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Dundee dives in on Canadian diamonds, adding coverage of 5 juniors

Dundee Capital Markets sees great upside in Canadian diamond stocks, and has just initiated coverage of two diamond developers and three advanced explorers.


Dundee Capital Markets sees great upside in Canadian diamond stocks, and has just initiated coverage of two diamond developers and three advanced explorers.

A report released on May 27 by senior mining analyst Matthew O’Keefe and research associate Erik Bermel notes that diamond companies — at least those with market caps of $30 million or higher — outperformed precious metals equities in 2013.

“Unlike gold equities, the main driver for diamond price growth, as with other luxury goods, is the steady recovery in the global economy,” reads the report.

However, this year, there’s been a disconnect between diamond prices and diamond stocks. While polished diamond prices are up 3.8% year to date, diamond equities have remained flat in 2014.

“Historically, diamond equities have moved in sympathy with gold equities, which seems to be the cause of this divergence, which began in February,” reads the report. “We view this as an opportunity for investors, creating attractive valuations in a rising diamond price environment.”

While Dundee’s list of Canadian developers and explorers is down 5% year to date, in line with their peers, the Dundee analysts expect better performance going forward as the companies meet significant milestones.

Those companies include developers Mountain Province Diamonds (TSX: MPV; NYSE-MKT: MDM) and Stornoway Diamond (TSX: SWY), and advanced explorers Kennady Diamonds (TSXV: KDI), North Arrow Minerals (TSXV: NAR) and Peregrine Diamonds (TSX: PGD). All five stocks are rated a buy, with the developers rated as high-risk and the explorers as speculative. Dundee has a target price of $9 on Mountain Province and $1.60 on Stornoway.

Mountain Province Diamonds’ 49%-owned Gahcho Kué project with De Beers in the Northwest Territories is already under construction, with first production expected in late 2016, and Stornoway has just completed the first $374-million portion of a nearly $1-billion financing announced in April to build its Renard diamond project in Quebec.

The advanced explorers on Dundee’s list also have milestones coming up. Kennady Diamonds is conducting a mini-bulk sample at its Kennady North project, adjacent to Gahcho Kué, and expects to have an initial resource estimate before the end of the year. Peregrine, which announced a first resource for its Chidliak project in Nunavut earlier this month, is conducting bulk samples at three to kimberlites next year to add resources and inform a prefeasibility study. And North Arrow is working on several projects, the most advanced being its Qilalugaq project (joint ventured from Stornoway), where it is carrying out a bulk sample to add resources and collect enough diamonds for an initial valuation.

The Dundee report advises investors to take a basket approach to investing in diamond stocks, especially at the exploration level, focusing on high-quality, well-funded names it identifies.

“The companies that we have identified in this report have well-regarded and experienced management teams and the resources required to reach key milestones and deliver positive results providing significant upside potential.”

The Dundee analysts believe it’s an opportune time to look at Canadian diamond companies as Dominion Diamond’s (TSX: DDC) consolidation of two mines (it bought 80% of Ekati in November 2012 and owns 40% of Diavik) and Stornoway’s financing announcement have put Canadian diamonds in the spotlight.

The report notes that since the beginning of 2013, demand for diamonds has recovered  significantly, with demand in the United States – the world’s largest diamond consumer – returning to pre-financial crisis levels, and improvements in Japan, China and India. Longer term, U.S. demand is expected to increase at the rate of overall economic growth, and Chinese and Indian demand will grow faster, driven by a surging middle class.

At the same time, there is limited new supply coming onstream.

“As a world-class discovery today would likely take 10-12 years to reach initial production, we believe demand is likely to outpace supply from existing mines in the short to medium term,” reads the report.

(For more diamond news, check out the May 2014 digital edition of Diamonds in Canada magazine.)


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