Tuzo Deep runs deeper, Mountain Province says

Two years ago, drilling at the Gahcho Kué project owned by De Beers Canada and Mountain Province Diamonds (TSX: MPV; NYSE-MKT: MDM) confirmed that the Tuzo Deep diamond-bearing kimberlite deposit was open at a depth below 564 metres. This year, the joint-venture partners completed a winter drill program to test the kimberlite structure and have found that it extends more than 740 metres below surface.   

The core will be processed at Geoanalytical Laboratories Diamond Services and the results will help determine whether the additional kimberlite is economic.

Gahcho Kué in Canada’s Northwest Territories is the world’s largest and richest new diamond development project, and is scheduled for first production in the third quarter of 2016. De Beers owns 51% and Mountain Province owns 49%. It will be the Northwest Territories’ fourth diamond mine, and the second that De Beers has permitted in the territory.

In July 2013, Mountain Province released an updated resource estimate for the project that incorporated the results of a 2012 Tuzo Deep drill program. In the estimate the Tuzo Deep resource was upgraded from an inferred resource to an indicated resource from a depth of 300 metres to 360 metres, extending the indicated resource from surface to 360 metres, while the inferred resource ran from a depth of 360 to 564 metres below surface.

An updated feasibility study released in April 2014 estimated that an open-pit operation would produce 4.5 million carats a year over 12 years for a total of 53.4 million carats, at revenues of US$149.66 per carat. The project’s post-tax net present value is pegged at $1 billion using a 10% discount rate, and its after-tax internal rate of return is 32.6%. Based on 5.6 million carats per year (on a 100% basis) in the first three years of production, or 2.8 million carats a year for Mountain Province, gross revenues for the company are estimated at $412 million per year during that period, or $240 million after all costs, which yields a payback of less than two years.

Patrick Evans, Mountain Province’s president and CEO, tells The Northern Miner that of all the kimberlites at Gahcho Kué, Tuzo Deep has the most potential for substantial volume at depth.

“The purpose of this deep drilling was to really take advantage of a relatively quiet period that we’ve had over the last few years while we’ve been permitting Gahcho Kué to do further exploration, to determine whether there’s potential for an extension of the mine life beyond the current plan of twelve years,” Evans explains. “Under the current mine plan it would be mined out by 2028. In 2025, in about eleven years’ time, production drops off from an average of 5 million carats a year to below 4 million carats.  If there is potential for the development of an underground mine, as has happened at Ekati and Diavik, it’s good to know sooner than later, for planning purposes.”

While Evans concedes it’s too early to know whether there is potential for an underground mine, it is encouraging that the Tuzo Deep kimberlite continues down to at least 750 metres. “It’s the last of the deep drilling we’ll be doing for the next few years while we focus on mine construction,” he adds. “But once construction is complete and the mine is in production in 2016–2017, we can turn our attention back to looking over the horizon to see if there is potential at Tuzo Deep for additional resources to extend the mine life beyond 2028.”

Commenting on the results of the 2014 winter drill program at Tuzo Deep, Edward Sterck of BMO Capital Markets noted that the Tuzo Deep resource “is not part of Gahcho Kué’s current mine plan, but a potential Tuzo Deep resource expansion could provide sufficient critical mass for an underground life-of-mine extension.”

The London-based analyst noted that the completion of the company’s $45.5-million non-brokered private placement on June 27, along with the $46 million Mountain Province held in cash at the end of March, should see the company funded into the fourth quarter of 2014.

Matthew O’Keefe of Dundee Capital Markets wrote in a research note that “favourable diamond results could help support the economic potential of Tuzo Deep, which could extend our modelled mine life of fifteen years.”

At press time Mountain Province traded at $5.08 per share within a 52-week range of $4.77 to $5.87.

Sterck has a $6.15-per-share target price, while O’Keefe’s target price runs to $9 per share.