KIM Report

Diamond prospects develop despite record lack of investor confidence.

Posted by David

Recent market activity, to be conservative, has been devastating to resource stocks. Over the past six months, junior mining/exploration companies have been hit hard with up to 80% depreciation in their share prices. Many of these have slid strongly in spite of what would be considered by many to be positive news releases: financing obtained, higher than expected grade, large extensions of mineralized zones, etc.

 

Diamond stocks in particular continue to be a source of scorn for retail investors. Gone are the days seen in the 90′s and early 00′s where diamond companies were the darlings of the Canadian mining sector. However, recent financial market woes and investor panic do not change the fact that many of these companies hold properties with strong upside for the presence of a economic diamond deposit.

 

Two companies that appear to hold such projects, despite seeing their share prices drop over 70% in the past year or so, are Shear Minerals and Stornoway Diamonds. Both of these companies jointly operate the Churchill Project near Rankin Inlet, Nunavut.

 

This project has been described in earlier articles posted on the KIM Report, but the discovery of a new kimberlite body, named “Killiq”, on the property this season has expanded the potential for a significant diamond mine in the area. This kimberlite was found during RC drilling of a target established by following the G10 garnet-dominated indicator mineral train in the Sedna corridor and geophysics. Churchill has already been established as a leader in diamond developments with the evaluation of the large Kahuna kimberlite dyke. Killiq is of note as it is very similar petrologically to the PST kimberlite also on the property that has an established grade of 2.18 c/t. Petrologically, characteristics that PST and Killiq both share include large olivine macrocrysts, purple-red pyropes, and blue-green phlogopite mica.

 

Shear Minerals, the project operator and majority interest holder, has sent heavy mineral concentrate from Killiq for chemical analysis. If any of the garnets in the concentrate have high Cr and low Ca contents like the G10 garnets in the till samples that led to the drilling, then there is significant potential for diamond.

 

This is one of nine kimberlites discovered this field season at Churchill, and is one of two, alongside the Kahuna breccia discovery, that was found to have significant petrological similarity to other pipes on the property with high diamond grades. The Kahuna breccia is interesting as it appears to be an extension of the Kahuna hypabyssal dyke, but it is of explosive, rather than magmatic nature.

 

Other activity that has occurred with Churchill include a mini-bulk sample of 26.1 t (wet) from the Notch kimberlite for an initial assessment of diamond content and quality for stones >0.86 mm in diameter. Further till sampling programs and geophysical (gravity, magnetic, etc.) surveys are ongoing.

 

In total there are 88 known kimberlite occurrences on the property with many at or beyond the mini-bulk sampling stage.

 

Stornoway has another property (90% owned) at the advanced exploration stage with Aviat on the Melville Peninsula in eastern Nunavut. Earlier this year, a 20.6 t mini-bulk sample from AV267 sheet, the largest body on the property, returned a grade of 1.62 c/t including a 3.64 c white gem. A larger bulk sample of 202 t is currently being processed with results expected by the end of the year. There are ten other kimberlite occurrences at Aviat discovered so far. Although some of these bodies may be separate outcrops of the same. All of the Aviat bodies are similar in petrology and diamond content (so far) and are of 535 Ma (Cambrian) age.

 

An obscure property on the sidelines a relatively short time ago, the high diamond grades coming out of Aviat have made it approach (and potentially exceed) the Churchill project in terms of importance.

 

Of course, all of these developments are being overshadowed to some degree by the impending pre-feasibility report on the Renard kimberlites. Part of the Foxtrot property that includes the Lynx and Hibou dykes as well, Renard already has had detailed diamond tonnage and valuation work done. Investor relations at Stornoway has acknowledged that there have been numerous delays in releasing the report, and not all of them related to the project. Peregrine Diamonds and Shore Gold have also employed AMEC, the same firm used by Stornoway to get their studies done, and this has resulted in a backlog. The revised date is now sometime is the later half of October. It will include the resource calculation and the economic study with an aim to be understandable to the non-expert investor. Unsurprisingly, the company remains optimistic that the report will allow them to move to the feasibility stage.

 

All of this has been accompanied by a drop in stock price from almost $0.90 to the $0.25 level. Brief reversals in the downward trend have been provided by the encouraging diamond valuations for Renard last fall (over $100/c) and an arrangement with the company’s creditors to eliminate its outstanding debt. However, current market pressures have kept this stock, along with all others in the sector, down.

 

Diamond companies and investors are desperate for a catalyst that will stop the haemorrhaging in the sector. Much of this will occur when (if?) the financial sector is done cutting out the dead wood, the rest will have to come from the companies themselves in the form of breakthrough news. Perhaps the impending pre-feasibility study for Renard will do that for Stornoway.

 

Large carats at Gahcho Kue, worth the wait?

Posted by David

Earlier this month, Mountain Province Diamonds (TSX-MPV, AMEX-MDM) dropped a big rock in the otherwise stagnant waters of diamond exploration and investment. The company announced that they had recovered a 25.13 c colourless octahedral diamond of exceptional clarity from the Tuzo kimberlite in the Gahcho Kue cluster, Northwest Territories. This diamond was valued at approximately (USD) $17,500/c, or $439,775 total. This is the largest diamond recovered in Canada during an exploration project. 

 

MPV discovered the Gahcho Kue cluster, which lies in the AK property in the Kennady Lake region. It owns 49% of the project, with De Beers Canada as the operator and majority stake holder. The geologic environment of the project is in the southeast Slave craton. The cluster was discovered in 1997 and DeBeers Canada (then Monopros) was quickly brought in as a JV partner where is could earn up to 51% of the project by shouldering a large portion of the costs. DeBeers has since exercised this option. Four main kimberlite bodies comprise the cluster (see map): Tuzo, 5034, Hearne, and Tesla. Tesla is not currently considered to be a resource as its small surface area, 0.4 hectares, is less than one third that of the next largest body: Tuzo at 1.4 hectares.

 

The geology of the three currently economic pipes is varied. 5034 is an irregular body of hypabyssal kimberlite, Hearne is a mix of hypabyssal and diatreme facies kimberlite, and Tuzo is believed to be the deeper part of a diatreme with no root zone found as of yet. These bodies together create a large reserve of ore that has been thoroughly drilled and modeled over the past decade. In a general way the geology could be seen as an intermediate between the Churchill (Stornoway Diamonds & Shear Minerals) and Snap Lake (De Beers Canada) projects that are entirely hypabyssal kimberlite and the Fort a la Corne (Shore Gold & Newmont) project where all of the kimberlite found is pyroclastic or resedimented pyroclastic.

 

The diamond was recovered from LDDH sampling in March of this year. After the sampling was completed the kimberlite was made into a concentrate at De Beers’ Grand Prairie, Alberta facility and then shipped to the GEMDL laboratory in South Africa (also run by De Beers) to recover the remaining diamonds. When this in completed, the diamonds will be sent to the DTC facility in London, U.K., for cleaning and valuation.

 

Of the three main kimberlites, Tuzo is the least developed in terms of sampling. The recent bulk sample was in part an effort to rectify this. 5034 has 8.7 Mt of indicated ore at 1.6 c/t and 4.9 Mt of inferred ore at 1.7 c/t. Hearne has 5.7 Mt of indicated ore at 1.7 c/t and 1.5 Mt of inferred ore at 1.53 c/t. Tuzo, meanwhile only has 10.6 Mt of inferred ore at 1.15 c/t.  MPV and De Beers are trying to remove the uncertainty with this body. For comparative purposes Diavik a few hundred km to the north has about 29.8 Mt of reserves in total at 3.2 c/t (measured+indicated), or 95.36 Mc. Thus far, Gahcho Kue has about 46 Mc (indicated+inferred). Keep in mind that the Diavik mine has unusually high grade. MPV estimates a mine life of about 24 years.

 

In terms of diamond valuation, an independent 2006 report by WWW International Diamond Consultants Ltd. gave (in USD) $101/c for 5034, $54/c for Hearne, and $43/c for Tuzo. The average for all three pipes was $75/c and it was noted that proper cleaning (usually in a hot acid bath) would raise the value of many of the diamonds by up to 10%.

 

It has been over ten years since the discovery at Gahcho Kue. Mining is expected to begin in full by 2012, giving about a fourteen year lag between discovery and mine. Diavik took only ten years in total to begin full capacity mining and Ekati took even less. Following statements for interviews with MPV management, it would seem that they would prefer a faster to-mine plan, but De Beers has preferred a more methodical approach. In light of what happened at Jericho with Tahera, perhaps this might be a more prudent option. Though perhaps De Beers has been focusing the bulk of its attention on their 100% owned Snap Lake and Victor projects in the Northwest Territories and Ontario, respectively.

 

Regardless of the slow timetable set for developing the project, the discovery of this diamond, along with other ones >5 c found in the past few years, has established the potential for large, high quality stones. As diamond price goes up exponentially with carat size, the profit margins for the future mine are looking larger. Now that above average grades, decent diamond values, and large, high quality, high value diamonds have been established at Gahcho Kue the main hurdle is to finance the project to completion as it will be about four years until commercial production. MPV needs about $370 million to fund its 49% share. The current market cap of the company is $280 million. The company has about $1.5 million net in cash and medium-term deposits, and has invested about $65 million in the project overall. While the sale of the diamond announced last week should pay for a few drill holes, in order to keep the full 49% share of the project MPV will undoubtedly require financing. This strategy may run into some resistance as diamonds are not a hot item in the current market and lenders in general are skittish after their collective failure to recognize the risks of sub prime mortgages and ABCP. Also, the fate of the aforementioned last diamond mine to open in the Arctic may be scaring way any potential suitors. Raising more capital by dilution is only a partial solution at this moment considering the vast funds involved. Although the company is not poorly positioned to issuing private placements effectively as its stock price has not suffered anywhere near to the degree that many of its peers have (mainly $4 to $5 over the past year). Another option is to default on their share of the costs and let De Beers’ deep pockets take care of things in return for letting their share slide to 40%. A third option that is being signaled by a strategic review of the company as alluded to in a National Post article last week is that the company may be putting itself up for sale.

 

Regardless of what option the company pursues, the nature of the deposit is likely to reap large rewards for shareholders when interest in the diamond market returns. What remains to be seen is that whether MPV chooses the option that gives the best gain to the shareholders.

 

Disclaimer: The author holds no shares of MPV. This article is based on the author’s personal research and experience. Please perform your own due diligence when investing.

 

The Stornoway without a Dion

Posted by David

To use an overused comparison in these current market climes, the diamond sector is the Rodney Dangerfield of mining stocks as it “don’t get no respect”. In this way, the diamond juniours are much like the official opposition (for the non-Canadian readers, Stornoway is also the name for the official residence of the leader of the opposition, currently Stephane Dion). To give a more focused discussion of the issue than did a previous article, presented is the case of Stornoway Diamonds (TSX-SWY).

 

The stock has been on a fairly steady decline since this time last year going from ~$1.20/share to about $0.37/share at current. Even the news that acclaimed diamond consultants – WWW International Diamond Consultants Ltd., had upped the estimated valuations for diamonds from the Renard kimberlites (Renard, together with the Lynx dykes, comprises the Foxtrot Property in Central Quebec, and is a 50/50 joint venture with SOQUEM Inc.) only caused a mere blip up from 0.35 to 0.43 that evaporated in the last two weeks.

 

In detail, the report displayed increased values for diamonds from Renard 2 and 3 (from U.S. $109/c to $121/c) and The North Complex Zone of Renard 4 ($69/c to $79/c), increases of 11% and 14% respectively. Since the pullback after the news, the stock has bounced around the mid thirty cent level. So what gives? The predominant idea here is that since last summer, most investors are still very wary of juniours, even ones with established and advance projects such as Foxtrot and, to a lesser extent, Churchill (joint venture with Shear Minerals). For Renard, the pre-feasibility study (NI 43-101 compliant) is due out sometime during this quarter and many investors may be waiting on that. The cost of a road to the potential mine site is one of the most speculated values.

 

Aside from Renard, the other properties in the Foxtrot property hold promise as well. The Lynx series of dykes produced a grade of 1.07 c/t from a 494 t bulk sample. Not enough sampling has been done to allow for a diamond valuation, but the sample did include a gem-quality octahedron weighing in at a whopping 21.53 c (pictured). A minibulk sample from the Hibou dyke, 1.3 km from the Renard bodies (see map), gave a grade of 1.26 c/t from 30.4 t of kimberlite. The largest stone from this sample was a 1.01 c octahedron.

 

After Renard, the next most advanced property is the Churchill project (JV with Shear Minerals), a series of kimberlite dykes located in the Churchill craton in Nunavut. This property was discussed the earlier Arctic Diamonds and Churchill articles.

 

SWY also holds a number of other advanced-level diamond prospects. The most promising of these is the group of eleven kimberlite bodies at Aviat on the Melville Peninsula, North of the aforementioned Churchill project. What really is really interesting about this project lately is the dense media separation results from January 2008 that reported a grade of 1.63 c/t from 20.6 t taken from the AV267 body, and included a 3.64 c stone. AV267 is a sheet-shaped body of macrocrystic hypabyssal kimberlite. Thus far, drilling has delineated AV267 to have an average thickness of 3 m and to extend at least 2000m along  strike and 500 m down dip (dip angle is 8-20 degrees). This is similar to the body at Snap Lake. Kahuna at Churchill is also similar in deposit shape, but it is a vertical sheet instead of the subhorizontal one at Aviat. The project began as a JV with SWY, BHP Billiton, and Hunter Exploration Group (a private firm). Last month SWY acquired BHP’s share of the project, making the split now 90% SWY and 10% Hunter. SWY also have 100% of the marketing rights for any Aviat stones.

 

SWY made news a couple of years back due to its aggressive takeover of Ashton Mining Canada. The main gain in this for SWY was the acquisition of Ashton’s share in the Foxtrot Project. SWY also gets a lot of press coverage because of its CEO, Eira Thomas, a celebrity in the diamond exploration industry due to her part in the discovery of the Diavik mine working for the then-juniour exploration company Aber Diamonds (now Harry Winston Diamonds). Her background and media appeal have made her popular with the press in an industry where companies are usually run by stolid old white guys. The acquisition of Ashton did not only add just properties to the company, but talent as well. Tom McCandless, a renowned and well-published specialist on North American diamonds (read Barren Lands by Kevin Krajick), stayed on with SWY as a consultant after the takeover and is now their chief mineralogist. Matt Manson, formerly VP marketing/technical services & control for Aber (now Harry Winston), came into SWY through the acquisition of Contact Diamond Corporation and is now company president.

 

In spite of these promising results and experienced management, SWY, like most diamond juniours, has been beaten into the ground. With the price at a severe low, investors will either shy away or look at the situation as a buying opportunity. SWY previously has been the focus of a lot of vitriol on investor bulletin boards such as www.stockhouse.com due to its aggressive takeover of Ashton, but shareholder crankiness aside, this is not the cause of the perceived downside.

 

SWY’s number one project is Foxtrot, specifically Renard. As a mine becomes more of a distinct possibility, the need for financing becomes impossible to ignore. Road and electricity access must be established, buildings erected, and equipment purchased. This will likely cost into the hundreds of millions of dollars. As of January 31^st, SWY had just under $18 million in cash and equivalents. Financing by dilution at current prices is unlikely, as management is a significant stockholder and do not want to see their equity devastated. That leaves turning to banks and the like for funds to construct the mine. The “subprime slime” that still sticks to financial institutions makes getting a loan far more difficult now than this time last year. However, considering the experience of the management and the premium nature of the properties, the choices made are likely to be in the best interests of the shareholders.

 

Disclaimer: The author holds 500 shares of SWY that he bought at $0.73/share and has only mildly freaked out about the price dropping to $0.37/share. This article is based on the personal opinions and experiences of the author. Please do your own due diligence when investing.

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.