Dominion Diamond (TSE:DDC) had its price target raised and buy rating reiterated by Dundee Capital Markets today after Rio Tinto formally approved mine development of the open pit A-21 pipe at the Diavik mine last night.
The A-21 pipe will fill excess mill capacity, improve margins and revive an otherwise declining production profile at the Diavik mine in the Northwest Territories, adding $115 million in annual cash flow over its mine life and $2.52 to Dundee's net asset value per share, the brokerage said.
First production of the five-year mine life is expected in late 2018, with construction to begin immediately, Dominion Diamond said. The initial capex of $350 million, well below Dundee's initial $500 million estimate, is expected to be funded with cash and cash flow.
"We estimate a 30% IRR for the project which includes cost per tonne improvements at Diavik's largely fixed cost mill. A-21 should decrease overall costs at Diavik from the US$230/t range to the US$190/t range," Dundee's Matthew O'Keefe wrote.
The project is 60 percent owned by Rio Tinto and 40 percent by Dominion Diamond.
The A-21 pipe is well understood, according to Dominion Diamond, and the bulk of infrastructure is already in place from previous dike construction. The four year construction period is due to begin immediately with equipment transported up via this season's ice road.
"With A-21 and the NWT's recent acceptance of a surety bond over cash to cover closure costs, we see Dominion's production profile and balance sheet growing increasingly attractive.
"This should increase Dominion's ability to pay a potential dividend. However, this may not be prudent until the high grade Misery pipe comes online in C2016," said Dundee.
Dundee's O'Keefe lifted his price target on the company to C$23.00 from C$21.00 previously, on an increase in the brokerage's net asset value per share after including A-21. The company's buy rating was reiterated, as Dundee expects Dominion's positive momentum to continue into next year.
"With additional clarity and Dominion's free cash flow yield moving towards ~20% in C2016 with the high grade Misery pipe coming online and sustained with A-21, we see potential for Dominion Diamond shares to ultimately trade at a premium multiple," said O'Keefe.