KIM Report

The Summer Exploration Season - Sans Fanfare

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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

Commodity Recovery or Death-Rattle?

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A Possibly Bumpy Road Ahead

The past month or so has seen a huge rise in the TSX and Venture indexes as all sectors slowly pull themselves out of the economic hole that was 2008. What may give investors some pause is the question as to whether this is a true recovery, or is this just the seasonal rise most commodities see each spring? What about the doldrums of the summer holidays and the lows of tax loss selling in December?

The TSX Composite Index has risen from a low of ~7500 at the start of 2009 to over 10000 this week. Is it possible that the seasonal spring rise in commodities has been the catalyst for this long-awaited and hoped-for recovery? Or will these gains evaporate with the spring rains as more inevitable bad news comes out of the (primarily U.S.) financial sector this summer?

Being an Eternal Optimist

I would like to think otherwise, and that some of these recent gains may be long-term. As someone heavily invested (relatively speaking) in the resources sector, I have no real choice other than to be optimistic as psychiatrists are expensive. This was the first month in about half a year that I started looking at my portfolio and searching for opportunities to start mitigating some of my losses. Some I managed to catch, others I wish I did.

Hit

I have had a little luck with two small companies that readers will know are favourites of mine. The first is Great Panther Resources which has managed to keep their metal production (primarily silver) costs well below market, allowing them to be profitable. They have very recently announced that this last quarter was the first in which a positive cash flow ($0.7 million) was attained and that earnings are up by 75%. The discovery of gold rich zones at their Topia mine does not hurt either. Stornoway Diamond Corp. has also seen a climb in share price from recent lows at nine cents a share to what is now strong support above sixteen cents a share. This is accompanied by fairly recent news of flow-through share investment and government support for a road to their Renard mine in Quebec. The latter discussed in an earlier article.

And Miss

An opportunity I did miss was with Teck (formerly Teck Cominco) when I could have picked up shares for less than $5. They now stand at ~$15. Teck is currently in the process of selling of some of its assets (e.g. its share in the Pogo gold mine in Alaska) and issuing more paper in order to pay off debt incurred when if bought out Fording Coal Trust near the peak of the commodity market about a year ago. Hopefully this will teach management to buy low and sell high and not the other way around as they have been doing. Yamana has also started to rise up and even led the pack for a little while, helped by high gold prices and the increase in copper prices. However it has stagnated around $10-11/share lately.

The Caveat

As mentioned at the top of this post, the individual investor must consider that we have negligible impact on the share price behaviour of publicly traded companies. Institutional investors going out or moving in will cause the share price to drop or climb respectively, regardless of the fundamentals. The funny thing is that sometimes, for all their trained staff, these big guys are often the first to disregard fundamentals and give in to psychology, following a pack mentality. With a little due diligence, patience, and discipline, the average guy can come out ahead.

Disclaimer: The author holds 4000 shares of SWY, 200 shares of YRI, 100 Shares of TCK, and 1000 shares of GPR. 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

Government Spending Supports Canadian Mine Development

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Background

At the 2009 PDAC convention this month, CEO and President Matt Manson of Stornoway Diamond Corp. commented that this current economic environment and resultant government plans to increase spending is good for companies trying to develop mines in the sense of available infrastructure. Mr. Manson was in particular referring to Stornoway’s Renard diamond project in the Otish Mountains of central Quebec. The pre-feasibility study released last fall made the assumption that the current winter road access available to the potential mine site would be upgraded to an all-season paved road by the time construction would commence. This was discussed to in the earlier KIM Report article covering the findings of this study.

The News

Good news came last Monday, when announced in Quebec’s 2009-2010 budget was $698 million for the development of roads in northern Quebec. Included in this allotment is money for the Route des Monts Otish (Route 167 Extension) that will extend from Chibougamau to the Renard site intersecting several other (metals) projects along the way (Eastmain, Strateco, and Western Troy). Details of the road project (in French) can be found on the government of Quebec website.

The Ramifications

This boon comes at a time when investors are showing little of the patience necessary to see out a diamond project develop into a mine. Although not as large as Ekati or Diavik, Renard is still of significant size, especially when the nearby Lynx and Hibou dykes (bulk sampling near completion) are considered. The main advantage Renard has is that it is not an Arctic diamond mine, but that it is located in central Quebec, within close proximity to infrastructure (closer now with this announcement). It will have much lower mining costs as compared to isolated projects.

Further Infrastructure Spending?

There still remains the potential for electric power to be brought in to the region, as power lines run only tens of kilometres away from the site, but no announcement has been made regarding this as of yet. However, the pre-feasibility study assumed that the mine would operate using electricity generated on site and with oil above US$100. At this point, considering the assumptions made by AMEC in conducting the study, any other additional infrastructure forthcoming is just gravy.

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

Selling Diamonds at the PDAC

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Diamonds were the focus of two sets of talks at the PDAC. The first was a more general discussion that dealt with varied topics such as threats to producers in the form of treated and synthetic stones, science in diamond exploration, the new Chidliak (Peregrine & BHP) discovery, and the diamond industry and its relation the to market in general. The second was a series of presentations by various diamond juniors and their properties.

Turnout for the first talk was surprisingly low, considering the reputation of the speakers, less surprisingly was the even lower turnout to the second series. However, some very good presentations were given and some interesting trends began to appear in the nature of the industry:

1. The diamond industry IS hurting. That is a no-brainer considering how every other mining sector is doing (with the possible exception of gold right now). Currently there is a glut of diamonds in the possession of the cutters right now and the consumer, -you, are not buying. Yes people continue to get married even in tough economic times, but that diamond on the engagement ring will be smaller. Less disposable income = lower consumer spending.

2. The aforementioned hurt has led to a serious slowdown in the discovery and development of diamond deposits. The collapsed diamond prices have led to a short term situation where long term supply will be affected.

3. In regards to that long term view, diamond mines are painstaking to develop. They require more proving-work than any metal commodity and have a discovery to production timeline of at least ten years.

4. This slowdown in the development process is coupled with the lack of world-class discoveries/openings since Diavik (Rio Tinto & Harry Winston) in 2001. The two biggest resources in terms of report value in the pipeline now are Grib (Lukoil & Archangel: TSX.V-AAD), Russia, and Fort a la Corne (Shore Gold & Newmont), Canada. Other developments include the reopening of the Letseng (Gem Diamonds: LSE-GMD) diamond mine, and the sampling of the Mothae kimberlite (Motapa: TSX.V-MTP), both in Lesotho, and the continuing development of the Renard project in Quebec into a mine (Stornoway & SOQUEM).

5. These projects are still 2-8 years before any chance of production, but that may be a good thing as it will be at least 3 years until diamond prices recover from their recent 40% drop. Imagine what would happen if gold went below $600/oz. in a few months.

6. These low diamond prices also mean that companies are holding off on having their projects evaluated in terms of US$/carat.

7. Two types of deposits that did see some focus at the conference are deposits with low grade, but very high diamond value, and those with very low production costs. Diamonds from Letseng are quite rare, but typically high quality. Values can reach up to $2000/c. Motapa and Shore Gold are hoping to enter this low grade – high value club as well. An interesting thing about these rare diamonds is that they appeal to the extremely wealthy, who are more insulated from economic cycles. Companies with low-mining cost projects include Dianor (TSX.V-DOR), who are developing their paleoplacer (old river deposit) Leadbetter diamond resource near Wawa, Ontario, and Mexivada (TSX.V-MNV, Frankfurt-M2Q) with younger placer projects in Sierra Leone. Placer deposits are usually alluvial (river-related) and can concentrate other heavy minerals, such as gold. Placer diamonds are typically higher in value than ones from kimberlites because transport tends to destroy brittle/cracked/included ones.

The key thing now is that companies are balancing keeping in the black with continuing to add value to their projects. The long development time for diamond deposits means that these companies cannot afford to waste 1-2 years due to market conditions. Smart companies are focusing their resources for their most promising resources. Ones that will ensure cash flow as soon as possible.

The lack of attention given to the diamond industry by institutional investors has led to extreme undervaluation in some cases, even at current diamond prices. This represents an opportunity for the individual investor with a 2-4 year outlook to make some serious coin. However, there are a number of diamond juniors out there that have extremely speculative projects and consumers must carefully weigh their expected returns with the risk they are undertaking. More advanced projects carry less risk, but also less expected return. Investors have to take advantage of mispricing by the market due to short term concerns and engage in due diligence to maximize their profits

Disclaimer: The author holds 4000 shares of SWY and 20 shares of HW. He wishes he bought some PGD shares a few months back, but life is far from perfect. This article is based on the opinions and experience of the author. Please conduct due diligence when investing.

Silver Linings

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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.

Dancing the Foxtrot: A diamond mine in Quebec?

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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.

Diamond prospects develop despite record lack of investor confidence.

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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.

 

The long and winding road to a Quebec diamond mine

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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?

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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

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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.

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