Stornoway Diamond (TSE:SWY) is a stock with "tremendous upside", according to Scotia Capital analyst Craig Johnston, who has initiated coverage of the Canadian diamond developer with a sector outperform rating and a 12-month target price of $1.00.
The company owns the fully permitted, fully financed and shovel-ready Renard diamond project in Quebec, which hosts some 17.9 million carats in reserves and 43.9 million carats in total resource.
"Stornoway currently trades at a 34% discount to our net asset valuation (NAV8%) of $1.03 per share, and we see tremendous upside to our valuation in the long term based on the potential for consistent recovery of large stones, as well as the addition of inferred resources and targets for further exploration," Johnston wrote in his research report published on Tuesday.
The unique factor of the Renard project was a central theme of the Scotia report, as it will be the first diamond mine in Canada with year-round access, and the first diamond mine located in Quebec. The analyst also took note of the company's "high proportion of gem diamonds", at approximately 99 percent, which is "expected to stand apart from the rest" of Canada's portfolio of diamond mines.
The company recently closed the single-largest public diamond financing package of $946 million, taking Stornoway through to commercial production.
The analyst highlighted the fact that the project seems to have the full support from the Quebec government, underpinned by Investissement Québec’s 28.7 percent holding in the company. The government also issued a $77 million loan to complete the Renard mine road.
"We also believe the new tax regime announced in Quebec in 2013 provides for a decreased risk of near- to medium-term increases in taxation on the project," said Johnston.
Based on a feasibility study released in February last year, Renard is expected to produce an average of 1.6 million carats per year over an 11-year mine life. The report estimated an after-tax IRR of 16.3 percent, though Scotia's analyst notes that "a lot has changed since the February 2013 feasibility study," which is highlighted throughout his research report.
"In our view, the true value in Stornoway is likely to be realized in calendar 2017 and 2018 when the mine’s cash flow ability becomes a reality," Scotia's Johnston wrote.
Shares of Stornoway added 1.45 percent on Wednesday, to trade at 70 Canadian cents within minutes of the closing bell.