Harry Winston, Rio revise Diavik plan

Harry Winston (HW-T, HWD-N) has released a much-anticipated mine plan update for its joint-venture Diavik diamond operation 300 km northeast of Yellowknife, N.W.T.

Harry Winston owns 40% of the mine alongside mega-operator Rio Tinto (RIO-N, RIO-L), though Rio has been publicly shopping its diamond assets in recent months.

The updated life-of-mine plan at Diavik includes current annual production estimates, as well as associated operating and capital costs through 2023. The last multi-year mine plan for Diavik was released in 2008, and the updated model involves the transition from open-pit to underground operations.

The plan assumes the development of the A21 diamond pipe, which is subject to approval from Rio, and includes a preliminary economic assessment and advanced engineering report for underground operations.

Diavik’s expansion will come in two stages, with the first being the completion of a final feasibility and engineering study at a cost of US$5.8 million, followed by crushing and screening tests for berm construction at a cost of US$47 million. The final stage includes berm and cut-off wall construction, as well as pit development and pre-stripping in 2017. The A21 diamond expansion budget is listed as US$507 million.

According to the prefeasibility study, the new plan carries a net present value of US$2.64 billion at a 7% discount rate, and including all reserves and resources. Life-of-mine capital costs through 2023 are pegged at US$917 million.

Diavik’s total proven and probable reserves total 18.9 million tonnes grading 3.1 carats per tonne for 58.9 million contained carats — the study also includes 3.6 million measured tonnes averaging 2.8 carats for 10 million contained carats at the A21 diamond pipeline. Harry Winston states that the measured resources at A21 will be promoted to “reserve” status after completing the development-approval process.

The major change to Diavik’s development comes from a delayed schedule on the A21 pipe. Where Harry Winston previously expected 100% capital expenditures to total US$400 million through 2013, the company has opted to delay development by one year at A21, thereby dropping near-term aggregate development costs to US$300 million. Capital intensity on the expansion is thereby reduced, as build-out expenditures are extended through 2017, when first production is now expected at A21.

As a result of the plan to delay development, Harry Winston expects a drop in short-term production and a subsequent increase in total cash costs at Diavik. The mine was projected to produce 8 million carats per year through 2016, but guidance has been revised to drop below 6 million carats per year, before jumping back to 6.8 million carats per year by 2018.

The partners are experiencing lower-than-expected throughput and grades at Diavik, and missed average analyst production estimates for the second quarter by 5% — Diavik produced 720,000 carats during the quarter — though the companies maintain 2012 production guidance at 8.3 million carats. Harry Winston also revised its diamond price forecast during its quarterly report, dropping it from US$140 per carat to US$129 per carat.

Shifting pieces in the diamond game — such as Rio’s ongoing attempts to sell its diamond business — are complicating matters. Rio’s chief financial officer Guy Elliott said during a quarterly conference call on Aug. 8 that the company is exploring multiple options following a 34% drop in profit to US$5.2 billion during the second quarter. Harry Winston said in June that it may be interested in Rio’s share in Diavik, but has not commented on the sale in the past two months.

According to a Thomson Reuters report dated Aug. 6, Harry Winston is in talks with BHP Billiton (BHP-N, BLT-L) regarding a purchase of the Ekati diamond mine, which lies close enough to Diavik to provide potential production synergies. Harry Winston has reportedly secured bank financing for the deal, but a lack of bidders has BHP considering holding the asset for now.

Harry Winston’s shares have been trending upwards during the second quarter, having gained 10%, or $1.13 per share since early July, en route to a $12.78 press-time close. The company has 85 million shares outstanding for a $1.1-billion market capitalization, and expects to generate US$231 million in net cash flow this year.

BMO Capital Markets analyst Edward Sterck has consistently dropped his target price on Harry Winston since mid-July. Sterck has maintained a “market perform” rating on the stock, though his target has decreased from $16 on July 17 to $13 following the Diavik mine plan update on Aug. 21.

“The updated mine plan provides clarity on the outlook for Diavik as it completes its transition to underground mining, and later brings the A21 kimberlite into production,” Sterck writes in an Aug. 21 research report. “However, a reduction to near-term [capital expenditure] is more than offset by lower-than-expected production and higher cash costs, resulting in an 18% reduction to Diavik’s valuation.”