KIM Report

Diamonds North works to turn high diamond counts into high share price

Posted by David

A rather vocal minority of Diamonds North (DDN) shareholders responded quite negatively to earlier criticisms of the company in regards to discussion on whether or not it was reading too much into rather high diamond counts from its Amaruk property.

 

Having attended the CEO’s (Mark Kolebaba) presentation to a sparse crowd at the 2008 Toronto Resource Investment Conference (Wake?) October 4th, it appears that DDN is not resting on its laurels and is attempting to make something of the encouraging results seen thus far from its arctic properties. Mr. Kolebaba gave a strong presentation outlining the importance of further diamond exploration in a market were the last significant deposit to start producing was Diavik in 2001 (no, Jericho does not count).

 

DDN’s main property, Amaruk, consists of ~2 million acres in Nunavut containing 29 kimberlite bodies. Many more geophysical targets remain to be drilled for kimberlite. Garnets from till samples in the region show strong G10 and G9 geochemical signatures (strong indicator minerals for peridotitic diamonds), with a minor eclogitic garnet component in terms of chromium and calcium contents.

 

One major criticism of the news release last March regarding the ~7 diamonds/kg result was that only 81.75 kg of rock from the Tuktu-1 kimberlite was sampled. Such a small sample is easily skewed to economic or uneconomic numbers by the addition or subtraction of a few carats, respectively. Mr. Kolebaba’s company is working to firm up the numbers for Amaruk by taking mini-bulk samples of 20 t from Tuktu-1, -2, and -3, and 15 t from the Qavvik body.

 

Larger sample sizes lower uncertainty and are especially important to diamond mining as even economic pipes have low absolute concentrations of diamond (well below 1% by weight). These samples have a higher chance of capturing economically viable macrodiamonds, rather than just the microdiamonds found do far. The mini-bulk sample is an important step as the Amaruk property moves from the reconnaissance stage towards the evaluation stage.

 

Interestingly, DDN’s share price has not been pounded down as badly as some other diamond juniors. It closed Friday at $0.40 down only 50% from its traditional support level at $0.80. Part of this may be due to loyal investor support, and the other part is that it has stumbled upon a potential base metals deposit also on the Amaruk property known as the Tunerq prospect. Rather than put it aside or option it out, DDN has decided to run with the prospect. Grades of up to 2.49 % Ni, 0.56% Cu, and 0.05% Co have been encountered in sulfides during drilling. An opportunistic and adaptable attitude by management should help keep the company’s head above water in a market that currently does not favour any sector, let alone diamonds.

 

Disclaimer: The author owns no shares of DDN. This article is based on the personal opinions and experience of the author. Please do your own due diligence when investing.

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.