KIM Report

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

New Developments and Talking Heads in the Resurgent Commodity Boom

Posted by David

This weekend I stopped by the 2009 Toronto Resource Investment Conference held by Cambridge House International Inc. I sort of treat these conferences as a useful mini-PDAC: 100-200 juniors and some talks by analysts, but less free booze and conference swag.

Before getting onto the discussions I had at the booths, a short note on the talks given at the workshops. I attended two very different types of talks at the conference. The first was by Thom Calandra of Ticker Trax fame titled Guanajuato Silver (e.g. Great Panther Resources), Canadian Moly (e.g. Avanti Mining Corporation, TSX.V-AVT), Ghana Gold, and Global H1N1. The talk covered his past experiences, the millions he made selling companies he helped found, his run-ins with the S.E.C., his recent fishing trip with other colleagues, how accurate his past stock predictions have been, past anecdotes, and basically very little to do with the topics covered by the title. No information on how to pick a good stock was given, nor were his strategies discussed in any useful detail. Although in his defense, his presentation was accompanied by many pictures of his visits to sites in those regions.

In contrast to this drivel I was forced to sit through until the main booths opened, Mr. John Kaiser (The Bottom Fishing Report) gave a later talk that Sunday titled Understanding the Rare Earth Metals. This talk was much more useful (even though I found it a little distracting that he looks a little like the PC guy from the “I’m a Mac and I’m a PC” commercials). Although he and his colleagues take a much looser stance on what constitutes a Rare Earth Metal than do us scientists –he includes metals like Y, In, Sc, Ga, Ge, etc. along with the lanthanides, he presented a compelling argument for the future’s demand for these metals. He discussed the increasing need for most rare/exotic metals in new consumer products such as LCD screens, hybrid and electric cars, cellphones, etc. He made an interesting point that the world market for lanthanides was ~$1 billion (USD) in 2005. This has obviously changed to a much higher number. Actual recent pricing for all exotic metals is very hard to find as there is no centralized commodities exchange for these metal oxides (pricing is done in oxides of these metals). A “journalistic approach” is required to obtain much of the current pricing market data, to quote Mr. Kaiser.

One gripe I have is mostly due to my own fault not closely following Mr. Kaiser’s advice earlier. Many of the juniors exploring for exotic metals that have earned a recommendation by him back as recently as the beginning of the summer have shot up significantly. Some include Avalon Rare Metals Inc. (TSX-AVL) (up 386% since May 1, 2009) and Quest Uranium (TSX.V-QUC) (up 2325% since May 1, 2009). I was not able to get around the crowd at the Avalon booth during my time at the conference, but they seem to be making good headway with their Thor Lake peralkaline pegmatite in the Northwest Territories. I did get a chance to speak to some QUC employees though, including one of their field geologists. Their Strange Lake project straddles the Quebec-Labrador border and is an altered (secondary hematite, specularite, fluorite, etc.) alkali granite. Recent drilling confirmed zones of REEs+Y of 1.11-3.47% over 1-14 m. There is also a weighting towards the more valuable heavy REEs. Although this is not unusual for pegmatite REE deposits when compared to their carbonatite counterparts. Though it has pegmatitic zones similar to Thor Lake, the mineralogy, particularly the ore minerals, are very different. Strange Lake has zircon, gittinsite, pyrochlore, gadolinite, and allanite, whereas Thor Lake possesses bastnaesite, monazite, synchesite, allanite, zircon, columbite-tantalite, and fergusonite. In some cases, these ore minerals are quite coarse grained (>1 cm), leading to easy liberation from the rock during processing.

This means that should both projects make it to production, very different metal processing methods with have to be employed for each to obtain marketable metal oxides. One thing that did concern me is that QUC has basically no idea how to process this amazing deposit. (Nor does the literature given out by AVL give a clear image of how to process theirs either). These metals, especially the REEs, are very similar chemically and difficult to separate. Then again, this may not be a problem as most companies this size will, at a certain point, bring in a senior partner with better technical know-how to worry about this.

Other exotic metals companies at the conference that were worth notice were Matamec Exploration Inc. (TSX.V-MAT, light-heavy REEs, Y, Zr), Hudson Resources (light REEs, Ta, Zr, Nb), Rare Element Resources (Au, U, REEs) and Commerce Resources (Ta, Nb).

Needless to say, there is a lot of investor appetite for these types of companies with promising properties. Though I am not a fan of buzzwords such as the “Green Economy” and so on, there is definitely some substance to the developing markets for these metals that new technologies cannot do without.

As a final, but somewhat unrelated note, fans of Stornoway Diamond Corp. will be happy to know that drilling results will be out soon and an update of the 43-101 report on Renard will be due in this upcoming quarter. The preliminary assessment will be out no more than 6 months after that. As for their Avait play on the Melville Peninsula, progress was mostly relegated to desktop work this year as the unexpected extension of the Renard-2 pipe has kept their resources tied up. The company did make it to $0.30/share (down to ~$0.20 now), but that has mostly been due to the success of Peregrine Diamonds’ progress at their Chidliak property, proving to the “sheeple” in the investment sectors that yes, you can still make money holding diamond stocks post-2007.

More news on the diamond sector to come in the next article. Thanks for reading and it looks like a bit of good luck is returning.

Disclaimer: The author owns 4000 shares of SWY and 1000 shares of GPR. Although he wishes he had bought some PGD back in March when he recommended it. 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

Dancing the Foxtrot: A diamond mine in Quebec?

Posted by David

Last Tuesday, Stornoway Diamond Corporation was halted late in the trading session due to release of the highlights from their long-anticipated pre-feasibility study regarding their Foxtrot diamond project in central Quebec (50% JV with SOQUEM Inc.). The Foxtrot project contains the Renard (R) kimberlite pipes as well as the Lynx and Hibou dykes. This is a NI 43-101 compliant report that outlines the Renard resource with 7 Mc indicated (11.6 Mt x 0.6 c/t) at R-2, -3, and -4, and 4.5 Mc inferred (7.2 Mt x 0.63 c/t) at R-2, -3, -4, -9, and the neighbouring Lynx dyke. R-3 appears to be the highest-grade body at 1.16 c/t, but has the lowest tonnage. An additional 9-21 Mc (14-32 Mt at 0.31-1.64 c/t) is classified as potential mineral deposit, but this requires further evaluation.

The projected cost to construct a mine on the site is C$308 million including contingency funds. Operating costs are assumed around C$50.39/t using the combined open pit + underground method, similar to that seen at Diavik’s A154 South kimberlite pipe. Plans for infrastructure to the mine (road, electricity) are in talks with local communities, government, and other mining companies with projects in the region. This has been covered in more detail by an earlier KIM Report article. The operating cost assumes that an all-season road will be built, but that the mine will be powered by diesel generators.

Diamond valuations for the R-2, -3, and -4 bodies were reported last fall as US$109/c (R-2 and R-3) and US$69/c (R-4). Doing some quick math, this means the value of the indicated resource is C$760.78 million (using the exchange rate given in the report of C$1.146/US$1). After subtracting the processing costs of the ore (C$585.53 million), this leaves the net value of the diamonds to be C$175.25 million. This is for the indicated resource alone, and does not take into account the inferred resource of 4.5 Mc or the additional 9-21 Mc of potential deposit that is still being evaluated. It would appear that the indicated resource pays for over 56% of the capital cost of the mine. However, given the expected processing capacity of the mine to be 1.3 Mt/y, this ore would take nine years to process. SWY would focus on the richer pipes on the mine (R-2 and R3) and leave the lower grade ones (R-4) for later processing in order to pay off the capital. The company will have to look at other bodies on the Foxtrot property for higher grade ore. R-65, Hibou, and Lynx are all possible candidates.

Should the Canadian dollar remain at current levels, the net profit for the indicated resource will be higher. As the Canadian dollar appears more likely to stay a dime below, rather than above, the American dollar, and world diamond prices continue to rise, SWY should be able to get a mine into the black relatively quickly after construction.

SWY has made an attempt to be as conservative as possible in calculating the costs of constructing and operating a mine as well as the amount of resource present. A prudent decision considering the fate of the last junior in Canada that went into diamond production. C$50 million of the C$308 million capital cost is budgeted for contingency. SWY investor relations has indicated that the report was calculated using spot prices from this summer when oil at well over US$100/bbl, giving a strong buffer in the budget against any rise in fuel costs.

There are two main goals for SWY in the immediate future: (1) expand the resource and put more viable carats under the “indicated” and even “measured” categories. Getting more solid diamond valuations is also a priority. (2) obtain the funds to build a mine. SWY is free of long-term debt thanks to some large backers. However, it has to come up with its C$154 million share of the capital costs, and there is only $6.9 million currently in the bank. Viable options for this have been discussed in the aforementioned earlier article. Permitting, environmental evaluations, and the like will also have to be conducted in order for construction to proceed.

The next day following this news, SWY closed up 40% to C$0.15/share on 1.1 million shares. By Friday that share price was back down around C$0.12/share, the level it was before the release of the report. This is a long way from the ~$0.80/share this time last year. However, should the mine get underway, a much higher share price is a very strong possibility.

Disclaimer: The author holds 4000 shares of SWY. This article is based on the opinions and experience of the author. Please do your own due diligence when investing.