Monday, July 11, 2016

Risk Reward V

Risk Reward Part V

There have been several milestones met along the way to the development of the first mine at Chidliak and each one of these milestones de-risks the project that much more.

The latest milestone being the first ever PEA (Preliminary Economic Assessment) that came out last week.

It shows an NPV after tax at a discount rate of 7.5% of nearly CAD Half billion and a significant IRR of 30%.

How does this de-risk the project?

1 - It clearly shows a Phase 1 development of a mine can occur with significant profitability.
2 - Conservative assumptions were used to come up with the NPV. This involves many facets of the project...not just one assumption. Going from conservative to more realistic values, as more information is obtained, could add significant NPV value to the project.
3 - The project clearly shows significant upside beyond the PEA inputs.

What is a project worth an NPV (after tax @ 7.5% discount) of CAD$471.2 million with significant upside actually worth in the market today?

The current price of Peregrine Diamond's shares sit at 27 cents. With 340 million shares outstanding, that equates to a value of CAD$91.8 million.

Let's look at a plausible scenario for a 50% partner with deep pockets.

In exchange for 50% of Chidliak, what would Peregrine want?

1 - The new partner to fund the project up to pre-construction phase at cost to the new partner.
2 - The new partner to fund all capital requirements and Peregrine to repay the capital out of future cash flow for its 50% share.

In the past, previous option deals have been similar to these requirements. Commit to spend $50+ million on the project plus pay for the capital for the construction of the mine.

At this point in the project, $50 million may not even be needed to get to construction of the project.
With the PEA, Peregrine might even demand more.

So, a deal might look something like this:

1 - Peregrine gets a commitment of $60 million from the new partner to spend on tasks required up to the point of construction for a mine.
2 - Any left over amount of the $60 million not spent yet, will go towards Peregrine's 50% share of the capital cost.
3 - The new partner will fund the remaining portion of Peregrine's capital requirement and Peregrine will pay this back with it's share of cashflow.

Is this plausible? Based on previous structured option deals, this is completely plausible.

One of the recent take-outs in the industry (not diamonds) was that of Kaminak's Coffee project.
They did a PEA, then proceeded to a FS and then were taken out (100%) by Goldcorp for roughly half billion $$'s.  Chidliak's PEA compares more positively than Coffee's PEA and some might say that Chidliak has a lot more upside.

So, with a  partner deal as above...one could actually use the 5% discount rate NPV and divide that by 2.

The after tax NPV at 5% equates to CAD$584 million.

That equates to CAD$292 million.
If the partner fast tracks the project, then a discount to present isn't as applicable, but one should still discount by a couple of years to present.

Estimate that at CAD$260 million.

The current market cap is about CAD $90 million and an estimated value using this scenario is CAD$260 million...and this is based on very conservative assumptions and with plenty of upside at Chidliak. That is clearly a 3x upside with some potential growth on top of that.

The risk is getting lower and the reward is still very high.

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