QUIC RESEARCH REPORT€¦ · 2013) and a 40% passive interest in the Diavik mine operated by Rio...

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QUIC RESEARCH REPORT

QUIC Research Reports focus on

emerging investment themes that

affect current portfolio companies

and companies under coverage.

Metals and Mining

Introduction

Dominion Diamond Corporation (TSX:DDC) is a Canadian diamond

miner with two assets in Canada’s Northwest Territories. It owns an

88.9% stake in the Ekati mine (purchased from BHP Billiton Ltd. in early

2013) and a 40% passive interest in the Diavik mine operated by Rio

Tinto.

Highlights

- The company maximizes the sales value of its rough stones from the

Diavik and Ekati mines. It does this through maintaining a preferred

position as a supplier of rough diamonds

- The world rough-diamond demand is expected to grow at an

average annual rate of 3% to 4% over the next 15 years

- Diavik diamonds are highly regarded in the commercial marketplace

particularly for their white colour and clarity

Target Price: $22.67 | Current Price: $12.75 | SL: $10.50 | Return: 82.2%

M&M

A Huge Gem: Dominion Diamond Corporation

October 3, 2016

Carmen Chen

Tracy Li

Charan Arulmani

QUIC Research Report

October 3, 2016


October 3, 2016

Table of Contents

History of Diamonds – DeBeers Cartel 3

History of Diamonds – Marketing Tactics 4

Gemstone Overview 5

Industry Overview 5

Company Overview 8

Investment Thesis I 9

Investment Thesis II 10

Investment Thesis III 10

Risks and Catalysts 11

Valuation 12

References 13

Appendix 14


October 3, 2016


October 3, 2016

“A gemstone is the ultimate luxury product. It has

no material use. Men and women desire to have

diamonds not for what it can do but for what they

desire.” These are the words said by Nicky

Oppenheimer, DeBeers’ deputy chairman

illustrating the peculiar nature of the diamond

market. By appealing to the customers’ sentiment,

diamonds are one of the most precious luxury

items.

DeBeers Diamond Cartel

DeBeers, founded by Cecil Rhodes in 1870, has

been a highly successful controller of the diamond

market for over a century. The company developed

a unique marketing and purchasing cartel that has

influenced prices in the market. For centuries, the

only two diamond producing nations were India

and Brazil. The concept of making diamonds

available to the general public was unthinkable as

supply was so scarce that the wealthiest were not

able to obtain them.

When diamonds were first found in South Africa in

1867, supply increased rapidly. However, the notion

that the gems are a precious and rare commodity

remained. Diamonds miners in the country were

allotted one claim and would live together in

limited areas. Small claimholders merged into larger

groups and rented expensive equipment to operate

together to begin mining on a larger scale. Cecil

Rhodes was one of the first businessmen to rent

out pumping equipment and reinvested his initial

proceeds to acquire claims. By 1880, he held a large

enough quantity of diamond claims to create the

DeBeers Mining Company. By 1887, DeBeers

became the sole owner of South African diamond

mines.

DeBeers took control of the distribution channels

through the creation of the “Diamond Syndicate,”

an alliance of merchants who recognized that their

own interests were compatible with Rhodes’. They

abided to Rhodes’ terms and aimed for high prices

and a notion of scarcity. After Ernest Oppenheimer

had gained full control and ownership of DeBeers in

1926, the Diamond Corporation was formed. This

company had subsidiaries dealing with producing

and selling diamonds globally and outside contracts

were made impossible by an exclusivity

requirement. When new discoveries of diamond

reserves in Australia, Siberia, and Western Africa

became known the company focused on

maintaining power through the Central Selling

Organization.

3

History of Diamonds

EXHIBIT I

Diamond Mine

Central Selling Organization

DeBeers Trading Company

Sightholder

Jewelry

ManufacturerCutting House

Jewelry Retailer

Consumer


October 3, 2016


October 3, 2016 4

EXHIBIT II

DeBeers Advertisements (1940s-1980s)

Source: DeBeers, BrandChannel

The Central Selling Organization (CSO) regulated

the quantity and price in the market for the

diamond industry. Packages of diamonds are

bought and sold at “sights,” held ten times a year

in London, on a take-it-or-leave-it basis. Over

80% of the world’s diamonds were traded

through the CSO in its early days. The buyers

from the CSO have the stones cut and polished

and resell them at one of the world’s main

diamond clearing centers: Antwerp, New York,

and Tel Aviv. One of DeBeers’ main roles is to

maintain the notion that diamonds are a scarce

commodity through advertising and purchasing

excess supplies. In 1984, DeBeers accumulated

$2B in diamonds causing prices to rise too highly.

If new suppliers emerge, it will flood the market

with similar diamonds at below market prices.

Zaire tried to break away from the cartel and sell

diamonds in the free market which caused

DeBeers to flood the market.

Marketing Tactics

DeBeers hired marketing firm N.W. Ayer to figure

out what North Americans thought about

diamonds in the late 1930s. They realized that

diamonds were considered a luxury reserved for

the super wealthy. N.W. Ayer’s game plan was to

“create a situation where almost every person

pledging marriage feels compelled to acquire a

diamond engagement ring.” In addition, DeBeers

offered educational tips on “how to buy a

diamond.” This spurred the “3 C’s of Diamonds”

which focuses on the cut, colour, and clarity of

the gem. From 1938 to 1941, DeBeers reported a

55% increase in US diamond sales. In 1947,

DeBeers launched its classic slogan, “A Diamond

is forever,” which spurred even more sales. The

implied durability of a diamond conveyed the

meaning that marriage is forever. DeBeers also

suggested that a man spend one month’s salary

on an engagement ring, a number that grew to

two months’ salary in the 1980s.

History of Diamonds


October 3, 2016


October 3, 2016

Diamonds are naturally-occurring minerals

composed of carbon. It is the hardest known

natural substance and is chemically resistant. These

properties make it suitable for use as a cutting tool.

The gem’s special optical properties such as a high

index of refraction, and high luster make it the

world’s most popular stone.

While 80% of mined diamond is industrial grade, it

represents a mere 3% of the diamond used in

industry. The remaining 97% are synthetic

diamonds which can be manufactured and tailored

to specific applications.

Fiscal year 2015 brought a large 13.5% rough

diamond price slump. After the 2008 financial crisis,

banks began lending large amounts of funds to

diamond cutters so that they could buy rough

diamonds. This strategy allowed cutters to stay

afloat but made rough diamond prices higher than

polished

prices. Cutters were borrowing money to buy rough

diamonds but were unable to sell the polished

products for a profit.

The outlook for diamonds in the future is positive

as there should be lower supply and increased

prices. Diamond miners have been proactively

reacting to the weak environment by taking supply

off the market and reducing prices. In addition,

DeBeers allowed their clients to refuse more

diamonds at sights this year to help the overall

value chain.

Shift in demand to emerging markets

Strong economic growth in emerging markets will

be an important driver to bolster diamond demand.

By 2020, “mainstream” Chinese consumers with a

middle class disposable income will make up 51%

of urban households.

EXHIBIT III

5

Relative Performance (Diamond Price and Dominion Diamond Corporation)

Source: Capital IQ

Gemstone and Industry Overview

94.9

110.7

80

100

120

140

160

180

200

220

28-Sep-10 28-Sep-12 28-Sep-14 28-Sep-16

Diamond Composite Price Index TSX:DDC


October 3, 2016


October 3, 2016 6

Plateauing levels of production for the next ten years

In 2013, global rough diamond production

amounted to over 136M carats however due to the

lack of recent, economically viable discoveries,

rough production is likely to remain relatively

constant over the next ten years. Post 2025, when a

number of mines are scheduled to go out of

production, production will start to decline.

Diamond deposit discoveries take a long time to

develop and a new discovery would be unlikely to

come on-stream in the next decade. The last major

diamond deposit discovery was discovered by Rio

Tinto in India in 2004, and has still not been mined.

Sources: Company Reports, Kimberly Process, Paul Zimnisky

Mine Name Location Owner

Anticipated

Production (MM

carats)

Start Date

Bunder India Rio Tinto 7.0 TBD

Gahcho Kué Canada

De Beers,

Mountain Province

Diamonds

4.5 Q1 2017

Renard CanadaStoronoway

Diamond1.7 Q2 2017

Star-Orion South Canada Star: Shore Gold 1.7 TBD

Verkhne-

MunskoyeRussia Alrosa 1.1 Q1 2019

Chidliak CanadaPeregrine

Diamonds1.0 TBD

Liqhobong ChinaFirestone

Diamond1.0 Q1 2017

Lace South Africa DiamondCorp 0.5 Q3 2016

Lerala BotswanaKimberley

Diamond0.4 Q4 2016

Merlin Australia Merlin Diamonds <0.05 TBD

Lemphane LesothoParagon

Diamonds<0.05 TBD

Future Pipeline for Diamond Projects

EXHIBIT IV


October 3, 2016


October 3, 2016

Increase in mining costs

New diamond deposits are found deeper

underground and in less accessible areas that

require more complex and expensive techniques for

extraction. Over the last ten years, the capital

intensity of new projects has risen threefold across

most minerals, and critical input factors, such as

labour costs have increased rapidly.

Pressure from producing countries to extract more

value

Across the world, resource-driven countries are

keen to extract more value from natural resources.

McKinsey & Company expects this pressure to

continue in major diamond-producing countries

with low levels of economic diversification such as

Botswana, Namibia, and South Africa.

Changing consumer preferences

Consumers have begun to strongly and increasingly

prefer branded jewelry particularly in the high-end

diamond jewelry subsector. “New-money”

consumers are likely to seek branded jewelry to

show their wealth compared to “old-money”

consumers that are more likely to have inherited it.

In addition, emerging market consumers trust

brands more with 80% of consumers quoting

established brands as providing lifestyle benefits

and inspiring trust. This helps diamond producers

as a rising amount of jewelry is sold through

branded stores such as Tiffany’s,

EXHIBIT V

7

Global Diamond Demand-Supply Gap - 2014-2050E (MM carats)

Source: Frost & Sullivan, Better Diamond Initiative

Industry Overview

08

41

87

159

197

216

240

267278

0

50

100

150

200

250

300

2014 2018E 2022E 2026E 2030E 2034E 2038E 2042E 2046E 2050E


October 3, 2016


October 3, 2016 8

EXHIBIT VI

Ekati and Diavik Carats Produced (MM)

Source: Company Reports

EXHIBIT VII

Canadian Diamond Production (MM carats)

Source: Government of Canada

Dominion Diamond Corporation (TSX:DDC) is a

Canadian diamond miner with two assets in

Canada’s Northwest Territories. It owns an 88.9%

stake in the Ekati mine (purchased from BHP

Billiton Ltd. in early 2013) and a 40% passive

interest in the Diavik mine operated by Rio Tinto.

In FY 2016, the company produced 3.7MM carats

at Ekati and 2.6MM carats in Diavik. They earned

revenues of $716MM with an adjusted EBITDA of

$219MM. Revenues and adjusted EBITDA were

lower than FY 2015 due to a 10% decline in

observed diamond prices and a substantial

number of low-value carats produced.

In Q2 2017, the company faced a fire at the Ekati

diamond mine which caused the plant to be shut

down for 3 months and repair costs of $15MM.

The Dominion Sales Process

The company maximizes the sales value of its

rough stones from the Diavik and Ekati mines. It

does this through maintaining a preferred

position as a supplier of rough diamonds to the

world’s diamond manufacturers (cutters and

polishers) by dealing directly with them. DDC also

tailors rough diamond parcels to the client’s

particular needs.

Once a stone is cleaned and sorted by carat

weight, it is individually inspected by Dominion’s

sorting staff using loupes and modern

technology. The company sorts rough diamonds

into approximately 10,000 different categories or

price points. The company owns sales offices in

the world’s major diamond centres - Antwerp,

Belgium, and Mumbai. This bypasses the process

set out by DeBeers and allows Dominion to deal

directly with consumers.

Company Overview

400

600

800

1,000

1,200

Q3

2015

Q4

2015

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Q1

2017

Q2

2017

Ekati Diavik

6

10

14

18

22


October 3, 2016


October 3, 2016 9

Investment Thesis I: Solid cash generation

underpinned by premium operations

Dominion has interest in two top-tier assets with its

controlling interest in Ekati and its non-operating

stake in the Diavik mine. These operations have

been operating successfully for over a decade and

are expected to be producing for more than the

next 13 years in term of Ekati and 8 years for Diavik.

The production schedule at Ekati was revised (as a

result of the mill fire) to bring forward processing of

higher value ore from the Misery Main and Koala

pipes. The ore from these pipes have been

stockpiled during the mill shutdown.

The company has had strong free cash flow

generation over the last eight quarters. Free cash

flow was positive through out FY 2016 except in Q1

due to increased capital expenditures for winter

roads.

The Ekati mine is world-renowned for its premium

gem quality diamonds. In September 2016, a 186

carat gem quality diamond was sold for $2.8MM by

Dominion which is the largest diamond recovered

at Ekati. In 2015, Ekati produced 3MM carats as the

company transitioned focus to the Misery Main

pipe which has 14MM carats of reserves. Ekati

production amounts to about 3% of world diamond

output by volume.

Diavik diamonds are highly regarded in the

international commercial marketplace particularly

for their white colour and good clarity. Diavik’s

exceptional grades make it one of the most

valuable diamond mines in the world. As of

December 2015, the mine had 32MM carats of

proven reserves and 20.9MM carats of probable

reserves.

Source: CIBC World Markets, Company Reports, CapIQ

EXHIBIT VIII

Largest Diamond Mines in the World – Production and Revenues (MM carats, $MM)

Investment Theses

0

5

10

15

20

$200

$700

$1,200

$1,700

$2,200

Revenues (RS) Carats (LS)


October 3, 2016


October 3, 2016

Investment Thesis II: Growth pipeline leverages

existing high-quality assets

At Ekati, Dominion is focused on bringing the Jay

and Sable pipes into the development pipeline by

the latter part of the decade in an effort to lengthen

the mine life.

The firm announced it plans to spend $647MM to

develop the Jay pipeline which is the largest of the

expansion opportunities at Ekati. The pipe is an

84.6MM carat reserve which would come online in

FY 2020. The current internal rate of return on the

project is 6% but if Dominion’s assumption of

diamond prices rising 2.5% per year come to life,

the IRR will be 15.6%. The sable pipe is located near

the Ekati mine infrastructure and is fully permitted.

The construction on the $142MM project has

already began and there is reported reserves of

10.1MM carats.

The A-21 pipe at Diavik has 10MM carats of proven

mineral reserves and is progressing according to

plan. Diamond production from the pipe is

anticipated by the end of 2018 and will supplement

underground production in the later years of the

Diavik mine life.

Investment Thesis III: Beneficial market

dynamics for diamonds

The world rough-diamond demand is expected to

grow at an average annual rate of 3% to 4% over

the next 15 years, while supply is projected to

decline at 1% to 2%. The gap between supply and

demand is supposed to widen starting in 2019. In

the United States, disposable income growth of 2%

per year should stimulate diamond consumption

with increase of 3% per year in the next 15 years. In

terms of China and India, diamond growth is

expected to grow with the expansion of the middle

and upper classes. Starting from 2017 to 2030,

diamond growth should be 5% annually in China.

On the other hand, India is transitioning from an

emerging diamond market to a more mature

market. However, increasing urbanization, middle-

class expansion and engagement ring penetration

will boost diamond demand by 8% per year.

2221

1516

18

22 22

2526

10

15

20

25

30

10

Investment Theses

EXHIBIT X

Rough Diamond Demand, 2005-2020E ($MM)

Source: IDEX Corporation, Kimberley Process

Middle Class Expansion in China and India

Sources: Company Reports, Thomson ONE

0

100

200

300

400

500

600

2000 2010 2015E 2020F 2025F 2030F

China India

EXHIBIT IX


October 3, 2016


October 3, 2016 11

Catalysts

Risks

1. Projects come online: Over the next 3 years many of the pipes and projects DDC is working on will be

coming online which will be adding carts to total production and extending mine life. This will give the

firm the ability to search for more projects that bolster growth while maintain operations

2. Increasing marriage rate: Census data shows that more Americans are getting married which will

increase demand for diamond. In addition, as divorce rates increase a potential uptick in remarriages

will help bolster demand.

3. Growing middle class in emerging markets: Key diamond markets like China and India are facing

growing middle classes which are more willing to pay for luxury gems

1. Development Risk: Major delays, capital cost overruns, or other issues at Dominion’s various

developments could occur. The focus for the company is currently on the ramp-up of the Misery Piper

(Ekati). However in the future DDC could see issues with the development of the Sable pipe, A-21 pipe,

and Jay pipe

2. Diamond prices: In 2015, slow demand from key markets such as the United States, China, and the

Middle East drove prices down by nearly 15% in 2015


October 3, 2016


October 3, 2016 12

Valuation

Net Asset Value Model

Target Price

NAV Summary Long-term Assumptions

Share Price (TSX:ASR) $12.75 Discount Rate 7.00%

FDSO 85.34 Diamond (USD/carat) $135.00

Exchange Rate (USD/CAD) 1.33

Market Capitalization (CAD) $1,088.09 Implied Current P/NAV 0.56x

Adjustments (CAD) $180.00 Revised P/NAV 1.00x

Enterprise Value (USD) $1,268.09 Target Price $22.67

NAV based on after-tax UFCF

AssetOwnership

Interest

Discount

Rate

NAV (USD

MM)

NAV per

share

Diavik 40.0% 7.0% 148.30 1.74

Etaki 88.9% 7.0% 1,126.36 13.20

Gross Asset Value 1,274.67 14.94

- Debt - -

+ Cash and investments 180.00 2.11

NAV (USD) 1,454.67 17.05

NAV (CAD) 1,934.71 22.67

$24.00

$23.00

$22.67

$18.50

$18.00

$15.00

TD Securities

Paradigm Capital

QUIC

Scotia Capital

BMO Capital

RBC Capital

Current Price $12.75

12-Month Target Price $22.67

Price Return 77.8%

Dividend Yield 4.4%

Total Implied Return 82.2%


October 3, 2016


October 3, 2016

References

13

1. CIBC World Markets

2. Wells Fargo

3. Kitco

4. Mining.com

5. Bain & Company

6. McKinsey & Company

7. Boston Consulting Group

8. RBC Capital Markets

9. BMO Capital Markets

10. Capital IQ

11. DeBeers

12. Company Reports

13. DiamondLand

14. Paul Zimnisky


October 3, 2016


October 3, 2016 14

Source: Capital IQ

Comparables Analysis

APPENDIX I

Diamond Mining - Canada Market Enterprise Dividend

Cap ($MM) Value ($MM) 2015 2016E Yield 2015 2016E

Lucara Diamond Corp. $1,641 $1,570 11.6x 6.1x - 19.3x 13.4x

Mountain Province Diamonds $1,021 $1,204 nmf nmf 2.5% nmf nmf

Stornoway Diamond $924 $1,023 nmf nmf - nmf nmf

Peregrine Diamonds $80 $53 nmf nmf 3.2% nmf nmf

Mean $916 $963 11.6x 6.1x 2.9% 19.3x 13.4x

Median $972 $1,114 11.6x 6.1x 2.9% 19.3x 13.4x

Dominion Diamond Corp. $1,073 $1,329 3.7x nmf 3.2% 10.9x nmf

EV/EBITDA Price / Earnings


October 3, 2016


October 3, 2016 15

Source: Capital IQ

Net Asset Value Model – Diavik

APPENDIX II

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 2036E 2037E 2038E 2039E

Diamond Price Assumptions

A-154S 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$

A-154N 180$ 180$ 180$ 180$ 180$ 180$ 180$ 180$

A-418 95$ 95$ 95$ 95$ 95$ 95$ 95$ 95$

A-21 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$

Payable Diamond

A154S tonnes processed 440,000 440,000 350,000 170,000

A154N tonnes processed 790,000 800,000 800,000 810,000 880,000 900,000 730,000 570,000

A418 tonnes processed 870000 870,000 800,000 750,000 750,000 600,000 50,000 0

A21 tonnes processed - - 160,000 370,000 570,000 800,000 1,520,000 240,000

A154S carats recovered 1,630,000 1,580,000 1,260,000 720,000

A154N carats recovered 1,560,000 1,660,000 1,810,000 1,890,000 2,170,000 2,230,000 1,800,000 1,370,000

A418 carats recovered 3,580,000 3,620,000 3,010,000 2,580,000 2,300,000 1,510,000 130,000 0

A21 carats recovered 0 0 480,000 1,140,000 1,930,000 2,130,000 3,820,000 530,000 - - - - - - - - - - - - - - - -

Total carats recovered 6,770,000 6,860,000 6,560,000 6,330,000 6,400,000 5,870,000 5,750,000 1,900,000 - - - - - - - - - - - - - - - -

40% Ownership 2,708,000 2,744,000 2,624,000 2,532,000 2,560,000 2,348,000 2,300,000 760,000 - - - - - - - - - - - - - - - -

Revenue - A-154S 220,050,000$ 213,300,000$ 170,100,000$ 97,200,000$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Revenue - A-154N 280,800,000$ 298,800,000$ 325,800,000$ 340,200,000$ 390,600,000$ 401,400,000$ 324,000,000$ 246,600,000$

Revenue - A-418 340,100,000$ 343,900,000$ 285,950,000$ 245,100,000$ 218,500,000$ 143,450,000$ 12,350,000$ -$

Revenue - A-21 -$ -$ 64,800,000$ 153,900,000$ 260,550,000$ 287,550,000$ 515,700,000$ 71,550,000$

Cash cost per carat $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00 $55.00

Operating costs/Reclamation 438,600,000$ 441,500,000$ 448,800,000$ 493,400,000$ 471,900,000$ 460,200,000$ 402,700,000$ 306,200,000 9,000,000$ 10,500,000$ 39,400,000$ 34,900,000$ 14,000,000$ 6,800,000$ 4,100,000$ 4,100,000$ 4,500,000$ 6,300,000$ 2,600,000$ 1,800,000$ 1,800,000$ -$ -$ -$

Royalty - Government at 13% 52,305,500$ 53,885,000$ 51,720,500$ 44,590,000$ 51,707,500$ 48,386,000$ 58,415,500$ 1,553,500$

Royalty - 2 private at 1% each 8,047,000$ 8,290,000$ 7,957,000$ 6,860,000$ 7,955,000$ 7,444,000$ 8,987,000$ 239,000$

Operating Income 6,641,061$ 352,325,000$ 338,172,500$ 291,550,000$ 338,087,500$ 316,370,000$ 381,947,500$ 10,157,500$ (9,000,000)$ (10,500,000)$ (39,400,000)$ (34,900,000)$ (14,000,000)$ (6,800,000)$ (4,100,000)$ (4,100,000)$ (4,500,000)$ (6,300,000)$ (2,600,000)$ (1,800,000)$ (1,800,000)$ -$ -$ -$

Less: D&A -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

EBIT 6,641,061$ 352,325,000$ 338,172,500$ 291,550,000$ 338,087,500$ 316,370,000$ 381,947,500$ 10,157,500$ -$ -$ -$

Less: Income Taxes 1,759,881$ 93,366,125$ 89,615,713$ 77,260,750$ 89,593,188$ 83,838,050$ 101,216,088$ 2,691,738$ -$ -$ -$

NOPAT 4,881,180$ 258,958,875$ 248,556,788$ 214,289,250$ 248,494,313$ 232,531,950$ 280,731,413$ 7,465,763$ (9,000,000)$ (10,500,000)$ (39,400,000)$ (34,900,000)$ (14,000,000)$ (6,800,000)$ (4,100,000)$ (4,100,000)$ (4,500,000)$ (6,300,000)$ (2,600,000)$ (1,800,000)$ (1,800,000)$ -$ -$ -$

Operating Income

Total CAPEX 177,000,000$ 193,000,000$ 124,000,000$ 43,000,000$ 32,000,000$ 6,000,000$ 2,000,000$ -$

Less: Change in WC 70,286,972$ 68,130,930$ 54,332,260$ 31,047,006$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Less: Taxes 1,759,881$ 93,366,125$ 89,615,713$ 77,260,750$ 89,593,188$ 83,838,050$ 101,216,088$ 2,691,738$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

After Tax UFCF (242,405,792)$ (2,172,055)$ 70,224,527$ 140,242,244$ 216,494,313$ 226,531,950$ 278,731,413$ 7,465,763$ (9,000,000)$ (10,500,000)$ (39,400,000)$ (34,900,000)$ (14,000,000)$ (6,800,000)$ (4,100,000)$ (4,100,000)$ (4,500,000)$ (6,300,000)$ (2,600,000)$ (1,800,000)$ (1,800,000)$ -$ -$ -$

Discount Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Discount Factor 0.966736 0.903492 0.844385 0.789145 0.737519 0.689270 0.644177 0.602035 0.562649 0.525841 0.491440 0.459290 0.429243 0.401161 0.374917 0.350390 0.327467 0.306044 0.286022 0.267311 0.249823 0.233480 0.218205 0.203930

PV of FCF 234,342,524-$ 1,962,434-$ 59,296,544$ 110,671,458$ 159,668,591$ 156,141,622$ 179,552,460$ 4,494,650$ 5,063,845-$ 5,521,326-$ 19,362,729-$ 16,029,205-$ 6,009,396-$ 2,727,897-$ 1,537,160-$ 1,436,598-$ 1,473,602-$ 1,928,077-$ 743,658-$ 481,159-$ 449,682-$ -$ -$ -$

NPV (100% Interest) 370,756,032


October 3, 2016


October 3, 2016 16

Source: Capital IQ

Net Asset Value Model – Ekati

APPENDIX III

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E 2031E 2032E 2033E 2034E 2035E 2036E 2037E 2038E 2039E

Diamond Price Assumptions

A-154S 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$ 135$

Ore Processed

Koala - 810,000 1,040,000 450,000 110,000

Misery 0 500,000 980,000 850,000 600,000

Pigeon 0 1,210,000 1,680,000 1,320,000 2,280,000 820,000 0

Sable - 1,390,000 1,750,000 2,300,000 3,270,000 1,240,000 1,240,000 780,000

Lynx 0 270,000 120,000 600,000

Jay 1,090,000 3,110,000 3,110,000 3,570,000 4,350,000 4,350,000 4,350,000 4,350,000 4,350,000 4,350,000 4,350,000 3,330,000

Carats Recovered

Koala 380,000 570,000 280,000 70,000

Misery 2,360,000 4,590,000 4,470,000 3,650,000

Pigeon 530,000 710,000 670,000 1,170,000 380,000 0

Sable 0 - - 930,000 1,300,000 2,060,000 3,040,000 1,130,000 1,040,000 660,000 - - - - - - - - - - - - -

Lynx 190,000 100,000 470,000

Jay 1,340,000 4,600,000 4,350,000 5,050,000 6,000,000 6,750,000 8,190,000 9,070,000 9,520,000 9,680,000 9,480,000 4,640,000

Total carats recovered - 2,740,000 5,880,000 5,560,000 5,790,000 2,470,000 2,440,000 4,380,000 5,730,000 5,390,000 5,710,000 6,000,000 6,750,000 8,190,000 9,070,000 9,520,000 9,680,000 9,480,000 4,640,000 - - - - -

80% Ownership - 2,192,000 4,704,000 4,448,000 4,632,000 1,976,000 1,952,000 3,504,000 4,584,000 4,312,000 4,568,000 4,800,000 5,400,000 6,552,000 7,256,000 7,616,000 7,744,000 7,584,000 3,712,000 - - - - -

Total Revenue -$ 369,900,000$ 793,800,000$ 750,600,000$ 781,650,000$ 333,450,000$ 329,400,000$ 591,300,000$ 773,550,000$ 727,650,000$ 770,850,000$ 810,000,000$ 911,250,000$ 1,105,650,000$ 1,224,450,000$ 1,285,200,000$ 1,306,800,000$ 1,279,800,000$ 626,400,000$ -$ -$ -$ -$ -$

Cash cost per carat $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00 $90.00

Operating costs 252,000,000$ 522,000,000$ 489,000,000$ 469,000,000$ 437,000,000$ 414,000,000$ 408,000,000$ 410,000,000$ 356,000,000$ 343,000,000$ 325,000,000$ 339,000,000$ 332,000,000$ 317,000,000$ 309,000,000$ 293,000,000$ 287,000,000$ 158,000,000$ -$ -$ -$ -$ -$

Royalty - Government at 13% -$ 15,327,000$ 35,334,000$ 34,008,000$ 40,644,500$ (13,461,500)$ (10,998,000)$ 23,829,000$ 47,261,500$ 48,314,500$ 55,620,500$ 63,050,000$ 74,392,500$ 100,574,500$ 117,968,500$ 126,906,000$ 131,794,000$ 129,064,000$ 60,892,000$

Reclamation Cost -$ 1,000,000$ 2,000,000$ 3,000,000$ 6,000,000$ 3,000,000$ 3,000,000$ 3,000,000$ 3,000,000$ 8,000,000$ 4,000,000$ 3,000,000$ 3,000,000$ 3,000,000$ 5,000,000$ 4,000,000$ 4,000,000$ 4,000,000$ 4,000,000$ 81,000,000$

Operating Income -$ 101,573,000$ 234,466,000$ 224,592,000$ 266,005,500$ (93,088,500)$ (76,602,000)$ 156,471,000$ 313,288,500$ 315,335,500$ 368,229,500$ 418,950,000$ 494,857,500$ 670,075,500$ 784,481,500$ 845,294,000$ 878,006,000$ 859,736,000$ 403,508,000$ (81,000,000)$ -$ -$ -$ -$

Less: D&A -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

EBIT -$ 101,573,000$ 234,466,000$ 224,592,000$ 266,005,500$ (93,088,500)$ (76,602,000)$ 156,471,000$ 313,288,500$ 315,335,500$ 368,229,500$ 418,950,000$ 494,857,500$ 670,075,500$ 784,481,500$ 845,294,000$ 878,006,000$ 859,736,000$ 403,508,000$ (81,000,000)$ -$ -$ -$ -$

Less: Income Taxes -$ 26,916,845$ 62,133,490$ 59,516,880$ 70,491,458$ 24,668,453-$ 20,299,530-$ 41,464,815$ 83,021,453$ 83,563,908$ 97,580,818$ 111,021,750$ 131,137,238$ 177,570,008$ 207,887,598$ 224,002,910$ 232,671,590$ 227,830,040$ 106,929,620$ 21,465,000-$ -$ -$ -$ -$

NOPAT -$ 74,656,155$ 172,332,510$ 165,075,120$ 195,514,043$ (68,420,048)$ (56,302,470)$ 115,006,185$ 230,267,048$ 231,771,593$ 270,648,683$ 307,928,250$ 363,720,263$ 492,505,493$ 576,593,903$ 621,291,090$ 645,334,410$ 631,905,960$ 296,578,380$ (59,535,000)$ -$ -$ -$ -$

Operating Income

Total CAPEX 75,000,000$ 213,000,000$ 237,000,000$ 245,000,000$ 200,000,000$ 244,000,000$ 39,000,000$ 31,000,000$ 25,000,000$ 25,000,000$ 20,000,000$ 10,000,000$ 5,000,000$ 2,000,000$ 1,000,000$

Less: Change in WC -$ -$ -$ -$

Less: Taxes -$ 26,916,845$ 62,133,490$ 59,516,880$ 70,491,458$ 24,668,453-$ 20,299,530-$ 41,464,815$ 83,021,453$ 83,563,908$ 97,580,818$ 111,021,750$ 131,137,238$ 177,570,008$ 207,887,598$ 224,002,910$ 232,671,590$ 227,830,040$ 106,929,620$ 21,465,000-$ -$ -$ -$ -$

After Tax UFCF -$ (343,845)$ (40,667,490)$ (71,924,880)$ (49,485,958)$ (268,420,048)$ (300,302,470)$ 76,006,185$ 199,267,048$ 206,771,593$ 245,648,683$ 287,928,250$ 353,720,263$ 487,505,493$ 574,593,903$ 620,291,090$ 645,334,410$ 631,905,960$ 296,578,380$ (59,535,000)$ -$ -$ -$ -$

Discount Rate 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Discount Factor 0.966736 0.903492 0.844385 0.789145 0.737519 0.689270 0.644177 0.602035 0.562649 0.525841 0.491440 0.459290 0.429243 0.401161 0.374917 0.350390 0.327467 0.306044 0.286022 0.267311 0.249823 0.233480 0.218205 0.203930

PV of FCF -$ 310,661-$ 34,339,022-$ 56,759,155-$ 36,496,816-$ 185,013,821-$ 193,448,047-$ 45,758,376$ 112,117,492$ 108,728,898$ 120,721,542$ 132,242,434$ ######### 195,568,324$ 215,425,067$ 217,343,666$ 211,325,785$ 193,391,037$ 84,828,073$ 15,914,342-$ -$ -$ -$ -$

NPV (100% Interest) 1,267,000,622


October 3, 2016


October 3, 2016 17

Source: Capital IQ

Net Asset Value Model

APPENDIX IV

Toggle Active Bear Base Bull

Commodity Price Assumptions

A-154S 2 135$ 110$ 135$ 150$

A-154N 2 180$ 150$ 180$ 200$

A-418 2 95$ 80$ 95$ 120$

A-21 2 135$ 100$ 135$ 150$

Ekati 2 135$ 100$ 135$ 150$

Financial Assumptions

Discount Rate 2 7.0% 9.0% 7.0% 6.0%

Tax Rate 2 26.5% 26.5% 26.5% 26.5%

Royalty - Government 2 13.0% 13.0% 13.0% 13.0%

Royalty - Private 2 2.0% 2.0% 2.0% 2.0%

Depreciation & Amortization 2 0.0% 0.0% 0.0% 0.0%

QUIC RESEARCH REPORT€¦ · 2013) and a 40% passive interest in the Diavik mine operated by Rio...

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