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

Stornoway Diamond Corp. Works to Expand Resources at Renard Project

Posted by David

Last week, Stornoway Diamond Corporation released the results of their latest drilling program at their Renard project (part of the Foxtrot property) in central Quebec. The dimensions of three diamond-bearing kimberlite bodies were expanded beyond those expected by the previous models.

Renard 1, 3, 4, and 65 Models Expanded

Although the density of drill-holes is too low to properly resolve the bodies at depth at a resolution that is suitable to be deemed an indicated or even inferred resource under NI 43-101 standards, the upside is promising. Three drill-holes each were put into Renard 3, 4, and 65. These data  increase the previously modeled dimensions of the kimberlite pipes. The maximum lower cut-off for Renard 3 was extended from the depth of 395m established in the existing NI 43-101 report to 439m. The same was done for Renard 4, going from 380m to 759m. No previous 43-101-compliant resource values existed for Renard 65, but drilling encountered kimberlite a a maximum vertical depth of 513m. One drill hole was also put into Renard 1 and further confirmed multiple lithologies and a maximum depth of 370m. The increase in tonnage for the project is not as large or as certain as with the reported increase in Renard 2 earlier this year, but it is substantial and unexpected (see above image of a geological model of R-4 with 3 drill-holes showing kimberlite outside of the modeled dimensions (PMD: potential mineral deposit).

Renard 65 (geological model above) stands apart from the other two bodies (R3 and 4) as it is entirely classified as PMD  and cannot be included in the 43-101 feasibility study recently contracted out to SNC-Lavalin. R65 is quite large in terms of ore tonnage, but lower grade than other bodies. The body would potentially add to the mine life or throughput of ore at the mine as extra reserves, but not significantly affect overall mine grade or diamond valuation as it is believed to be one of the least economic bodies in the cluster. Renard 1 would be classified in the same group as 65. Also adding to the potential reserves at the future Quebec mine would be the 4+ km long Lynx dyke, and smaller Hibou dyke. However, the diamonds from these kimberlite dykes are typically more brownish in colour than the ones from the Renard pipes and thus have a lower average valuation (US$/c).

Other Projects Put on Hold

Stornoway’s increasing focus on Renard has left its other lower-stage targets on the back-burner. Aviat on the Melville peninsula in Nunavut is the next most promising after Renard.  Though less-studied and containing smaller white diamonds, its high grade (~2c/t) and unknown extent holds significant potential. Completion of a mine at Renard should provide an income stream to fund the next necessary step of bulk sampling.

The only remaining project of relative significance held by Stornoway is its minority share in the Churchill kimberlite project operated by Shear Minerals. Although a portion of the project has attracted the attention of Rio Tinto, it appears to be doomed to languish as Shear Minerals has become preoccupied by its purchase of the Jericho mine and Stornoway’s lack of funds for non-priorities.

Coins Remaining in the Piggy Bank

As of its last quarterly report, the company had $14 million in cash. From this, Stornoway must fund its 50% share of the upcoming Renard mine feasibility study (the other half belongs to SOQUEM). A secondary study is in the works to examine bringing hydroelectric power lines into the camp from the north. If possible, attaching the mine to the electric grid would occur a few years into the mine-life. The earlier pre-feasibility study from over a year ago assumed on-site electric generation. Access to Quebec’s cheap hydroelectricity would significantly lower operating costs and avoid vulnerability to high oil prices.

Given that the third generation of Canadian diamond mines (Renard, Fort à la Corne, and maybe even Gahcho Kue) are coming on-line in the next few years, diamond stocks are rising. A half-decade of disinterest and bad luck (see Tahera and Jericho) is hopefully over, and investors: individual and institutional, will begin to see the value in the long wait for a diamond mine to reach production.

Disclaimer: The author holds shares of SWY and SRM. 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

Newsworthy Week For Canadian Diamond Companies

Posted by David

It has been an exciting week thus far for the Canadian diamond industry. A few major news releases from junior Canadian diamond exploration companies has shown that the industry is climbing out of its stagnation from the past couple of years.

A New Mine for Nunavut, Again

A curious development in the Canadian diamond scene occurred with Shear Minerals‘ announcement that they were purchasing 100% of the Jericho diamond mine in Nunavut. Shear will purchase the mine for $2,000,000 and 80,000,000 common shares. The bulk of this will be paid to the main creditor of Jericho’s bankrupt owner (Tahera Diamonds). The main creditor is CAZ Petroleum Ltd. Other terms of the deal is that CAZ will get a 2% royalty on mine production and be allowed to appoint one member of Shear’s board of directors. Though extremely dilutive (they are looking to raise funds of $15 million by private placement), this move may give Shear an income stream within a couple of years. The problem with the Jericho mine is that $/ton value is somewhat lower than at Ekati or Diavik. Grade ranges from 0.34 to 1.49 c/t and average diamond value from (US) $78/c to $112/c as given in the NI 43-101 report. It is also significantly further north than the other mines. Narrow margins mean that diamond prices must remain high, the ice-road season be lengthy, a stronger US dollar, and mining be problem-free in order to draw a profit from Jericho and avoid Tahera’s fate. However, Shear does benefit from Tahera’s case study example in what a junior should avoid in operating an Arctic diamond mine. Should the economy remain strong, SRM should have a decent chance at making the mine work.

More Kimberlites at Chidliak

The other bit of significant news this week comes from Peregrine Diamonds where they continue to find new kimberlites with relative ease at their Chidliak property (Baffin Island). The company reports eight new kimberlite finds: two by drilling and six by surface prospecting. The latter discoveries seem to characterize the direction of this project as PGD continues to make textbook finds with ease in southwest Baffin Island. They also report mini-bulk samples taken from two earlier finds. The company continues this summer with their plan to investigate further geophysical anomalies in tandem with kimberlite indicator mineral data.

Renard Moves Towards Production

Moving away from Arctic diamond projects, Stornoway Diamond Corp. has added to this week’s mix with the formal commencement of the feasibility study for a mine at the Renard Diamond Project (central Quebec). This involves looking at how the proposed mine would affect the environment and local communities, increasing the capacity of the proposed mine from 5 kt/day to 8 kt/day, and a separate project to tie the mine into the electric power grid; amongst other items. The issues regarding corporate environmental and social responsibility are important as it shows that local stakeholders, i.e. the Quebec government and the local aboriginal (Cree) and non-aboriginal communities are on board with the project. The Impact and Benefits Agreement that the feasibility study considers is an important step in cementing this relationship.

As an addendum, the company announced that it had reached a pre-development agreement with the local Cree nation shortly after the initial publication of this article. This is an important step towards working out the Impact and Benefits Agreement necessary for the mine to develop.

In terms of exploration, SWY will continue expanding on the Foxtrot property that the Renard cluster is a part of. Winter drilling has already expanded the resources at Renard 3, 4, and 65. More drilling is happening this summer on these three kimberlite pipes.

While the economic recovery has reinvigorated consumer appetite for pretty carbon, the market still treats diamond juniors with some trepidation, being burnt by failures such as Tahera and lengthy lead times to production (e.g. Shore Gold and Fort à la Corne-Star).  Only prolonged stable economic growth and the development of some good projects to profitable production will see investors flock back to the diamond sector.

Disclaimer: The author holds shares of SWY, and SRM. Relevant comments are welcome and encouraged. Spam comments will be not posted and 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 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.