KIM Report

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…

The long and winding road to a Quebec diamond mine

Posted by David

Stornoway Diamond Corp. (TSX-SWY) saw a 24.14% jump in stock price today, up seven cents to $0.36/share. The rise followed the resumption of trading following a halt this morning due to a financing-related news release. SWY reported that they have received $22 million from a private placement of 24,444,444 common shares at ninety cents a share. This is a premium of 195% on top of the opening price of $0.305 today. The participants in the private placement are Agnico-Eagle Mines Ltd. (TSX-AEM) and Lorito Holdings Ltd. This $22 million will go to pay off debt in the form of debentures held by AEM and Lorito. AEM is already a significant shareholder of SWY, and with this transaction they will hold 17.6% of the outstanding shares. After the completion of this transaction, SWY will be debt-free.

 

This transaction is something of a coup in the current market. Juniors have been struggling to obtain funds to develop their projects and pay off debts. The credit market has been mostly deaf and blind to the woes of these companies as many lenders are themselves finding it a struggle to remain solvent. For a mining and exploration junior to pull off a private placement at a pre-subprime crisis share price is something of a shock (albeit a pleasant one) to investors and analysts who have become used to seeing the market cap of companies such as SWY slide by fifty to eighty percent. By offering equity to pay off its debts, SWY has managed to find a creative alternative to solving its cash problems in a bear market. The main upside here is that the dilution of the stock is one third of that if SWY were to issue stock at market price.

 

Now with balanced books, SWY faces only one major and immediate hurdle – to finance the construction of a diamond mine on their Foxtrot property in Quebec. This project, focusing mainly on the Renard kimberlite pipes, but also the Lynx and Hibou kimberlite dykes nearby, is joint owned 50/50 with SOQUEM and is fully described in an earlier article. SWY’s share of the mine construction costs will likely be over $100 million. The actual numbers are due out in September with the pre-feasibility study. The report was initially due this summer, but similar projects submitted earlier by Peregrine and Shore Gold tied up AMEC, the company contracted to conduct the study, until recently. Should the report be positive, as the geology and current diamond prices suggest, a significant amount of capital investment must be made to bring in the needed infrastructure for a mine. SWY will have to carry at least 50% of these costs.

 

Immediate of these costs is road access. Renard will not be an arctic diamond mine, dependent on airlifts and unpredictable ice roads for supply, but rather a site accessible by land year round. SWY is in talks with Western Troy Capital Resources Inc. (TSX.V-WRY), Strateco Resources Inc. (TSX-RSC), and Eastmain Resources Inc. (TSX-ER) – other mineral/metal exploration companies with projects in the Otish Mountains, local communities, and the Quebec government to build the “Route Monts Otish”. This partnership would provide strong benefits for all parties involved by sharing the cost of construction. SWY will need to bring September’s report to the table when the parties decide who pays what share of the road costs. It is also possible that the construction will bring in electricity service as well, further reducing the large bill SWY faces.

 

After September, SWY will have to come to a decision on how to fund the mine. Even if the Quebec government pays its full 50% share and the aforementioned road plan comes through, the cost to SWY will be well into the tens of millions of dollars. The company has a number of options to consider in obtaining the cash necessary to build the mine:

 

(1) They can go the traditional route and get financing from credit institutions. If the credit market simmers down by the winter this may be a possibility. Factors that would attract a lender are that the company has settled its accounts, the Foxtrot property has high and fairly well established diamond potential, and the company has many other promising secondary properties such as Aviat and Churchill (the latter a JV with Shear Minerals).

 

(2) Future private placements can be made. This will dilute the stock, but by how much is dependent on how the share price is doing at the time of issue. If today’s rise in share price is any indication, a positive report in September may be the catalyst investors need to return the company to the ~$1.00 level. In addition, management has established that they possess some expertise in brokering strong deals with large investment players (Rio Tinto is another major shareholder, with ~11% of the company).

 

(3) The company may bring in a third party to purchase a portion of their share in exchange for funding most of SWY’s costs a la the Franco-Nevada strategy.

 

(4) Interested parties could be sold secondary assets in exchange for cash to fund the mine. In addition to the aforementioned Aviat and Churchill projects, SWY holds promising advanced and reconnaissance stage projects in Nunavut, Ontario, the Northwest Territories, Alberta, and Saskatchewan.

 

It is likely the company will use a mix involving one, some, or even all of the above options to in order to proceed with construction.

 

Given that Quebec is regularly acclaimed as one of the top mining-friendly provinces in Canada, and that the province has a direct stake in the project, there seems to be fewer speedbumps on the road to Renard. Management with have to use every means at their disposal in order to navigate markets wracked with investor apathy towards diamond players.

 

Disclaimer: The author holds 2000 shares of SWY. This article is based on the personal opinion and experience of the author. Please do your own due diligence when investing.

 

 

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 Stornoway without a Dion

Posted by David

To use an overused comparison in these current market climes, the diamond sector is the Rodney Dangerfield of mining stocks as it “don’t get no respect”. In this way, the diamond juniours are much like the official opposition (for the non-Canadian readers, Stornoway is also the name for the official residence of the leader of the opposition, currently Stephane Dion). To give a more focused discussion of the issue than did a previous article, presented is the case of Stornoway Diamonds (TSX-SWY).

 

The stock has been on a fairly steady decline since this time last year going from ~$1.20/share to about $0.37/share at current. Even the news that acclaimed diamond consultants – WWW International Diamond Consultants Ltd., had upped the estimated valuations for diamonds from the Renard kimberlites (Renard, together with the Lynx dykes, comprises the Foxtrot Property in Central Quebec, and is a 50/50 joint venture with SOQUEM Inc.) only caused a mere blip up from 0.35 to 0.43 that evaporated in the last two weeks.

 

In detail, the report displayed increased values for diamonds from Renard 2 and 3 (from U.S. $109/c to $121/c) and The North Complex Zone of Renard 4 ($69/c to $79/c), increases of 11% and 14% respectively. Since the pullback after the news, the stock has bounced around the mid thirty cent level. So what gives? The predominant idea here is that since last summer, most investors are still very wary of juniours, even ones with established and advance projects such as Foxtrot and, to a lesser extent, Churchill (joint venture with Shear Minerals). For Renard, the pre-feasibility study (NI 43-101 compliant) is due out sometime during this quarter and many investors may be waiting on that. The cost of a road to the potential mine site is one of the most speculated values.

 

Aside from Renard, the other properties in the Foxtrot property hold promise as well. The Lynx series of dykes produced a grade of 1.07 c/t from a 494 t bulk sample. Not enough sampling has been done to allow for a diamond valuation, but the sample did include a gem-quality octahedron weighing in at a whopping 21.53 c (pictured). A minibulk sample from the Hibou dyke, 1.3 km from the Renard bodies (see map), gave a grade of 1.26 c/t from 30.4 t of kimberlite. The largest stone from this sample was a 1.01 c octahedron.

 

After Renard, the next most advanced property is the Churchill project (JV with Shear Minerals), a series of kimberlite dykes located in the Churchill craton in Nunavut. This property was discussed the earlier Arctic Diamonds and Churchill articles.

 

SWY also holds a number of other advanced-level diamond prospects. The most promising of these is the group of eleven kimberlite bodies at Aviat on the Melville Peninsula, North of the aforementioned Churchill project. What really is really interesting about this project lately is the dense media separation results from January 2008 that reported a grade of 1.63 c/t from 20.6 t taken from the AV267 body, and included a 3.64 c stone. AV267 is a sheet-shaped body of macrocrystic hypabyssal kimberlite. Thus far, drilling has delineated AV267 to have an average thickness of 3 m and to extend at least 2000m along  strike and 500 m down dip (dip angle is 8-20 degrees). This is similar to the body at Snap Lake. Kahuna at Churchill is also similar in deposit shape, but it is a vertical sheet instead of the subhorizontal one at Aviat. The project began as a JV with SWY, BHP Billiton, and Hunter Exploration Group (a private firm). Last month SWY acquired BHP’s share of the project, making the split now 90% SWY and 10% Hunter. SWY also have 100% of the marketing rights for any Aviat stones.

 

SWY made news a couple of years back due to its aggressive takeover of Ashton Mining Canada. The main gain in this for SWY was the acquisition of Ashton’s share in the Foxtrot Project. SWY also gets a lot of press coverage because of its CEO, Eira Thomas, a celebrity in the diamond exploration industry due to her part in the discovery of the Diavik mine working for the then-juniour exploration company Aber Diamonds (now Harry Winston Diamonds). Her background and media appeal have made her popular with the press in an industry where companies are usually run by stolid old white guys. The acquisition of Ashton did not only add just properties to the company, but talent as well. Tom McCandless, a renowned and well-published specialist on North American diamonds (read Barren Lands by Kevin Krajick), stayed on with SWY as a consultant after the takeover and is now their chief mineralogist. Matt Manson, formerly VP marketing/technical services & control for Aber (now Harry Winston), came into SWY through the acquisition of Contact Diamond Corporation and is now company president.

 

In spite of these promising results and experienced management, SWY, like most diamond juniours, has been beaten into the ground. With the price at a severe low, investors will either shy away or look at the situation as a buying opportunity. SWY previously has been the focus of a lot of vitriol on investor bulletin boards such as www.stockhouse.com due to its aggressive takeover of Ashton, but shareholder crankiness aside, this is not the cause of the perceived downside.

 

SWY’s number one project is Foxtrot, specifically Renard. As a mine becomes more of a distinct possibility, the need for financing becomes impossible to ignore. Road and electricity access must be established, buildings erected, and equipment purchased. This will likely cost into the hundreds of millions of dollars. As of January 31^st, SWY had just under $18 million in cash and equivalents. Financing by dilution at current prices is unlikely, as management is a significant stockholder and do not want to see their equity devastated. That leaves turning to banks and the like for funds to construct the mine. The “subprime slime” that still sticks to financial institutions makes getting a loan far more difficult now than this time last year. However, considering the experience of the management and the premium nature of the properties, the choices made are likely to be in the best interests of the shareholders.

 

Disclaimer: The author holds 500 shares of SWY that he bought at $0.73/share and has only mildly freaked out about the price dropping to $0.37/share. This article is based on the personal opinions and experiences of the author. Please do your own due diligence when investing.

Churchill part 2

Posted by David

Now moving onto another Churchill, the Churchill craton, where Stornoway Diamonds and Shear Minerals have the Kahuna diamondiferous kimberlite, amongst others.

As I mentioned in an earlier post, the Kahuna body is a dyke. If we model the dyke as an ideal tabular body using the reported dimensions of 4 m width by 5000m strike, and assume a mining depth of 100m, this gives a mine-able volume of 2 million cubic meters.

Using the density of olivine (forsterite), a major constituent of kimberlite, as a proxy for kimberlite density at 3.27 tons per cubic meter, the above volume equates to approximately 6.54Mt.

The latest diamond grade reported from Kahuna in December was 0.95c/t. Thus this modeled body contains 6.213 million carats at a mining depth of 100m.

Unfortunately, no diamond valuation data for Kahuna has been released yet. The individual diamonds shown seem to be of fairly good size with no overall population distribution would indicate poor quality stones, such as the case at the Argyle mine, Australia. Also the possibility for large stones exists as a 5.43 c stone that was a fragment of an even larger stone (up to 14 c in possible size) was reported in November.

To give an idea of the value of the rock, (in USD$) at a low diamond value of $50/c, the diamonds contained in the modeled body would be worth over $310 million, at a better valuation of $100/c, the value would be double at over $610 million.

Note that Kahuna is but one of the properties in the Churchill project.

An earlier 2007 report read that the PST003 dyke gave a result of 2.04 c/t, and the Jigsaw and Notch bodies gave 0.39-0.8c/t.

So with the 2008 drilling season started it will be interesting to see if Shear and Stornoway can keep up the positive results that may help is pulling their stocks away from recent lows.

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.

Arctic Diamonds

Posted by David

Considering that my focus is on diamonds it seems appropriate to have the first content post regarding diamonds.

A project I have been following for some time is the Churchill diamond joint venture between Shear Minerals (majority operator, TSX.V-SRM) and Stornoway Diamonds (TSX-SWY).

This project is near the northwest coast of Hudson’s Bay in Nunavut, Canada, near the town of Rankin Inlet.

What is interesting about this project is that one of these bodies is the Kahuna kimberlite dyke. It is an igneous diamond-bearing tabular/sheet-like vertical body about 4m wide on average and very deep with a linear extent of at least 5km. The diamond grade is a little less than 1ct/t and diamond valuations are pending.

Kimberlite comes in a few different flavours. The kimberlite at Kahuna is hypabyssal or magamatic. This means that the kimberlite intruded as a sheet into the surrounding Canadian Shield rock and crystallized slowly at depth. The diamond distribution of this rock should theoretically be homogeneous or the same throughout the body. This is in contrast to diamond deposits that consist all or in part of pyroclastic/volcaniclastic kimberlite. Here the diamond-bearing kimberlite has erupted into the air in a spectacular fashion, scattering kimberlite fragments and the diamonds in a circular pattern. Later geologic processes re-work the erupted fragments with wind, water, and chemical action. These processes will create a resedimented unit of kimberlite with zones where diamond can be alternatively concentrated or depleted, such as in the Fort a la Corne kimberlites, being evaluated by Shore Gold (TSX-SGF).

Therefore the benefit of the Kahuna body is that is should be relatively easy/cheap to characterize in terms of $/ton kimberlite at the diamond distribution will likely be homogenous, whereas the 70+ kimberlites of the Fort a la Corne cluster each have numerous zones within them that vary significantly in diamond grade.

Disclaimer: The author holds 500 shares each of SRM and SWY.  The views expressed in this article are based on the personal knowledge and experience of  the author.  Please conduct your own due diligence when investing.

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