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

PDAC 2011 – this March

Posted by David

Hello and happy New Year!

Sorry for the delay in posts.

This year’s Prospectors and Developers Association of Canada’s (PDAC) main convention is March 6th to 9th. It is at the Metro Toronto Convention Centre’s south building. Delegates can register HERE for the conference. For the non-student or non-senior, the convention can be a little pricey, but day passes can be had for ~$81 and the Investor’s Exchange portion is free.

For those of you who purchase full access to the convention be sure to check out the Technical Sessions. They are often quite good and have excellent speakers on relevant topics. A list of the sessions is HERE. Other sessions include the CSR Event Series, the Aboriginal Program, an Open Session, and an Innovation Forum. Ten short courses/workshops also occur just before and after the convention itself.

Sessions mentioning diamond exploration/mining are:

• 21 years of Canadian diamonds: Coming of age? – room 716, Monday March 7th, 2-4 pm
• New geoscience in support of exploration in the Canadian Shield North of 60⁰ – room 716, Tuesday March 8th, 9 am-noon
• Africa – room 713, Tuesday March 8th, 10 am

Major and minor diamond producers/explorers typically have booths at the PDAC. Some of the usual suspects from past years include Rio Tinto, Harry Winston, Stornoway, Shear, Shore Gold, Peregrine, and BHP Billiton. For those unfamiliar with this convention, it is the premier mining and exploration convention in North America and is not to be missed for those working in or investing in the industry.

Make sure to sign up by this Friday (February 4th) as the prices for most admission types go up after that. Happy investing.

Disclaimer: 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

2010 Toronto Resource Investment Conference

Posted by David

Sorry, for the lack of recent posts, it’s paper-writing season again.

Mining and exploration investors may be interested in attending this year’s Toronto Resource Investment Conference at the Metro Toronto Convention Centre this weekend (Sept. 25-26). Register now with Cambridge House International Inc., the organizers, to get in for free and avoid paying about $20 at the door.

Publicly-traded mining and exploration companies will have booths on the floor. Commodities present at the show are varied and range from silver (e.g. Great Panther, Soltoro), to diamonds (e.g. Stornoway, Shear), to REEs (Avalon, Quest). There are also fairly well-known speakers in the sector that are giving talks: Kevin O’Leary, John Kaiser, the Coffins, Mickey Fulp, etc.

While not as grand as the PDAC and with less plentiful freebies, the Toronto Resource Investment Conference is a nice way to spend the weekend for the individual investor.

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

Kimberlites and Diamonds of Western Canada

Posted by David

This year’s GeoCanada conference and related workshops saw some attention to diamonds and kimberlites. Specifically those located in the western Canadian sedimentary basin (WCSB), covering Alberta and Saskatchewan.

The two main kimberlite clusters in this region are the well-known Fort a la Corne (FalC), and the lesser known Buffalo Head Hills (BHH) occurrences. The former cluster is in Saskatchewan and has been the focus of a major JV between Shore Gold (operator) and Newmont, the background of which was discussed in previous KIM Report posts. On the technical aspect of things, Shore Gold has done a lot of work in characterizing the complex structure of their two most economic kimberlite pipes: Orion South and Star (both are ~100 Ma). These pipes are composed of multiple units each formed during a separate volcanic eruption millions of years ago on the margins of an ancient shallow inland sea that covered most of what is today called the Great Plains. There are at least five  main units: Pense, Viking, Early Joli Fou, Late Joli Fou, and Cantuar (see the 3D model of the Star kimberlite below: different colours represent different petrological units). These units each erupted at a different time over many thousand of years, and differ in petrology, diamond grade and diamond size distribution. To further complicate things, these eruptions occurred over a timespan during which the inland sea was alternately expanding and contracting. The effect of these sedimentary processes (e.g. erosion, transportation, deposition) on the erupted kimberlite material led to the concentration of diamonds in some rock units and the removal of diamonds from others.

The other less-studied cluster is the ~65-85 Ma BHH in Alberta. Both barren and diamond-bearing pipes occur, also with variable geology and diamond grades as with the FalC pipes, although the extent of the complexity is unknown. The highest grade pulled from a BHH sample so far is close to 0.9 c/t (K252). Most of the pipes are a JV between Canterra Minerals Corporation (TSX.V-CTM; 28.5%, operator), Shore Gold (28.5%), and EnCana Corporation (43%). Shore Gold and Canterra each carry 50% of the operating costs. Canterra is the result of the business arrangement between Diamondex Resources Ltd. (TSX.V-DSP) and Triex Minerals Corporation (TSX.V-TKM) in 2009. Diamondex and Shore Gold bought their shares in a deal with Stornoway Diamond Corp. back in 2007. They later purchased another 12% from Burnstone Ventures Inc. (CNSX-BVE, formerly Pure Diamonds). A smaller subset of diamond-bearing pipes has been discovered by Grizzly Discoveries Inc. (TSX.V-GZD). These kimberlites: BE-02 and BE-03, are in the southeast region of the BHH cluster, previously thought to be barren. Grizzly also owns interest in a couple of much smaller diamond plays to the ENE in the Birch Mountains area of Alberta, as does Shear Minerals.

A couple of other companies have diamond interests in the WCSB: Vaaldiam Mining Inc. (TSX-VAA – Candle Lake, Saskatchewan) and Forest Gate Energy (TSX.V-FGE, formerly Forest Gate Resources – Fort a la Corne, Saskatchewan). However, activity on these properties has been fairly light (see map image of kimberlites in the WCSB below).

Both the BHH and FalC clusters were initially discovered by activities relating to energy exploration – petroleum and uranium, respectively. The BHH pipes were discovered by re-evaluating aeromagnetic survey maps that had classified the anomalies caused by the pipes to be well-heads for the oil fields that clutter the region. Some diamonds from these pipes have even been found to be coated with petroleum when recovered. The FalC cluster was found during aeromagnetic surveys. These pipes are located under 80-100 m of gravel, sand, and clay.

Though in comparison to other diamond mining regions (e.g. the Northwest Territories or the Otish Mountains in Quebec) current grade numbers are rather low, diamond valuations that do exist (only from FalC at this point) are higher than average for Canadian kimberlites. Access to infrastructure is also better, particularly when compared to Arctic kimberlites. This bolsters the revenue $/t kimberlite coming from those pipes. The main hurdle with this is the geological complexity of the FalC (and to a lesser extent BHH). Overcoming this problem has taken Shore Gold and the previous owners of the FalC pipes the better part of 20 years to overcome with exhaustive drilling and geophysics. The amount of detail given in recent reports indicates that their geology and diamond characteristics are becoming less vague, at least for the Orion South and Star bodies. Now having more information where and how rich the higher-grade zones are at Orion and Star, have allowed Shore Gold (and Newmont) to almost finalize their mine plan. Mr. George Read, Shore Gold’s senior VP exploration and development, confidently expects a full net profit after all costs and taxes of ~$25/t (CAN) ore from the project as it stands. The 50+ other kimberlite pipes remaining at FalC, along with those at BHH represent possible future resources for Shore Gold and its partners beyond the two currently gearing up for production.

On an ending note, Shore Gold reported re-valuation (April 2010) of the diamond parcels it had originally sent out and had valuated in March 2008. Price increases (in US$/c) since then are 10-20% higher for every parcel. What to keep in mind here is how the American dollar (what the revenues come in) fares against the Canadian dollar (what the costs come in). Over the past two years, the exchange rate has fluctuated from about $1 (US) buying $0.98 (CAN) to $1.30 (CAN). How much of that price increase is due to supply/demand and not currency adjustment is uncertain.

Disclaimer: The author holds shares of SWY, SRM, and FGE. 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

Resurgent Commodity Sector for 2010

Posted by David

The 2010 annual PDAC convention this week was resoundingly more vibrant and bustling than last year’s. The nice thing about commodity downturns is that they are often self-correcting given time. The excess of supply that leads to commodity price drops and mine closures also ceases mine development. With no new resources coming onto the pipeline, supply drops as existing deposits are tapped out. This drop in supply leads to an increase in the commodity price, beginning the cycle all over again.

This current resurgence is much to early to be mainly due to this process, lack of exploration typically takes years to manifest into resource shortages. Whatever the cause, the mood of exhibitors, investors, and geologists was significantly improved over 2009′s show. Though there are still many companies out there just hanging on, both those with quality and questionable properties.

Gold was still king of the commodities this year, unsurprising considering it has remained at ~$1100 for some time in spite of the predictions of certain pundits. Though keep in mind that price is in American dollars. Well-run gold producers such as Barrick, Goldcorp, and Wesdome, have been reporting steady and strong profits. The Wesdome booth at PDAC had some impressive display samples of quartz-vein ore containing visible gold mineralization from their Kiena mine. Although some producers are still struggling, e.g. Yamana.

The buzz about exotic metals such as yttrium, niobium, and the rare earth elements has died down a little since the excitement of last fall. Leading juniors in that field, such as Avalon and Matamec, were still well represented at the show. In terms of fundamentals, however, nothing has changed, our increased dependence on technologies is leading to a demand that will continue to ramp up with each passing year and the Chinese control virtually all production. Not a pretty picture from either an economic, strategic, or political view (for everyone but the Chinese that is).

Copper, nickel, and other base and ferrous metal prices have all climbed back up significantly. The earthquake in Chile barely caused a blip in copper prices (Chile produces about one third of the world’s copper), and metal producers like Amerigo and Lundin are starting to see their first real profits in over a year. Speaking with Amerigo reps at the PDAC, they predict a return of their one-vaunted dividend should copper prices hold close to their current levels.

The investment talks for the junior diamond sector saw increased attendance this year. The best was saved for the last for talks by Peregrine, Shear Minerals, Shore Gold, and Stornoway, discussing the most promising Canadian diamond projects and their various stages of development. Peregrine’s Chidliak project on Baffin Island continues to steal the spotlight with preliminary results from CH-6 that indicate the potential for the highest grade diamond find since A-154 South at Diavik in the 1990′s.

Chidliak is still many years from and possible mine. The Renard and Fort a la Corne deposits of Stornoway and Shore Gold, respectively, are each within five years of a potential mine.  Last fall’s announcement by Stornoway regarding the expanded resource at Renard-2 is putting the company at odds with Shore Gold for the title of owner of Canada’s (and for that matter, the world) largest undeveloped diamond deposit (video interview with SWY founder Eira Thomas HERE). Shear Minerals, though somewhat stagnated by lack of funds, had returned a promising grade of 0.862 c/t from the Notch kimberlite in the Churchill property.

The repeated message from all diamond companies is that world diamond prices have recovered, and possibly then some. Unlike metals, getting firm numbers on world diamond demand and pricing is difficult, but some estimates put current diamond prices as high as 25% over those of pre-crash 2008. With the recovery as of yet incomplete, this could spell a significant jump in share prices for quality diamond stocks over the next 12 months.

Disclaimer: The author holds shares of SWY, YRI, SRM, ARG, and LUN. This article is based on the personal 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

Silver Linings

Posted by David

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.

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.

 

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