KIM Report

Different Types of Diamonds at Fort à la Corne

Posted by David

Early last month, Shore Gold (SGF) announced that a high proportion (26%) of diamonds >2.7 c retrieved from the underground bulk sample at its 100% owned Star kimberlite in Saskatchewan are type IIa. This is a category of diamond that is typical of many “large special” diamonds >10.8 carats in size.

Diamond Types

In terms of impurities in their crystal structure, diamond can substitute nitrogen (N), boron (B), and/or hydrogen (H) for carbon. Nitrogen is the most abundant and well-studied impurity and can range from concentrations of 0 to >10,000 ppm (~1%). Diamonds with significant nitrogen (>10 ppm) are termed Type I and those without are Type II. N-bearing diamonds are further categorized into those where the substituting N is organized as single atoms (Type Ib) or as aggregates of more than one atom (Type Ia). These aggregates are classified into paired N atoms (Type IaA) or quartets (Type IaB), or a mix of both (Type IaAB).

Diamonds that are relatively free of N are Type II. Those with no N and some B are Type IIb. Type IIa diamonds are more common and have no N or B. Type Ib and IIb diamonds are relatively rare. Type Ia diamonds are the most common.

How Diamond Types Are Determined

How impurities such as nitrogen are arranged in a diamond can be determined in a non-destructive manner using Fourier-transform infra-Red (FTIR) spectroscopy. Simply, light of a lower energy than visible light (infra-red) is shone through the diamond. By measuring the exact amount of light of a given energy that comes out the other side of the diamond (i.e. how much light is absorbed), it is possible to learn things about the diamond’s molecular structure. For example, how much nitrogen is in the diamond, and if it is in atomic pairs, or quartets. Fourier-transform is a mathematical and instrumental technique applied to infrared spectrometry to speed up analyses.

Issues With The Report’s Interpretation

In their news release, SGF refers to the Letšeng-la-Terae (Letšeng) mine in Lesotho (operated by Gem Diamonds, LSE-GEMD). This mine is considered quite unique as its low grade – <0.04 c/t, but has diamonds impressive quality and size. Average diamond value for this mine is >US$2000/c. This means a revenue of ~$80/t (2008 values).

However, the report’s suggestion that Type IIa equates to higher value stones cannot be considered absolute fact. This is because the mine they are comparing their diamonds to – Letšeng, is an anomaly in terms of its diamond population. While it is possible that with further valuation of parcels for SGF pipes a higher valuation could be realized, the current one is only about 10% (~$225/c) of Letšeng’s.

The diamonds shown by SGF in the full report (see above image for an example)- while large, are typically yellow-brown and some appear to contain large inclusions (internal cracks or non-diamond minerals). The report goes on to compare Letšeng and Star diamonds in terms of size class and % Type IIa. While Letšeng does show a marked increase in % Type IIa with increasing size, Star shows only a marginal increase, if at all.

The FTIR report commissioned by SGF also makes an error when referring to the trend of increasing percentage of Type IIa diamonds with increasing carat size for Star as comparable to that of Letšeng. The trends for each pipe are in fact rather different. Letšeng shows a significant increase of the proportion of Type IIa diamonds with size, whereas Star shows only a marginal increase (see plot below).

The SGF report states that the above figure “shows explicity that the abundance of Type II diamonds increases with increasing diamond size.” This statement is misleading as it is really only true for Letšeng diamonds. The academic study on Letšeng diamonds that SGF references for this report was based on less than 500 diamond samples (large stones of value being hard to obtain even for non-destructive studies). This relatively small number means that care must be taken when applying this study on a small number of diamonds from one kimberlite to the entire potential production of another. Granted, not that many large diamonds have been made available for such studies, but such over-reaching statements should not be made.

While the results of the report are interesting, and parallels can be made with the academic paper on Letšeng, there does not appear to be much evidence at this point for increased financial prospects of the Star project in terms of diamond type. Star still has one tenth the average diamond valuation of Letšeng without having close to ten times the grade. Though this does not in any way forestall a diamond mine in Saskatchewan, far better numbers have to come out of the Fort à la Corne area kimberlites for it to approach the level of Letšeng.

Disclaimer: The author does not hold shares of any company mentioned in this article. 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

Expansion of Drilling Program Leads to 1400% Jump in Renard’s NPV

Posted by David

Stornoway Diamond Corp. released its updated preliminary assessment for its Renard project a few weeks ago. SWY owns 50% of the Foxtrot property with SOQUEM. Renard is one of three kimberlite occurrences on the property, with Lynx and Hibou being the other two. The bottom line of this report is an increase in the project’s NPV to CAN$885 million.

The assessment incorporates and effectively quantifies the earlier reported extension of the Renard-2 body. The carats contained by this kimberlite is approximately 4x the initial amount reported almost two years ago, and the body remains open at depth. This means that the full extent of the mineable portion of the body is less well known, leaving a significant upside that is yet to be determined. The other major Renard pipe remain open at depth as well (see image).

A release from the middle of April has shown that SWY and SOQUEM are looking at having similar success at the Renard 65, 3, and 4 bodies. Expansions of the resource at Foxtrot such as these one have led to the proposed mine life expanding from under a dozen years to twenty-five.

Investors jumped on this news, propelling the stock as high at CAN$0.80/share before settling in the mid-sixty cent range. I could be not long now before SWY stock begins to creep into the $1 range. Further reports such as these and burgeoning institutional investor interest will be crucial factors in this stock’s rise.

One concern with these studies concerning Renard is the value of the US dollar. Diamonds are valued and sold rough in $US/c. The rise in the Canadian dollar against the American is going to dig into SWY’s bottom line (and any diamond mine in Canada). As costs are in CAN$ and sales in $US, the modeled margins will be narrower if the diamond prices do not increase in adjustment. The aforementioned preliminary report assumes US$1 = CAN$1.11 and a diamond valuation of US$117/c.

Not being an arctic diamond mine, the relatively low production cost of <CAN$50/t will go great lengths to insulate SWY from most fluctuations in the exchange rate. Along with Shore Gold’s Star-Orion project in Saskatchewan, the recession has left Renard as one of two Canadian diamond projects with a reasonable chance of becoming a mine in the next fives years.

Disclaimer: The author holds shares of SWY. 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

Sure gold with Shore Gold?

Posted by David

In an earlier blog entry I briefly mentioned Shore Gold (TSX-SGF) for a point of comparison.

SGF now has a 60% interest in the Fort a la Corne (FALC) property, one of the largest kimberlite clusters in the world. Newmont Mining (NYSE-NEM, TSX-NMC) holds the other 40%, but the Star property remains separate from the adjacent FALC project and is 100% owned by SGF.

SGF has come quite a ways in the past few years. They first came to significant attention with their Star kimberlite project in FALC cluster, Saskatchewan, a few years ago. With the assistance of NMC, they then bought out their neighbours with the lion’s share of the FALC cluster to the north, starting with the acquisition of Kensington Resources. They then completed their dominion over the site by buying the remainder property interest from DeBeers Canada and a couple of smaller companies. Now only a few other companies hold properties in the area, mostly around the margins. Forest Gate Resources (TSX.V-FGT) is one example.

The FALC kimberlites were discovered by Uranerz (taken over in 1998 by Cameco) in 1988 during a uranium exploration program. Later the project fell into the hands of DeBeers and Kensington Resources until the buyout a couple of years ago by SGF and NMC.

Since 1988, evaluation has been almost continuous across this cluster. In 2005, prior to the buyout, DeBeers was budgeting over $20 million annually for the project, and their share was less than 50% at that time. SGF’s 2008 share of the spending will be over twice that.

Aside from the number of kimberlites in the cluster (and thus the high tonnage), many of them diamondiferous, the other main appeal of the location is that it is close to infrastructure. Logging roads that could be upgraded cross the areas and electrical power could be easily brought in from nearby towns such as Snowden. The city of Prince Albert is only a mildly unpleasant 1.5 hour drive away. The geology of the kimberlites is interesting as they resemble a coupe-style champagne glass in cross section, rather than the more common carrot-shaped diatreme cross section seen in kimberlite pipes. This means more of the kimberlite’s volume is near the surface.

The surface I am referring to here is the surface of the kimberlite. Unfortunately for SGF and NMC, most of the kimberlite pipes lie beneath about 80 to 100 m of glacial till (boulders, sand, clay, pebbles, and cobbles). This makes getting to the kimberlite rather difficult. Drilling petrologic core (NQ, BQ, etc.) is not too much of a problem, but large samples of kimberlite (tons) are required to correctly evaluate the diamond grade. One method used at FALC is sinking a pilot mine shaft into the body (such as the case for the Star kimberlite, adjacent to the FALC project); this is too expensive to do 70+ times though. The other option is to sink a large diameter drill hole (LDDH). Using a 2’ to 3’ wide drill bit (tricone or drag bit) a hole is drilled into the kimberlite. The broken up kimberlite is moved to the surface by circulating drilling mud, washed on a screen and bagged into ~1 cubic meter parcels for later diamond analysis. Drilling through 100 m of overburden and then 100-200m of kimberlite can take from less than a week to over a month, depending on the hardness of the kimberlite, breakdowns, and weather conditions. A LDDH samples much less kimberlite than sampling from a mine shaft. Both of these methods are much more costly than the standard method of trench bulk sampling in order to determine diamond grade (ct/t) and later average diamond value (USD$/ct).

A second problem I alluded to in my first article is that of kimberlite heterogeneity in terms of diamond content. The FALC kimberlites erupted in the Cretaceous (about 100 million years ago), excavating shallow and wide craters, and infilling them with sometimes diamondiferous pyroclastic kimberlite. The advance and retreat of the inland seas of the area at that time led to geological “sorting” of the diamonds in the kimberlite craters. This results in strong variation in the diamond grade between zones in these bodies, some of which are up to 200 hectares in area, and between the bodies themselves. Diamonds would be concentrated in some zones and depleted in others as the pyroclastic sediments were reworked by the elements. The short point is that each body must be studied in higher detail than the average in order to produce an accurate grade and diamond valuation.

SGF has a current market cap of around $0.5 billion, half of what it used to be. The $50+ million that is SGF’s share of the FALC budget will be difficult to meet with only $32.3 million in cash on hand as of December 31^st, 2007. Getting financing may be difficult with the credit shortfall that now characterizes the market and shareholders will definitely be opposed to further dilution at stock levels that they surely feel are undervalued. Commercial diamond production, along with positive cash flow appears to be a long way off. SGF and NMC still have a large amount of money to spend before they can get together an accurate idea of the $ value per ton for the whole property. This is in addition to the fact that compared to some other diamond properties in Canada, such as Diavik (2-4 c/t), Ekati (1-3.8 c/t), and Snap Lake (1.2 c/t), the grades for the FALC pipes are rather low: Approximately 0.2 c/t on average and 0.1605 c/t from a recent report on underground shaft sampling at the Orion South kimberlite. To be fair, a number of diamonds from FALC have been of significant size. For example, a 6.31 c stone was recovered during the aforementioned analysis and a 15.88 c stone was reported earlier this month. These large diamonds significantly increase the average USD$/c value of the bodies that contain them, but are there enough of these stones to offset low grade and high evaluation costs?

From my perspective looking forward a few years, the light at the end of the tunnel for the FALC project appears very dim indeed. It seems management is making some good decisions in trying to develop the richest pipes (Orion, Star, etc.) first, but even those are not fully understood in terms of their potential net $/ton value, if there is any.

With the recent credit woes and their crushing effect on diamond exploration stocks (see an earlier post), the market is saturated with exciting diamond plays. As things are now, there seems to be so many other places with better upside to put money into. After taking a good hard look at Shore Gold, things are looking not so sure.

Disclaimer: The author holds 1000 shares of FGT, but no stock in SGF or NMC. The opinions expressed in this article are personal in nature and are based on his research and experience. Please do your own due diligence when trading securities.