KIM Report

Full date and time now posted

Posted by David

As per a request by one of my readers, the full date and time of the posts are now displayed in the footer. Please keep up the constructive comments.

More new articles are in the pipes.

Marifil Mines Ltd. holds diverse assets in Argentina

Posted by David

The strategy of Marifil Mines Ltd. (TSX.V-MFM) seems similar to that of Franco-Nevada (TSX-FNV): Prospect out a property with good potential, get in a larger joint venture partner to shoulder the development costs, and then collect royalties after production commences. MFM is focused solely in Argentina, where is has a variety of resources

 

In various Argentine provinces MFM is prospecting for Au, Ag, In (indium), Pb, Zn, Mo, Cu, cement-grade limestone, Ni, Co, PGM, U, and oil/natural gas. Activities are in 18 properties across 7 provinces. This company is no one-trick pony.

 

Having thrown off the Peronist junta in 1983 in place of a democratic system and surviving the economic crises of the 1990s, Argentina has been stable politically and economically since 2002. Although Argentina is on good relations with other South American nations, it does not seem to have caught the socialist nationalization trend of so many of its neighbours, such as Venezuela, Ecuador, or Bolivia, that has put a halt to mineral exploration in those countries.

 

The current share price is hovering around $0.40, but it had a recent pop to $0.89 a couple of months back due to results from one of its PGM projects that is a JV with Castillian Resources (TSX.V-CT). The project centers on the historic Las Aguilas Mine and neighbouring areas that the layered ultramafic complex extends to. Values of 0.61 g/t to 2.10 g/t Pt+Pd were found over significant widths (7 to 14.68 m) and zones up to 5.66 g/t Pt were found in smaller zones (~1 m). In terms of base metals, grab samples on the property have returned values of up to 6.71% Cu, 2.21% Ni, and 0.21% Co. Following the company strategy, CT is earning an interest in the Las Aguilas Ni-Cu-PGM project from MFM.

 

Aside from PGM, the In deposits are of particular interest as the metal is used in LCD screens. Old-fashioned CRT monitors and TVs are longer being produced and the increase in LCD screen production has resulted in a rise in In prices (see image below).

 

Current In prices average between $800/kg and $900/kg. The demand caused by the LCD market for In is supplemented by other uses in the chemical and electronics industries. In commonly occurs in sphalerite ((Zn,Fe)S) by replacing iron or zinc. In grades of up to 0.5 kg/t over 4.5 m have been found in core from the San Roque property (epithermal Au-Ag-Zn-Pb-In breccia vein deposit).

 

MFM has another JV with ATW Venture Corp. (TSX.V-ATW) on the Amarillo epithermal Au-Ag and Cu-Au porphyry deposit. Although sampling has recently started on this project, early grab samples have returned values of up to 2251 g/t Au (65.28 oz/t) from a 10 cm wide vein. This property is located in the same gold belt as Barrick’s (TSX-ABX) Veladero and Pascua Llama deposits. The geology is also similar to that of the Newmont-Buenaventura (NYSE-BVN) Yanacocha Mine in Peru. ATW can earn up to 70% interest in the property over 5 years in return for investing resources in the project. What is interesting about this deposit is that in addition to the potential for high grade Au and Ag, there is also the potential for high tonnage as well as most porphyry-type deposits are quite large in volume, being the left-over hydrothermal systems associated with volcanism at convergent oceanic-continental boundaries.

 

MFM has two non-metal projects: Mina El Carmen (oil/gas) and Punta Colorado (limestone). Although these commodities are not their specialty, the intent of the company as expressed to me by a company representative at last March’s PDAC is to sell them or enter into a JV in order to begin production and use the proceeds to fund their core metals exploration. Due to the nature of the deposit, MFM management believes that it will be much easier to exploit (particularly the limestone) or sell off one or both of these assets than any of the metal properties. They also believe that in the long run, many of the metal assets will prove to be more lucrative than the non-metal ones.

 

MFM certainly has a diverse set of properties with much potential. Their main challenge right now is to better define the deposits that have returned such promising values: Amarillo, Las Aguilas, and San Roque. To do so, this means coming up with enough cash for the drills. This may be difficult as MFM (using 2007 annual financials) has only about $1,000,000 (CAD) in cash and equivalents in the bank, and about $380,000 in debt. Their burn rate for 2007 was about $500,000, so they should probably be good until the end of the year, even if they ramp up spending on drilling a little. Using their FNV-inspired plan they should be able to mitigate these costs as JV partners take on a higher share as operators.

 

It seems that with their sound corporate strategy, diverse holdings, and liquid properties, MFM is poised to continue returning strong results from Argentina in spite of economic pressures on juniour explorers.

 

Disclaimer: The Author holds 1000 shares of Marifil Mines. This article is intended for entertainment purposes only and is based on the author’s personal opinion and experience. Investors are responsible for their own due diligence when investing.

The Diamond Market

Posted by David

“The demand for diamonds is driven by two factors: greed and vanity. We do not foresee a shortage of either two in the future.” to paraphrase a former director of the Diamond Trading Company (the wing of DeBeers responsible for selling rough diamonds).

 

There has been some talk as of late of rising diamond prices. Part of this is that diamonds, like almost all commodities are priced in U.S. dollars. As the dollar goes down the price goes up. Most economists would agree that the US dollar is falling relative to the other major currencies. This situation is different from a few years ago, when South African producers were closing mines, some in part due to end of mine life, but also in part due to a strong Rand versus the U.S. dollar.

 

On the other hand, news stories such as the failed auction of a 72 c pear-cut D flawless diamond certainly grasp the attention of people following global diamond trends.

 

So in which direction is the diamond market heading? If one were to look at the stock performance of most diamond mining and exploration companies, and take that as an indicator of the diamond market, then things are definitely downhill. That poses the question of whether the very poor performance of diamond companies (see a previous article) has anything to do with loss of demand, or if it is due to more general financial pressures. Prolific analysts in the industry, such as Allan Barry Laboucan, believe that the diamond market is strong, that the above quote stays true, and current market lows are temporary.

 

I have to agree with Mr. Laboucan and his like-minded colleagues. Diamonds will continue to see strong demand. In particular the emerging upper-class of very populous countries (China and India) will continue to be a growing market for luxury goods, on that will outstrip that of the U.S. Even if only 1 % of the 2.4 billion people living China and India make it to the high disposable in income level to afford luxury goods in the next ten years, that is a new crop of 24 million consumers – a number a little short of the population of Canada.

 

With a few exceptions, e.g. Jericho (operations now suspended by Tahera), there have been no large diamond mines opened in the past 5 years since the end of the 1990’s diamond boom and the startup of Ekati (BHP Billiton) and Diavik (Rio Tinto & Harry Winston). This will disturb the supply chain for diamonds for years to come. Should current projects falter now, a shortage of diamonds in the near future is inevitable and will be accompanied by rising diamond prices. Current projects, mostly in Canada, include Snap Lake and Victor (DeBeers), Fort a la Corne (Shore Gold), and Renard (Stornoway).

 

The problem with diamonds is that they are not just any other commodity. Gemstones are valuated individually based on a number of characteristics unique to each individual stone. It can be difficult to determine if prices for diamonds are increasing due to this increased complexity. Mr. Laboucan alludes to this by mentioning the fact that companies producing larger/high quality diamonds will always see strong business as such goods are for the “ultra-rich” and immune to economic swings. The market for smaller/lower quality diamonds is more sensitive to economic pressures and is mainly a function of the level of disposable income possessed by the upper-middle class. This brings us back to the emerging middle class in the BRIC countries, the potential size of which could very well dwarf that of North America, and possibly even Europe as well. Should the economies of these countries continue to grow, scenario becomes a strong possibility. Even with signs of slowdown in China, other growing countries such as India, Brazil, Russia, South Africa, and Turkey will pull up the slack.

 

With these fundamentals in mind, a cautious investor should be able to pick the most promising diamond companies now, when they are cheap. Assuming due diligence has been properly performed; strong gains could be reaped in the market within a few years time.

 

Disclaimer: The author holds 500 shares of Stornoway Diamonds. This article is based on the personal opinions and experience of the author. Investors are responsible for their own due diligence.

May 2008 Interview on Stockhouse.com

Posted by David

The other day I had the privilege of being interviewed by Stockhouse.com where I post as “Diopside”. The interview link is here.

Update: more articles are in the works and some will be published by the end of the month, I promise.

Cutting the hype: the numbers that really matter

Posted by David

During the beating that has recently fallen upon the diamond exploration sector, good news, when it actually comes, is generally ignored. This is why I found it surprising when Diamonds North Resources (TSX.V-DDN) stock took off like a rocket when it reported a diamond count of approximately 7 diamonds/kg from a bulk sample. Stock price rose from $0.79 to $2.07 over two days in early January. The stock quickly corrected to about the $1.40 level the week after that. The gains had fully evaporated by March and the stock has now returned to the $0.80-$0.85 level.

The company stated that the 7 diamonds/kg value from their Tuktu-1 kimberlite in their Amaruk project is significant because just 1 diamond/kg is considered good for exploration results. This is a misleading statement. When you get down to the fundamentals, there are three compulsory values one must consider when evaluating a diamond deposit:

1) GRADE: in c/t or c/100t

2) VALUATION: average US$/c value of the stones from the deposit

3) TONNAGE: total amount of mine-able rock present

Diamond counts are nice to have; they tell you that the kimberlite is diamondiferous. After all, only 5% of all kimberlite bodies are diamondiferous. Keep in mind, however, that only about 5% of diamondiferous kimberlites are economic. Only two of the 550 diamonds from the 81.75 kg Tuktu-1 bulk sample are greater than 0.5 mm in diameter. Most of the diamonds recovered from the sample are microdiamonds. It is true, that microdiamond populations can be extrapolated to estimate macrodiamond grade. This method is used to estimate diamond content of a kimberlite without spending vast sums on huge bulk samples. Should the microdiamond counts be encouraging (as they seem to be at Tuktu-1) much larger bulk samples will follow with the aim of getting enough macrodiamonds for proper grade and valuation estimates.

For example, the Argyle mine in Western Australia has a diamond grade of around 7 c/t, almost twice that of Diavik (Both mines are operated by Rio Tinto plc.). The mine also has a rather high diamond count. Yet the average gem value is less than $25/c, and lower once you remove the rare pink diamonds found there from the population.

As a side issue, some diamonds from the Amaruk property (it is not indicated what sample(s) they come from) are pictured on the company website. A glaring omission on these images, one that any junior geology student would be penalized for, is the lack of a scale bar. From the images, the diamonds could be 0.1 mm or 1 cm across. Although, due to the lack of a scale, I suspect they are on the smaller side of the spectrum. This is also seen with other “instructional” diagrams on the website such as indicator mineral train maps that lack legends, scales, and so forth.

Another piece of mixed news from the Tuktu-1 samples is the types of microdiamonds recovered. Most were clear white octahedra. Assuming that any macrodiamonds would follow that morphology, this would indicate a high US$/c value for the stones. What is missing is any note in the report of fragments of larger stones that would indicate the presence of a significant macrodiamond population.

The main point in this article is that for a stock to more than double on mere diamond count data, however encouraging, is a good example of carefully worded (properly “hyped” if you will) news releases and emotional investing. Many diamond juniors, particularly those exploring in Canada, have found diamondiferous kimberlites. One would certainly hope that after a few years of diamond prospecting a company would have found some diamonds. However, the real question is whether the deposit is actually economic. Speculatively investing in diamond exploration stocks is often more dangerous than in other resource stocks as diamond deposits tend to be more complex. The pay-off for both company and investor can be significant, but this prospect is often paired with equally significant risk. Knowing what to look for in a project can decrease investment risk and helps differentiate hype from true ‘hidden gems’.

To those that sold off quickly at the $2.00 mark, congrats. Whether you just wanted to take a quick profit, or saw through the hype, it is the same in the end. Those who bought high or failed to sell, perhaps some more meaningful news in the future will produce lasting gains in the stock price.

Disclaimer: This article is based on the personal opion and experience of the author. The author does not hold stock in any of the companies mentioned. Please due you own due diligence when investing.

Small cap Cu-Mo producer gives steady payout

Posted by David

Red gems in Greenland

Posted by David

Sure gold with Shore Gold?

Posted by David

In an earlier blog entry I briefly mentioned Shore Gold (TSX-SGF) for a point of comparison.

SGF now has a 60% interest in the Fort a la Corne (FALC) property, one of the largest kimberlite clusters in the world. Newmont Mining (NYSE-NEM, TSX-NMC) holds the other 40%, but the Star property remains separate from the adjacent FALC project and is 100% owned by SGF.

SGF has come quite a ways in the past few years. They first came to significant attention with their Star kimberlite project in FALC cluster, Saskatchewan, a few years ago. With the assistance of NMC, they then bought out their neighbours with the lion’s share of the FALC cluster to the north, starting with the acquisition of Kensington Resources. They then completed their dominion over the site by buying the remainder property interest from DeBeers Canada and a couple of smaller companies. Now only a few other companies hold properties in the area, mostly around the margins. Forest Gate Resources (TSX.V-FGT) is one example.

The FALC kimberlites were discovered by Uranerz (taken over in 1998 by Cameco) in 1988 during a uranium exploration program. Later the project fell into the hands of DeBeers and Kensington Resources until the buyout a couple of years ago by SGF and NMC.

Since 1988, evaluation has been almost continuous across this cluster. In 2005, prior to the buyout, DeBeers was budgeting over $20 million annually for the project, and their share was less than 50% at that time. SGF’s 2008 share of the spending will be over twice that.

Aside from the number of kimberlites in the cluster (and thus the high tonnage), many of them diamondiferous, the other main appeal of the location is that it is close to infrastructure. Logging roads that could be upgraded cross the areas and electrical power could be easily brought in from nearby towns such as Snowden. The city of Prince Albert is only a mildly unpleasant 1.5 hour drive away. The geology of the kimberlites is interesting as they resemble a coupe-style champagne glass in cross section, rather than the more common carrot-shaped diatreme cross section seen in kimberlite pipes. This means more of the kimberlite’s volume is near the surface.

The surface I am referring to here is the surface of the kimberlite. Unfortunately for SGF and NMC, most of the kimberlite pipes lie beneath about 80 to 100 m of glacial till (boulders, sand, clay, pebbles, and cobbles). This makes getting to the kimberlite rather difficult. Drilling petrologic core (NQ, BQ, etc.) is not too much of a problem, but large samples of kimberlite (tons) are required to correctly evaluate the diamond grade. One method used at FALC is sinking a pilot mine shaft into the body (such as the case for the Star kimberlite, adjacent to the FALC project); this is too expensive to do 70+ times though. The other option is to sink a large diameter drill hole (LDDH). Using a 2’ to 3’ wide drill bit (tricone or drag bit) a hole is drilled into the kimberlite. The broken up kimberlite is moved to the surface by circulating drilling mud, washed on a screen and bagged into ~1 cubic meter parcels for later diamond analysis. Drilling through 100 m of overburden and then 100-200m of kimberlite can take from less than a week to over a month, depending on the hardness of the kimberlite, breakdowns, and weather conditions. A LDDH samples much less kimberlite than sampling from a mine shaft. Both of these methods are much more costly than the standard method of trench bulk sampling in order to determine diamond grade (ct/t) and later average diamond value (USD$/ct).

A second problem I alluded to in my first article is that of kimberlite heterogeneity in terms of diamond content. The FALC kimberlites erupted in the Cretaceous (about 100 million years ago), excavating shallow and wide craters, and infilling them with sometimes diamondiferous pyroclastic kimberlite. The advance and retreat of the inland seas of the area at that time led to geological “sorting” of the diamonds in the kimberlite craters. This results in strong variation in the diamond grade between zones in these bodies, some of which are up to 200 hectares in area, and between the bodies themselves. Diamonds would be concentrated in some zones and depleted in others as the pyroclastic sediments were reworked by the elements. The short point is that each body must be studied in higher detail than the average in order to produce an accurate grade and diamond valuation.

SGF has a current market cap of around $0.5 billion, half of what it used to be. The $50+ million that is SGF’s share of the FALC budget will be difficult to meet with only $32.3 million in cash on hand as of December 31^st, 2007. Getting financing may be difficult with the credit shortfall that now characterizes the market and shareholders will definitely be opposed to further dilution at stock levels that they surely feel are undervalued. Commercial diamond production, along with positive cash flow appears to be a long way off. SGF and NMC still have a large amount of money to spend before they can get together an accurate idea of the $ value per ton for the whole property. This is in addition to the fact that compared to some other diamond properties in Canada, such as Diavik (2-4 c/t), Ekati (1-3.8 c/t), and Snap Lake (1.2 c/t), the grades for the FALC pipes are rather low: Approximately 0.2 c/t on average and 0.1605 c/t from a recent report on underground shaft sampling at the Orion South kimberlite. To be fair, a number of diamonds from FALC have been of significant size. For example, a 6.31 c stone was recovered during the aforementioned analysis and a 15.88 c stone was reported earlier this month. These large diamonds significantly increase the average USD$/c value of the bodies that contain them, but are there enough of these stones to offset low grade and high evaluation costs?

From my perspective looking forward a few years, the light at the end of the tunnel for the FALC project appears very dim indeed. It seems management is making some good decisions in trying to develop the richest pipes (Orion, Star, etc.) first, but even those are not fully understood in terms of their potential net $/ton value, if there is any.

With the recent credit woes and their crushing effect on diamond exploration stocks (see an earlier post), the market is saturated with exciting diamond plays. As things are now, there seems to be so many other places with better upside to put money into. After taking a good hard look at Shore Gold, things are looking not so sure.

Disclaimer: The author holds 1000 shares of FGT, but no stock in SGF or NMC. The opinions expressed in this article are personal in nature and are based on his research and experience. Please do your own due diligence when trading securities.

Churchill part 2

Posted by David

Now moving onto another Churchill, the Churchill craton, where Stornoway Diamonds and Shear Minerals have the Kahuna diamondiferous kimberlite, amongst others.

As I mentioned in an earlier post, the Kahuna body is a dyke. If we model the dyke as an ideal tabular body using the reported dimensions of 4 m width by 5000m strike, and assume a mining depth of 100m, this gives a mine-able volume of 2 million cubic meters.

Using the density of olivine (forsterite), a major constituent of kimberlite, as a proxy for kimberlite density at 3.27 tons per cubic meter, the above volume equates to approximately 6.54Mt.

The latest diamond grade reported from Kahuna in December was 0.95c/t. Thus this modeled body contains 6.213 million carats at a mining depth of 100m.

Unfortunately, no diamond valuation data for Kahuna has been released yet. The individual diamonds shown seem to be of fairly good size with no overall population distribution would indicate poor quality stones, such as the case at the Argyle mine, Australia. Also the possibility for large stones exists as a 5.43 c stone that was a fragment of an even larger stone (up to 14 c in possible size) was reported in November.

To give an idea of the value of the rock, (in USD$) at a low diamond value of $50/c, the diamonds contained in the modeled body would be worth over $310 million, at a better valuation of $100/c, the value would be double at over $610 million.

Note that Kahuna is but one of the properties in the Churchill project.

An earlier 2007 report read that the PST003 dyke gave a result of 2.04 c/t, and the Jigsaw and Notch bodies gave 0.39-0.8c/t.

So with the 2008 drilling season started it will be interesting to see if Shear and Stornoway can keep up the positive results that may help is pulling their stocks away from recent lows.

Churchill part 1

Posted by David

“We shall fight on the beaches…we shall never surrender.” (Sir Winston Churchill)

In regard to this speech by the famed leader and orator, the diamond exploration and mining industry will have to do plenty of fighting in terms of good results and investor relations in order to regain positive investor sentiment.

At least one small producer seems to have surrendered already in terms of Tahera Diamond Corp. (TSX-TAH), the operator of the Jericho Diamond Mine, Nunavut. Underestimations of production costs and overestimations of reserve tonnage (e.g. Muskox Kimberlite) and $ value/t led to the company filing for protection from its creditors despite hiring some big names in the diamond business (e.g. former DeBeers Canada CEO Richard G. Molyneux). Big investment backers such as Teck Cominco (TSX-TCK.B) and Tiffany’s (NYSE-TIF) did not seem to help either.

Juniors have been hit the hardest, with many having seen their share price cut by well over half since last year. Even companies with advanced projects such as Shear Minerals (TSX.V-SRM), Stornoway (TSX-SWY), and Peregrine (TSX-PGD) have been hit heavily.

In part the banking/credit crisis is in part to blame as many juniors depend on financing to get started, and the more advanced of the group depend on loans to provide capital for building their mines. The lack of available cash banks are willing to loan leaves many companies with no option but to issue more equity to finance their projects. This is very bad when their share price is already depressed due to general bearish market sentiment. This creates a vicious cycle as companies that cannot raise enough funds see their share price drop further due to perceived lack of activity by potential investors and/or further dilution.

On the production side of things, even big names such as Harry Winston Diamonds (TSX-HW) (formerly Aber Diamonds, and yes, a weak connection with Sir Churchill) have seen their share prices drop in spite of the only major concern being the rising Canadian dollar (or rather the dropping US$) as their costs are in Canadian currency and diamonds are sold in American dollars. Although even this should be offset by rising diamond prices, mainly in response to the lower US$ in addition to rising demand.

Hopefully the banks will get their acts together soon so that a major economic organ of this country: mining and exploration, can return to full function.

As for the remainder of the Winston Churchill connections, that will have to wait until next post.

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