By Peter Kennedy
Stornoway Diamond Corp.Â [SWY-TSX; SWYDF-OTC] is facing a liquidity shortfall this year unless diamond prices recover from current levels.
It is a scenario which could have negative implications for Stornowayâ€™s share price, which was down 34.4% or $0.055 to 10.5 cents on Friday March 29 in heavy trading volume of 10.7 million.
The warning is contained in an investment report by Scotiabank which has downgraded its rating on the shares to â€œSector Underperform.â€
Stornowayâ€™s Renard Diamond Mine is Quebecâ€™s first producing diamond mine and Canadaâ€™s sixth. It is located approximately 250 km north of the Cree community of Mistissini and 350 km north of the Chibougamau in the James Bay region of north-central Quebec.
Construction on the project commenced on July 10, 2014 and commercial production was declared on January 1, 2017.Â Average annual diamond production was forecast at 1.8 million carats per year over the first 10 years of mining.
In a March 28, 2019 press release that contained the companyâ€™s fourth quarter and 2018 financial results, Stornoway President and CEO Patrick Godin said 2018, the second year of commercial production, was one of transition from open pit mining to primarily underground mining.
â€œThis transition proved to be challenging, but our team overcame the difficulties we faced, safely and successfully completing the ramp up of the underground mine in August,â€ he said.
Godin went on to say that the low diamond pricing environment in which Renard began operating persisted in 2018. â€œThis along with the delays and initially lower than expected grades mined underground prompted discussions with key stakeholders that led to the financing agreements announced in the fourth quarter,â€ Godin said.
He was referring to a series of financing transactions with lenders and key stakeholders valued at $129 million. They included:
- The deferral of certain principal repayments for a 24-month period, amounting to debt service cost deferral of up to$54 million.
- Amendments to the Renard diamond streaming agreement consisting of a supplementary up front deposit of US$45 million in cash, and certain sales and pricing changes.
- A private placement of units consisting of common shares and warrants for approximately $20 million, with an additional amount of up to approximately $10 million, subscribed by existing shareholders.
Last year, Stornoway said 1.04 million carats of run-of-mine production were sold for gross proceeds of $1.41 million at an average price of US$105 per carat. In addition, 164,322 carats of supplemental diamond production was sold for gross proceeds of $3.5 million at an average price of US$16 per carat.
Stornoway sells its diamond production in an open market tender, and, other than in exceptional circumstances, is a market price-taker. The company said the second half of 2018 saw a significant rough market price correction that resulted in a price index decrease of 13% as compared to June, 2018.
â€œThis market decline is partly attributed to the further weakening of the Indian Rupee, the lack of available credit available to Indian diamantaires, and the fluctuating seasonal effects caused by important Indian and Jewish holidays in the third and fourth quarters,â€ the company said.
In 2019, Stornoway has said it expects to produce between 1.8 million and 2.10 million carats from the processing of between 2.40-2.55 million tonnes of ore.
The company said ore will be derived primarily from the 290-metre level of the Renard 2 underground mine, with additional production from the Renard 65 open pit.Â Renard 3 underground ore is expected to be available to supplement Renard 2 production.
Although operational performance at the mine appears to be generally improving, Scotiabank analyst Scott Macdonald says he expects Stornoway to continue to burn cash as realized prices remain under pressure.
While Macdonald thinks existing stakeholders may provide further funding support, this is likely to be dilutive to shareholders.
Meanwhile, the Scotiabank analyst has reduced its average realized diamond price forecast to US$92 per carat US$99.
Stornoway has said it expects its diamond production to be sold in eight tender sales at prices between US$80 and US$105 per carat.