KIM Report

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.

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