Dominion Diamonds

Could Dominion Diamonds be interested in Chidliak?

A recent interview to the CEO of Dominion Diamonds (DDC) had some very telling information on merger and acquisition in the industry.

Here is the full link of the article -- Interview Dominion Diamonds

Ignoring the fact that Dominion diamonds indicated in the interview that they would be logical acquirer, there has been a steady sequence of events to get to the point where they are making this said statement.

History:

Aber Resources was one of the original explorers/developers in the 1990's diamond rush in Lac De Gras.
This company became a major partner in Ekati and Diavik and later this entity (Aber) became Harry Winston Diamonds and it included a big retail arm in the jewellery industry. This arrangement lasted for several years (spanning a couple of decades).
Fast forward to the 2010's and the diamond producer and jewellery company decides it was going to become a pure player in the mining industry.
So, they sold off the Harry Winston jewellery of the business including the name "Harry Winston" to the Swatch group and became a pure player miner named Dominion Diamonds with a wall of cash that came in from the sale of the jewellery group.
They then approached all the various partners and looked at consolidating the industry. They managed to buy out BHP's share of Ekati and one of the minor partners.
This was a couple of years back.
Fast forward to late 2015 and you have some very activist shareholders who want changes to be done and changes were done. This created a shift in the Board and a detailed strategic review of the business.
Fast forward to the conference call last week by DDC and the official acknowledgement of the end of the strategic review.

What became of that review? Some key actions:

1 - Jay pipe is a go, but the starting year and first years of production have been significantly tweaked. Also look for other potential projects within the current foray of Dominion Diamond's lands.
2 - Buy back up to 7.2% of all Dominion Diamond shares. (This was probably a direct impact of those activist shareholders)
3 - Sell a fixed asset - Building property in the Toronto area for 10's of million's of dollars.
4 - Replace CFO with a strategic M&A skilled specialist. New CFO tbd.
5 - Room on the current Board to place strategic board members.
6 - Increase dividends from the 40 cent annual dividend plan at some point in the future.

What is known?
7.2% of current shares for buy back.
85 million shares outstanding.
6.1 million shares possibly available to buy back and cancel.
If that was available at current stock price ($11.70) that could equate to $72 million.
The company itself is worth about CAD$1 billion.

The main goals?
Fund internal capital projects with cash flow.
Fund dividends with cash flow.
Fund buy back of shares with current cash flow.
Buy other projects with ??

Doesn't sound like the company would want to spend actual cash on an acquisition as cash flow is earmarked for several tasks.
That leaves a paper share transaction.  X # of DDC shares for X # of company/project.
A lot of times when an all paper share transaction happens, there is a premium on the company been acquired and sometimes there is pressure on the stock of the acquirer (DDC) and the share price can drop.
But, of possible significance, if there is a buy back program to support the share price, this could set up an opportune moment to try to buy some shares on the market as well.
Kind of a mixed bag here, you can issue new issues, at the same time buying and cancelling shares.
You might end up with more shares in the end, but you do end up with a new project to develop.
They also have stated the availability to join the board of directors. There is a chance that any of the projects/companies being acquired could be offered 1 or 2 seats on the board as a selling point.

Assuming Dominion Diamonds does want to acquire a new project, what does the new project have to be able to do?

1 - It needs to be able to raise its own bank financing at reasonable rates. This is significantly helped with DDC backing any loans from the bank.
2 - It needs to generate a significant payback to DDC to, not only generate some nice dividend cash flow for DDC shareholders, but to also make up for the small amount of dilution that occurred from the transaction.

Does a project like Chidliak make this criteria?

With the current PEA, it clearly demonstrates a good return on investment (~30% IRR) and with the right loan backing and the smaller capital $$'s required, a bank loan is a very plausible outcome. There probably needs some extra $$'s spent on the project ($15 to $25 million) upgrade the project detail to bankable financing level, but the project also comes with significant upside that experts at DDC should clearly see and actually be able to try and define what it would mean for them.

Quotes in the interview(s)??

From DDC's CEO:

""We think there are some very encouraging prospects on the horizon potentially," Bell said in an interview."

Speculation --> They are not thinking of internal prospects here...Chidliak could easily be a 'read between the lines' answer to what he is talking about. Other projects could be of interest too.

""We think Dominion Diamonds, the largest publicly traded Canadian diamond player, is the logical acquirer," he said."

Speculation --> This isn't a passive statement...they will be aggressively pursuing this and is a continuation of what they started a few years back with the focus on a pure player. Quite different then what another diamond company said recently when they acknowledged possible M&A opportunities and not necessarily with the diamond industry. DDC is focused on Diamonds.

"Dominion's main focus remains on developing its core internal diamond projects in Canada's Northwest Territories and it was "not desperate to rush in and overpay", Bell said. "

Speculation --> They don't have to acquire any other project as they have a few on the internal pipeline...but they might just be drooling over what they see ("encouraging prospects").

"Dominion was open to purchasing either a project that it would develop into a mine, or a producing mine, he said."

Speculation --> Again, confirming the seriousness of what they want to do. Giving any project in Canada with a phone, to call up Mr. Bell.

""Asked if Dominion would be interested in De Beers' Snap Lake mine, also located in the Northwest Territories, Bell said he was not aware that it was for sale"

Speculation --> Why ask just about Snap Lake? Mr. Bell obviously had an answer with that. One wonders if others were asked and the response was a 'no comment at this time'.

From Peregrine's CEO (a recent interview):

"Mr. Peregoodoff also did nothing to dispel the notion of a possible takeover by, or a joint venture with, a diamond major."

"He says that in mining, every asset is potentially for sale if the price is right, although he hastily adds that, since Mr. Friedland and his older brother, Robert Friedland, own nearly half the company, the "price would have to be right.""

Speculation --> Peregrine is looking at all options to progress the Childiak project as quickly, efficiently and profitably as possible (this is not new). If this includes a possible deal with DDC, now that DDC has officially announced to their shareholders and the public that they are in the mood for an acquisition, then that is a new scenario that may eventually develop some legs. For now, the market can move from speculation to speculation and the speculation of the day/week is that DDC might be seriously looking into Chidliak. It may just be a question how to get in and at what cost....or it may just be some conversations in a back room somewhere that nobody ever hears about and no one is the wiser.