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Positive Study for Acceleration of Cash Flows from Surface Mining at Tongo Project in Sierra Leone
Stellar Diamonds plc, the London quoted (AIM:STEL) diamond development company focused on West Africa, announces the results of an independent study on its 100% owned 1.45 million carat Tongo Dyke-1 project in eastern Sierra Leone. The study and associated financial modeling focused on the economics of undertaking surface open pit mining concurrent with underground mine development activities with a view to accelerating generation of cash in-flows for the project.
The Directors have used the base case financial model recently produced by PPM and increased the life of mine to 16 years to achieve mining of approximately 1.1 million carats of the inferred resource of 1.45 million carats, which the Directors believe is achievable at Tongo. A comparison of the PPM model and the financial model adopted by the Directors is set out further below in this announcement. Unless stated otherwise, figures below are derived from the Director’s Model.
Highlights of Tongo Dyke-1 Surface Mining Study and the Directors Model:
· Attractive economics for surface open pit mining concurrent with underground mine development
· 42% increase in project NPV(10) from US$53 million to US$75 million with pre-tax IRR of 55% using grade of 120cpht and value of US$270 per carat
· Significant potential NPV(10) upside to US$146 million if modelled using new increased resource average grade of 165cpht and value of US$270 per carat
· Potential for 120,000 carats to be mined from open pit in first 3 years of mine life and for over 1 million carats to be mined from the expected 16 year mine life
· Low capital expenditure estimate of US$16 million to develop mine into production
Chief Executive Karl Smithson commented:
“The possibility of generating early cash flow from surface mining at Tongo Dyke-1 in conjunction with underground mine development is a very attractive financial option. Using a grade of 120cpht and diamond value of US$270 per carat in the financial model (previously US$248 per carat had been used) generates an NPV(10) of US$75 million for Dyke-1. We recently announced an increased resource average grade of 165cpht for Dyke-1, which if applied in the financial model and maintaining the US$270 per carat modelled diamond value, approximately doubles the estimated NPV. The Directors believe the NPV modelled compared to the Company’s current market capitalisation provides significant potential value upside.
“Having recently commenced trial mining at our Baoulé project in Guinea to generate cash-flow before the end of 2014, we are delighted that we believe we have also found a route to early cash flow for Tongo and believe we are demonstrating our ability to deliver optimum value from our projects. We look forward to updating shareholders on our results from Baoulé and on the next development steps of the Tongo project.”
Surface Mining Study:
Paradigm Project Management has completed a study into surface mining options that may complement the overall mine planning and financial returns of the Tongo Dyke-1 project.
A number of mining methods were analysed that could be expected to profitably mine kimberlite ore from along the 1.9km surface strike length at the same time as underground mine development. The mine plan and model demonstrates that as surface mining comes to an end after a period of approximately three years, production from underground mining would provide continuity of cash flows from the third year onwards.
The PPM study concludes that surface mining to supplement Stellar’s underground mining proposal is both technically feasible and economically viable, though such economic viability is ultimately to be determined by the Directors of Stellar.
Manual slot or open bench stoping has been identified by PPM as the preferred surface mining option, based on its superior safety parameters as well as the ability to mine from surface to 40m depth and deliver ore simultaneously from a number of mine faces and depths along strike. A total of three to four mining pits each of 500m length along the 2km strike of the ore body are modelled to deliver 100,000 tonnes of ore and 120,000 carats (at a grade of 120cpht) over the first three years. Two stopes with multiple mining faces of 2.5m vertical height are envisaged per mining pit. The ore will be drilled and blasted from the mine faces, then hoisted to surface via rail mounted 1 tonne kibbles and transported to the processing plant. Each pit will be adequately de-watered and ventilated as mining progresses to depth. As a result of the study, the Directors will now consider whether any additional work is required to confirm the viability of the preferred surface mining method proposed.
The financial model used by the Directors targets revenues of approximately US$36 million in the first three years of the mines life from surface mining alone. This assumes the production rates for surface mining as set out above are achieved and assumes a diamond value of US$270 per carat in which increases at an average of 4.5 percent per annum.
Underground Mining:
The underground mine plan and capital / operating budget remains unchanged from the economic scoping study previously completed by PPM and announced on 24 July 2013. The plan allows for a single shaft to be sunk to 300m and for mining levels to be established every 40m. The plan assumes that first underground diamond production would be realised late in the second year of mine development and would yield a total of 35,000 carats in its first two years of mining production, targeting revenues of approximately US$10 million that would complement revenues realised from the surface mining. Production from the fourth year onwards is forecast to be exclusively from underground mining and assumes an increase from 42,000 carats per year in year four growing to expected optimum production of 91,000 carats per year from year eight onwards.
Updated Financial Model:
The financial model prepared by PPM for this surface and underground mining study is based on the result of the Conceptual Economic Scoping Study for Tongo, which was previously announced on 24 July 2013. This new financial model has assumed the same shaft access and underground mining scenario as the scoping study. However the surface mining option has replaced the previously planned decline option.
Due to the availability of mining ore from surface, the PPM Model now assumes mining of 797,000 carats of the previously announced 1.1 million carat resource (subsequently increased to 1.45 million carats),over a 13 year life of mine. The capital requirement for the first three years has been calculated by PPM to be approximately US$15 million. The PPM Model used a diamond grade and value of 120cpht and US$270 per carat respectively. Based on projected costs and revenues the payback of the initial capital expenditure is less than two years. The PPM Model has a NPV(10) of US$33.3 million. The model is uninflated for cost and diamond price appreciation.
The Directors of the Company have used the base case model of PPM and extended the life of mine to 16 years to mine 1.1 million carats (of the current 1.45 million carat resource). Furthermore, Stellar has inflated the costs and diamond prices by 4.5% (nominal) per year in line with most diamond analyst forecasts. This results in a NPV(10) of US$75.2 million. If the recently announced increased resource average grade of 165cpht is applied (instead of 120cpht) and the same diamond value of US$270 per carat is achieved, then the NPV(10) further increases to US$145.7 million.
The impact of surface mining has a very positive impact on the overall financial model, through realising cash flow in Years-1 and 2 whilst underground mine development is on-going and not yielding production tonnes. Furthermore, as demonstrated by the PPM report, the Directors believe there will be no additional capital requirement for undertaking the surface mining than had previously been estimated for the decline, shaft and underground development.
As announced by the Company on 28 November 2014, recent bulk sampling has led to the Company adopting two size distribution models resulting in two sets of grade and average diamond valuation. Expected grade at +1 mm based on microdiamond sampling was unchanged at 120 cpht. Grade based on the finer diamond size distribution model is estimated at 165 cpht.
