Nunavut earlier this month, is conducting bulk
samples on at least three kimberlites next year to add resources
and inform a prefeasibility study. North Arrow is working on several projects, the most advanced being its Qilalugaq project (joint ventured from Stornoway), where it is carrying out a bulk sample to add resources and collect enough diamonds for an initial valuation.
The Dundee report advises taking a “basket approach” to investing in diamond stocks, especially at the exploration level, focusing on high-quality, well-funded names it identifies.
“The companies that we have identified in this report have well-regarded and experienced management teams and the resources required to reach key milestones and deliver positive results providing significant upside potential.”
The report notes that since 2013, demand for diamonds has recovered, with demand in the U.S. — the world’s largest diamond consumer — returning to pre-financial crisis levels, and improvements in Japan, China and India. Longer term, U.S. demand is expected to increase at the rate of overall economic growth, and Chinese and Indian demand will grow faster, driven by a surging middle class.
At the same time, there is limited new supply coming on stream.
“As a world-class discovery today would likely take ten to twelve years to reach initial production, we believe demand is likely to outpace supply from existing mines in the short- to medium-term,” the report says.
— This article originally appeared on The Northern Miner’s sister website www.miningmarkets.ca.
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