With the construction schedule at its Renard diamond project in Quebec at risk, Stornoway Diamond (SWY-T) has stepped up to take charge of the Route 167 extension that will provide road access to the project.
A good portion of the 243-km-long road, which is being built by the provincial government under its Plan Nord initiative to open up investment in Quebec's northern reaches, is already complete.
But following a government review of spending on major infrastructure projects that was announced in early October, and threatened to derail Stornoway's construction plans, the junior has declared it will build the northern segments of the road itself.
Under a new letter of intent signed with the province, Stornoway will build the northern “C” and “D” segments of the road, totalling 97 km, with the help of a $77-million unsecured loan. The road will be somewhat scaled back – instead of a two-lane, 70-km-per hour highway, the junior will build a 50-km-per-hour one-lane mining road.
The southern “A” and “B” segments are well underway, with 109 km of 143 km completed by the province.
Stornoway received the mining lease for Renard in October, and expects the certificate of authorization – the final permit required to build the mine -- to be granted shortly. But without road access, the junior wouldn't be able to start construction at the project, located in the James Bay region of north-central Quebec, 350 km north of Chibougamau.
Stornoway has confirmed it now expects access to the site in the fourth quarter of 2013 instead of mid-year, as originally planned. However, in provincial hands, the delay could have been longer. A 2011 feasibility study projected that the largely underground mine could be in production by early 2016.
Stornoway will start its road work in April 2013, with the aid of a winter road completed by Quebec's Ministry of Transportation by March to allow fuel, road construction equipment and camps to be brought in.
"Today's news represents the removal of a major element of uncertainty over the Renard diamond project,” said Stornoway president and CEO Matt Manson in a release. “With Stornoway now responsible for the completion of the project's access road, we will be in full control of our overall development schedule for the first time. The financing terms that we have negotiated to complete this work are beneficial to Stornoway, and are expected to have a minimal impact on the project's overall valuation and financing capacity.”
The $77-million provincial loan includes a 15% contingency and will bear annual interest of 3.35%. It will be paid back over 15 years, starting after Renard reaches commercial production. If more funds are required, Quebec’s Ministry of Transportation (MTQ) has agreed to loan Stornoway another $7.7 million at 6.3% interest.
The arrangement replaces a previous agreement with the province, under which Stornoway agreed to contribute $44 million, plus up to $1.2 million per year toward the construction and maintenance of the road. The deal is contingent on a definitive financing agreement, currently being negotiated between Stornoway and Quebec’s MTQ.
The company is examining ways to reduce initial capital expenditures at the $802-million project. Stornoway secured a mandate letter with a consortium of banks In September for a loan of $475 million, and Investissement Quebec, a 25% shareholder in Stornoway, has committed $100 million toward construction.
A 2011 feasibility study outlined an open pit and underground mine that would produce 1.7 million carats annually over 11 years. At a 7% discount rate, the project has a pretax net present value of $672 million ($376 million after taxes) and an internal rate of return of 18.7% (14.9%).
Stornoway shares were up 7% or 3.5¢ on the news to 53¢. The company has 139.7 million shares outstanding that have traded between 45¢-$1.41 during the past 52 weeks.
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