KIM Report

Respectable Showing For the Diamond Sector at PDAC 2011

Posted by David

Last week Monday’s technical session at the PDAC on diamonds was titled: “21 years of Canadian diamonds: Coming of age?”. Five talks were given and three were based on Canadian diamond projects. The remaining two were on the Bunder project in India with Rio Tinto, and the development of Petra Diamonds to being a major producer in Africa.

While not full to capacity, the seating room approached that mark during a few of the talks and significant figures in the diamond industry were present. Including the discoverers (or co-discoverer) of Canada’s first two diamond mines: Chuck Fipke (Ekati, with Stu Blusson), and Eira Thomas (Diavik). Also present were academics, geology students, financial analysts, independent investors, and representatives from most senior and junior diamond exploration/mining companies.

The award for most entertaining talk goes to Jim Davidson of Petra Diamonds (AIM:PDL), for his repeated well-placed, but thinly veiled stabs at sector giant De Beers for buying some of their declared “unprofitable” mines (e.g., the Cullinan in South Africa) and turning them to the opposite within a few years. Technical award goes to Robin Hopkins for going into detail on how macrodiamond (the economic stones) grades are extrapolated from the microdiamond grades. This was during his talk on what has been developing at the Renard project as it progresses towards a Mineral Resource update for this year as part of Stornoway’s feasibility study for mine at that location within a few years. The most notable aspects of Stornoway’s recent work (aside from buying out partner SOQUEM’s 50% share in the project in exchange for equity) is the increase of the project to a 25 year mine life with a NPV of $885 million and pre-tax IRR of 24.8%.

De Beers geologist Brad Wood gave a fine synopsis of the discovery, evaluation, development, and starting in 2008, production of the Victor deposit in northern Ontario. He discussed the challenges in the natural environment and in working with the affected communities in realizing the mine. Much of the talk dealt with the hurdles of construction. A lot of lessons were learned in the process, mainly technical ones that he passed on to the audience. An example is how the company utilized the large diameter drill holes left over from the deposit evaluation stage as wells to keep the mine drained as it is suitated in Muskeg.

Peregrine Diamonds updated the audience with further news of more kimberlite and more diamond finds at Chidliak (51% owned by BHP Billiton) on Baffin Island. Chief geoscientist Jennifer Pell noted that fifty kimberlite bodies have been discovered, about half by surface prospecting. Many of the kimberlites not exposed have been found by geophysics using aeromagnetic surveys as they typically exhibit a clear “bullseye” pattern. One of the more recently discovered bodies was in fact, found by accident by a university student sponsored by Peregrine doing fieldwork on the glacial terranes of the area. More kimberlite discoveries are bound to follow with the drilling season starting this month.

Although diamond shares (and really, most companies worldwide) have taken a major hit this week with the Sendai earthquake in Japan, the sector seems able to continue capitalizing on new discoveries and mines nearing production as investors again take notice. If anything, the recent recession did the sector a small favour in driving out diamond companies with below-average/extremely speculative prospects to bankruptcy or at least to other commodities. In regards to this, it will be interesting to watch Shear Minerals in the coming months. Their efforts to resurrect the Jericho mine in Nunavut may renew some investor interest in higher-risk diamond stocks.

Disclaimer: The author holds shares of SWY, SRM, and PGD. Relevant comments are welcome and encouraged. Spam comments will be deleted. This article is based on the opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2011 www.kimreport.com

Peregrine Finds 1.15 Carat Diamond at Chidliak

Posted by David

Peregrine Diamonds Ltd. added to their exceptional track record last week when they found a 1.15 c macrodiamond. It was in an 840 kg total microdiamond sample from the CH-31 kimberlite in the Chidliak project, Baffin Island, Nunavut. CH-31 is the largest kimberlite in terms of surface area (5 ha) in the Chidliak project that is a JV between PGD (49%) and BHP Billiton (51%).

CH-31 is just the latest of many kimberlite pipes found at Chidliak since 2008 in what has been a textbook study of how to prospect for diamonds.

Kimberlite Pipe Characteristics

Being more specific, the 1.15 c stone is an off-white tetrahexahedroid recovered from the CH-31D sample that comprised 201 kg of the total sample (see above table). This find is impressive as PGD found CH-31 last August when prospecting an anomalously low zone on an aeromagnetic survey. Samples A and B are surface samples collected from the margins of the kimberlite. Samples C and D are from drill core collected from the same angled drill core at depth ranges of 6-328 m and 328-416 m, respectively. This kimberlite is being considered for the next step: a mini-bulk sample (usually >100 t), in 2011.

The kimberlite itself is volcaniclastic facies, the type typical of the upper regions within kimberlite pipes. Both crustal (e.g., carbonate rocks, gneisses, etc.) and mantle (e.g., peridotite and eclogite; the parent rocks for diamond formation) xenoliths were found in some abundance in the kimberlite. At first glance, the kimberlite appears to consist of only one eruptive phase, although these are only preliminary observations.

Future Prospects

This find has possibly buoyed management’s confidence in the project and they have increased their earlier private placement of 2 million shares by 800,000 at $2.50/share. This will bring in about $12 million (not including warrants).

PGD’s management is well-versed in diamond exploration. The company’s early days were focused on the DO-27 kimberlite in the Lac de Gras region. Before that, many of the geologists had experience with other projects. Brooke Clements, President, was part of the Ashton Mining Canada team that found the Renard kimberlite cluster that is now being developed into Quebec’s first diamond mine by Stornoway and SOQUEM. The VP Exploration, Peter Holmes, was previously with De Beers and participated in evaluating the Lomonosov diamond deposit (now a mine as of 2005) in northwest Russia (close to the massive V. Grib deposit and subject to legal strife between LUKOIL, De Beers, and the now defunct Archangel Diamond Corporation).

This past month seems to have been a very good one for PGD as it began with their October 3rd press release of their confirmation of diamondiferous kimberlites in the Qilaq property. This property surrounds Chidliak and is 100% owned by Peregrine (see above map). The challenge now is to keep the project’s momentum going by following investors’ expectations after this spate of successes.

Disclaimer: The author holds shares of SWY. Relevant comments are welcome and encouraged. Spam comments will be deleted. This article is based on the opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2010 www.kimreport.com

The Summer Exploration Season – Sans Fanfare

Posted by David

Now that commodities have recovered slightly and the stock indexes appear to be climbing out of the financial hole that was March 2009, investors – both institutional and individual, appear to be breathing some life into the mining juniors that have been so beaten down. The ones that remain solvent anyways.

On the diamond front, things are pretty quiet. Gold and silver, followed by base metals, have been attracting most of the press in regards to this resurgence. The return of capital to the diamond industry has been pretty subdued. However, this is not to say that is has been forgotten.

Diamonds Resurgent

An example is with Harry Winston Diamond Corp. that has seen is share price double to about $7/share in the past couple of months when some smart investors thought it may not be a bad idea to hold share in one of the highest grade gem diamond mines in the world (their retail arm notwithstanding). Kinross had the right idea when it acquired a 19.9% stake in the company during the lows of March.

Motapa Diamonds Inc., a junior diamond explorer in Lesotho has also doubled since the New Year as it is in the process of being acquired by Lucara Diamond Corp. (TSX.V-LUC). Their Mothae project draws many parallels with that of the nearby Letseng mine, well-know for its relatively abundant diamonds of exceptional size and quality (about 20c).

Gearing Up For a Recovery

The Canadian exploration front has been even more low-key. The only significant new find has been Peregrine Diamond’s Chidliak property on southern Baffin Island as discussed in a previous article. Other juniors are conserving their cash and focusing on their best projects. Stornoway recently announced that it would commence further drilling on their Renard project to prove up their case for a mine there. The only other project they are looking at now is the Aviat kimberlite complex on the Melville Peninsula in Nunavut having gotten some promising number from samples taken there last year. Smaller companies are having to conduct private placements at still-low share prices in order to pay for critical work on their properties. Such is the case with Dianor Resources issuing shares at $0.10 to pay in part for a 50 000 t bulk sample at their diamond-bearing Leadbetter conglomerate property near Wawa, Ontario.

Stagnation of Diamond Prospecting in Canada

Comparatively speaking, other companies have not had it so rosy. Shear Minerals is looking at a dearth of funding for its main project: Churchill after its partner, Stornoway, decided not to participate in the recent exploration season in order to fund the abovementioned projects. Like many other companies that previously had diamonds as their sole focus, Diamonds North has been looking at the potential for metals on its properties in the Arctic after some samples this winter showed an unexpected scarcity of diamonds. To round things off, Shore Gold, a classic punching-bag/favourite for many diamond investors is still trying to figure out how to reconcile low grades with ~100m of glacial overburden atop their kimberlites in Saskatchewan. Although they did recover a 7.99 c diamond from a mini-bulk sample recently taken by large diameter drilling to add to their promising repertoire of large diamonds found in the Fort a la Corne cluster. A more thorough discussion of the Fort a la Corne kimberlites can be found here.

Choose Your Partners Wisely

A third set of companies with promising properties appear to be in limbo. Mountain Province Diamonds Inc. is still at loggerheads with partner De Beers over the timeline from the rich Gahcho Kue diamond deposit in the Northwest Territories in spite of an updated mineral resource estimate released in late May. DeBeers is having a headache of its own through its majority holding of thinly-traded Archangel Diamonds Corp. with continued legal struggles with Russian companies (chiefly LUKoil) over the massive Grib diamond deposit in northwest Russia. De Beers, like many other companies seeking to do business in Russia, is learning that when you get into bed with Ivan (particularly on his turf); he usually ends up on top.

Recovery is a long way away. Especially in the diamond sector as it was already lagging near the tail end of the resource bubble that popped last year. But as with panning for diamonds, the companies with little weight and substance will be washed away by the financial currents and the gems will be left behind.

Disclaimer: The author owns shares in HW, SWY, and SRM. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com

Chidliak: Peregrine Diamonds Discovers New Hope for Arctic Diamond Exploration

Posted by David

The one diamond discovery that commanded the most attention at this year’s PDAC convention was Peregrine Diamonds‘ kimberlite (and subsequent diamond) discovery on its Chidliak property in south Baffin Island, Nunavut. Chidliak is 9800 km², and since the discovery of diamonds on the property, Peregrine has added a buffer claim around the property of ~3200 km² in area called Qilaq this February. BHP-Billiton has earn-in rights of up to 51% in Chidliak if they spend $22.3 million on the property over the next five years. Although BHP is spending five times what Peregrine is, Peregrine remains the operator for 2009′s program.

Chidliak was the focus of two talks in two separate diamond sessions at this year’s PDAC. What is so interesting about Chidliak is the sequence of events that led to the discovery of three kimberlite bodies: CH-1, -2, and -3, on the property.

Till sampling of kimberlite indicator minerals from 2005 to 2007 confirmed that kimberlite was present in the area. These samples indicated that 10% of the garnets found were G10. Last year, an aeromagnetic survey that covered less than 15% of the property resulted in a number of magnetic anomalies. These are commonly associated with kimberlite, but not always. Field geologists sent out to investigate the three most promising anomalies encountered kimberlite rock at the surface. Approximately 1100 kg mini-bulk surface samples from the CH-1 and CH-2 kimberlites gave back 2.17 c/t and 0.9 c/t, respectively. This includes a 2.01 c gem-quality colourless resorbed octahedron from the CH-1 sample.

These are in no way statistical samples of the diamond potential of the kimberlites, but they are superb returns from a grassroots exploration program that has yet to put a drill hole into the ground. Considering these encouraging results, there is significant upside to this project. Over 170 magnetic anomalies remain from the aeromagnetic survey for investigation and the bulk of the claim remains yet to be surveyed. Consider that the size of the Chidliak and Qilaq claims are much larger than the Ekati (BHP-Billiton) or Diavik (Rio Tinto and Harry Winston) mine camps in the Northwest Territories.

Another long-term benefit for the project is its proximity to infrastructure. That is of course a relative term when in the arctic. The property is less than 100 km from the territorial capital of Iqaluit and even closer to the coast, unlike the land-locked and isolated Lac de Gras mines that are ~400 km from Yellowknife by ice road.

Considering that current mines in the pipeline are either modest in comparison to Ekati and Diavik: e.g. Snap Lake (De Beers), Renard (Stornoway and SOQUEM), DO-27 (Peregrine), or have slowed in their development: e.g. Fort a la Corne (Shore Gold and Newmont), Gahcho Kue (Mountain Province and DeBeers); Chidliak hopefully represents a large part of a new period of Canadian diamond exploration.

Disclaimer: The author holds 4000 shares of SWY and 20 of HW. This article is based on the personal opinions and experience of the author. Please conduct due diligence when investing. ©KIM Report 2009 www.kimreport.com

Bending Clifford’s Rule

Posted by David

In his famed 1966 paper, T.S. Clifford noted that diamond-bearing kimberlite pipes were always ones that intruded regions of ancient continental crust. To be more specific, these regions are Archean in age (>2.5 billion years old) and formed the tectonically stable cores of continents known as cratons. Thus “Clifford’s Rule” states that diamondiferous kimberlites occur in geologic regions that have been tectonically stable (i.e. cratons) since the Archean and that diamond exploration should focus on those areas.

 

However, over the past forty years these regions of high diamond potential have been thoroughly investigated for diamond deposits and a number of world class deposits have been found in this manner, such as those in the Canadian arctic. As time passes, there are fewer and fewer areas of apparent diamond potential that remain unexplored. Diamond prospectors must start looking in places that appear at first not to follow Clifford’s rule. More diamond discoveries are being made in regions where Archean craton is not obvious.

 

Attending this August’s 9^th International Kimberlite Conference, a prevalent theme was diamond exploration and discoveries in atypical areas falling outside of Clifford’s rule. For example, one presentation was regarding the nature of the Arygle mine, owned by Rio Tinto plc. Although situated in a Proterozoic (between 2.5 and 0.542 billion years old) mountain belt, Argyle has probably the highest diamond grade of all operating diamond mines. This presentation suggested the possibility of Archean mantle existing kilometers below the younger material at surface and thus providing the conditions optimal for diamond stability. Another example of developing properties in non-Archean areas is the diamondiferous Carolina kimberlite in Brazil. Located in the 1.8-1.2 billion year old Amazon craton, this kimberlite and others near it are being investigated by Sola Resource Corporation (TSX.V-SL). The characteristics of this kimberlite discovered thus far show no significant deviation from those of kimberlites situated in Archean cratons.

 

Regardless of how the current market environment is treating diamond stocks, the increasing core demand for diamonds has pushed diamond exploration to looking at areas previously considered to be at the fringes. Examples of significant discoveries in these areas include those mentioned above, plus Fort a la Corne, Saskatchewan; and Guaniamo, Venezuela.

 

The rising demand for diamonds has caused the small group of large companies who control the bulk of the rough supply (De Beers, Rio Tinto, BHP Billiton) to raise prices. As with any commodity, when price rises, new technology and new exploration philosophies are employed to discover deposits in previously unexplored areas.

Conference-Induced Hiatus

Posted by David

Sorry for the lack of updates the past few weeks. My time had been taken up in preparing my research for presentation at the aforementioned 9th International Kimberlite Conference in Frankfurt, Germany.

The conference was a big success. Canadians made up about a third of the ~450 participants, with Russia, Australia, the U.K., the U.S.A., Japan, South Africa, and Germany also making large contributions. Although mainly an academic conference, representatives of companies such as Rio Tinto, Diamondex (TSX.V-DSP), BHP Billiton, Metalex (TSX.V-MTX), Indicator Minerals (TSX.V-IME), Teck Cominco, Shear Minerals, and Shore Gold were present. Private company De Beers also have a strong presence through both its exploration/mining arms and the Diamond Trading Company (DTC). Topics of discussion included diamonds and their formation, kimberlite emplacement, exploration techniques, and the mantle.

More information on the highlights of the conference to come…

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 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.

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 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.