Mining has started at the Aappaluttoq ruby and pink sapphire mine on schedule and budget, marking a significant milestone in True North Gems' (TGX) history. With specialised process equipment currently being shipped, the mining underway will form a stockpile of raw gemstone-bearing material for subsequent processing towards the end of Q116. While sales contracts are being finalised we suspend our small FY15 revenue assumption as it has a negligible effect on our base case value, reducing it by only 2.6%. Sales contracts for Aappaluttoq material remain the key near-term catalyst to re-rating True North’s shares.
Our valuation of True North Gems relies heavily on third-party pricing data for its rubies and pink sapphire, as detailed in the revised 2015 PFS. The average of all the rough and polished ruby and pink sapphire prices used is US$7/Ct. This price remains conservative in view of prices used to generate Gemfields’ reserve estimate for its Montepuez ruby deposit (see our October ’15 update note ‘funded through to production’ and April ’15 outlook note ‘Greenland’s ruby and pink sapphire mine’, for further information).
We have adjusted our financial model slightly for True North’s Q315 results and the removal of our C$5m FY15 sales revenue assumption. The latter is due to no sale of Aappaluttoq material expected by end 2015. We stress that this small amount of revenue only reduces our previous C$0.38/share discounted dividend flow valuation by 2.6% or C$0.01, demonstrating the longer-term value inherent in Aappaluttoq’s mine plan. True North’s Q315 results indicate expenditures of a company transitioning from the exploration stage into production with a l-f-l widening of its net loss from a very low C$0.7m to C$3.2m. We originally booked the entire C$20m in development capex for Aappaluttoq to FY15. However, with third-quarter accounts recording only C$3.2m, we pro-rata this amount to year end and book the balance of C$15.8m to FY16. On this basis and also on the assumptions governing our base case valuation (given in our April 2015 initiation note), our valuation of True North’s shares becomes C$0.37 using a 10% discount to reflect general equity risk. We revise our previous end-FY15 net debt position of C$11.4m to a net cash position of C$0.7m, reflecting the rescheduling of capex to FY16.