KIM Report

During this seemingly never-ending drop in equity prices, many analysts are recommending that now is the time to buy stocks as so many solid companies are trading at deep discounts. But what companies does one invest in currently? In terms of resource stocks, most are trading at 70-90% below their stock price last winter. Metal prices have yet to properly recover and most producers have either gone to great lengths in cutting production costs or have shut down their operations. Explorers have also strongly cut back on projects for 2009 or have gone into “hibernation mode” in an effort to preserve their remaining cash until this crisis abates and future private placements can be made.

There are some case examples for optimism however: Harry Winston recently reported net earnings of $1.17/share for Q3 compared to loss of $0.13/share in the previous year’s quarter. Retail jewellery sales offset decreased earnings from sales of rough diamonds due to decreased production resulting from grade variation in the main kimberlite pipe at the Diavik mine: A-154 South. Another case is the small-cap silver producer Great Panther Resources, mentioned in an earlier case study article, that has managed to reduce their operating costs from about $11/oz. to $7.40/oz. in the face of <$10/oz. silver (although we have seen a bit of recovery in the metals over the course of the week). However, news of this was later added to by the announcement of dilution in the form of a $2.7 million private placement. On the exploration end, Shear Minerals continues to discover more kimberlites with high diamond counts on its Churchill property. But, as with Great Panther, this was also followed by the announcement by Shear of a $1.18 million private placement and thus shareholders would see further dilution. In the meantime, Shear’s JV partner at Churchill, Stornoway Diamond Corp. has decided to focus the bulk of its resources into developing its Renard property into a mine. Although its Aviat project on the Melville Peninsula is a definite target for further exploration in 2009. True North Gems is preparing its Aappaluttoq ruby project in Greenland for mine permitting. This will allow them to sell the large stockpile of gems they have acquired from sampling over the past few years. Diamonds North, buoyed by high diamond counts from some of their kimberlites this year, is planning for a modest exploration program in 2009 and is currently working on finishing this year’s mini-bulk sampling program. There are many other companies like those aforementioned that are meeting or exceeding their stated goals. Positive news releases (e.g. this one), however, are promptly ignored by the market -or at least the retail investors.

An unavoidable fact is that the manufacturing and housing sectors are in a tight retraction worldwide. Commodities used in these fields: base metals, iron, aluminum, petroleum, and even some precious metals (silver, PGEs) will continue to see lessened demand as consumers disappear. Many analysts suggest that the US dollar is due for a significant collapse due to the variety of debts piled on America by the Bush government. Traditionally, this would cause investors to flock to precious metals (primarily gold) and other forms of solid investments (diamonds, other rare gemstones, etc.) in order to preserve their capital until the malaise has passed. This bodes well for companies mining and exploring for these commodities. Another silver lining to this recession is that low oil prices have given miners and explorers a break in operating costs via cheaper fuel.

The real challenge is in determining which of these companies will survive the downturn until they can start to benefit from increased demand. Factors to look for are a strong treasury, a demonstrated history of cutting costs, a willingness to open new revenue streams, and management ownership. Management must make serious decisions on whether to conserve cash and limit exploration activities or to spend to continue adding value to their properties. Often the latter involves offering new shares at the currently extremely low market prices in order to raise that cash as banks loans are not forthcoming.

Currently, there are excellent opportunities for investment in mining and exploration stocks. In particular, there is potential in the diamonds sector as it was already undervalued prior to the current crisis and diamond prices are more firm than that of other commodities. A final factor to consider is that tax-loss selling at the end of this year will result in further devaluation of many companies, adding to the allure for bargain hunters. For those who actually have cash left to invest at this point, a long term (3-5 yrs) outlook is mandatory. Those who do their homework and invest in a non-reactionary fashion will definitely benefit when this bear turns into a bull.

Disclaimer: The author holds 20 shares of HW, 4000 of SWY, 500 of SRM, 500 of GPR, and 1000 of TGX., most of which were bought at much higher prices than current. This article is based on the opinion and experience of the author. Please do your own due diligence when investing.

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.