By Drew Hasselback, -- About a year ago, I wrote that Mountain Province Diamonds had effectively placed a “For Sale” sign on its flagship asset, a 49 per cent stake in the Gahcho Kué diamond deposit in the NWT. Mountain Province was looking for a way to exit a long and frustrating relationship with De Beers.
I can now provide an interesting update: Mountain Province won’t be selling its stake in Gahcho Kué after all. Rather, it has negotiated a new agreement with De Beers that seems to relieve tensions that led Mountain Province to consider backing away from the project.
The new joint venture makes several significant changes to the companies’ working relationship, but I think the key move is that Mountain Province is now responsible for paying its own way on the project.
It’s a logical way to approach the rift that had developed between the two companies. Since March 2000, De Beers had been paying all the bills. In return for piloting the project past several key milestones, De Beers would edge its ownership in the project from its current stake of 51 per cent toward an eventual 60 per cent, while Mountain Province’s stake would shift down to 40 per cent from its current 49 per cent. Because it was paying the bills, De Beers was basically in the driver’s seat. As I wrote last year, Mountain Province was growing impatient of having to ride shotgun because it didn’t think De Beers was driving fast enough.
There was a time when the old funding arrangement seemed like a great idea, particularly before De Beers shifted its focus to launching Snap Lake in the NWT and Victor in northern Ontario. Such developments knocked Gahcho Kué down a few ranks in De Beers’ development pipeline. It’s not that De Beers has never wanted the project to flourish into a mine; it’s just that De Beers had enough on its plate with Snap Lake and Victor.
Mountain Province obviously takes a different perspective. Things looked great nearly a decade ago when Gahcho Kué was De Beers’ most advanced Canadian project. The company seemed willing to do everything possible to develop this project into a mine. All Mountain Province investors had to do was sit back, let De Beers take charge, and patiently await the dividend stream when the diamonds started flowing out of the ground.
As we all know, patience is finite. De Beers might have had a pipeline of projects, but Mountain Province is a single-asset company. Mountain Province grew frustrated as De Beers shifted its focus elsewhere. Mountain Province announced in June, 2008, that its ownership in Gahcho Kué would undergo “a process to review strategic alternatives,” the usual Bay Street code words for putting something up for sale.
We don’t know what happened behind closed doors. What we can surmise is that if someone had tabled an attractive offer for the Mountain Province stake, the company would have been obliged to present it to shareholders. As we all know, the past year has been a lousy time to try and sell a treasured asset.
The new joint-venture agreement seems to address the frustrations on both sides. De Beers isn’t just relieved from having to front all the development costs on Gahcho Kué, Mountain Province has also promised to repay De Beers up to $59-million of the $120- million the South African miner has poured into the project to date. The money isn’t due instantly; a schedule sets out when Mountain Province needs to pay De Beers back, depending on future development milestones.
In the short term, Mountain Province is going to foot the bill for a new feasibility study. Such studies are immensely important for junior miners. Third-party geologists and engineers step in, examine the drilling data, then provide their expert opinions on whether a mine would make economic sense. In May, Mountain Province unveiled a precursor to the feasibility study, a technical report that states an “indicated resource” of 50.5 million carats of diamonds, with another 10.3 million carats in the “inferred” category. A feasibility study would enable Mountain Province to issue a more certain report, a “reserve.”
The technical report was about 14 years in coming, a frustrating length of time even for seasoned mining investors accustomed to the glacial pace of project advancement. There was a time when Gahcho Kué was an odds-on favourite to emerge as Canada’s first diamond mine. As of 2009, Canada has five operating mines, and Gahcho Kué isn’t one of them. Under De Beers’ stewardship, it was likely to stay that way. You can see why Mountain Province has been itching to get things moving.
