Stornoway looks to be cash-flow positive in 2019

An ore shortage in the first half of the year and a challenging underground ramp-up at its Renard mine led Stornoway Diamond (TSX: SWY) to close a $129-million financing in October. But Stornoway president and CEO Matt Manson says that all the pieces are now in place, and the company is set to be cash-flow positive in 2019.

Stornoway achieved commercial production at Renard, in north-central Quebec, in early 2017. The initial open-pit development was five months ahead of schedule, but underground at the Renard 2 kimberlite, where the majority of the Renard ore lies, Stornoway has been slightly behind plan. Full production of 6,000 tonnes per day was achieved at the end of August, two months behind schedule.

Part of the slower than expected ramp-up had to do with a change in the mining method underground from blast-hole shrinkage stopage to assisted block caving.

“In mid-stride, we had to make an adjustment to the mining method because all of our data was telling us in the mine design process that the kimberlite was quite competent and wouldn’t cave,” Manson said. “But when we opened up the production stopes, we were getting a natural cave.”

In the end, the change in method is a net positive, as it means less dilution and lower costs. Fortunately, the company had prepared for a potential block-cave scenario in its planning, and the infrastructure required for both methods — the drawpoints, overall panel designs and equipment specifications — is the same. Less blasting is needed for assisted block-caving and the company is transitioning to horizontal from vertical panels.

In addition, in the first half of the year, the company wasn’t able to supply enough ore to the mill. While the open-pit development was five months ahead of schedule, underground development wasn’t – opening up a potential production gap.

Recognizing the risk, the company’s mitigation strategy was to extend the life of the open pit, which was a relatively shallow pit with a short life.

“That proved to be unfeasible during the winter because of bad winter conditions, ice, restricted access, and health and safety issues in the pit,” Manson said. “So we were caught short in the first half of the year during the ramp-up in what ore was available to supply the mill,” Manson said.

Meanwhile, the ore coming from underground development from the edges of the Renard 2 orebody was lower grade. Grades are now improving as the company advances toward the centre of the orebody.

Between the ore supply crunch and the ramp-up issues underground, Stornoway had to lower its production guidance in May (to 1.35-1.4 million carats from 1.6 million carats). And at that point, with lower than expected sales revenues affecting liquidity and cash flow, the company recognized the need for an additional financing.

“When we had to change our guidance in terms of carats because of the ore supply issue and the ramp-up, it became clear that we needed to address the balance sheet,” Manson said.

In early October, the company announced a financing of $129 million, consisting of loan principal payment deferrals (up to $54 million); and adjustments to streaming agreements that give Stornoway $45 million. A private placement with institutional investors added $20 million, with an additional $10 million available to existing shareholders.

Manson noted that the company was able to avoid adding any new debt, or doing a dilutive rights offering, as many of Stornoway’s peers have done recently.

“We should be cash flow positive in 2019,” Manson said. “The big capex is now behind us and we’re looking forward to getting cash flow in 2019, and then enjoying that for a long time.”

A relatively weak diamond market has not helped revenues. “Every diamond company that started production in the last couple of years has had a miss on price compared to feasibility planning, and we’re no exception,” he said.

While sales prices for Renard diamonds are much higher this year — by the end of June they were up 27% from the very first sale, Manson notes — they are still below the levels projected in the feasibility study. (The average achieved price was US$109 per carat in the second quarter and US$103 per carat in the third quarter.)

But with several diamond mines slated to close starting next year with the closure of De Beers’ Victor mine in Ontario, Manson believes natural diamond prices will have to rise in the future.

“I think 2017 will prove to have been the top of the supply curve for diamonds,” he said, noting the new production coming on-stream from Renard, Gahcho Kué and Firestone Diamonds’ Liqhobong last year.

“I think 2018 will be down and then it’s down every year for the next five years. The diamond business has never gone through a genuine supply decay before and it will be very interesting to see what happens.”

The company’s ore sorting plant, which was commissioned in May 2018 to reduce diamond breakage, has been working well. The circuit eliminates about 20% of the head feed — most of that consisting of very hard waste rock. As a result, it has cut overall power consumption in the plant.

— This article was first published in the November 2018 issue of Diamonds in Canada.