It took nearly 9 years but I am beginning after many false hopes and dashed dreams that KRT might pan out. Except for Sieg I don't know how many of the old SI posters are there - Buddy are you still following this?
February 23, 2005
The Saskatchewan Diamonds make it to the Olympics
Synopsis: Saskatchewan's Fort a la Corne diamond play has received significant news on two fronts which turn it into the most important advanced diamond project in the world: De Beers has approved a $26 million budget for 2005 on the FALC JV and Shore Gold has confirmed that the Star diamonds fall within a modeled range of $110-$162 carats per tonne. Both developments signal that the Fort a la Corne diamond field is in a world class league and possibly of enormous strategic significance to the world's major diamond producers. As Shore Gold Inc (SGF-T: $5.09) busies itself with the task of proving that it has sufficient tonnage at the indicated US $22 per tonne rock value to justify mine development and a valuation higher than the current $5 stock price, the market's attention will shift to Kensington Resources Ltd (KRT-V: $1.50) which along with equal partner De Beers is embarking on an unprecedented exploration drilling campaign to identify the precise location of higher grade kimberlite units within their multi-billion tonne cluster. This work will include drilling right next door to the Star kimberlite, a "significant portion" of which De Beers believes to be on its ground. Given that Kensington and De Beers have more than enough "kimberlite room" to find their target of 70 million carats in higher grade units, and may by the end of 2005 have demonstrated that their portion of the Star kimberlite may be as big as that controlled by Shore Gold, it is hard to avoid the conclusion that the greater upside potential during the near term lies with Kensington. In the spirit of the bottom-fishing rule of selling some too soon and some too late I am issuing a 25% Partial Sell for Shore Gold, leaving a Spec Cycle 75% Hold recommendation in place. Anybody hoping to spin this into a "Shore Gold Sell by Kaiser" should note that the bottom-fishing strategy involves buying juniors when they are unloved by the market and taking profits as the market falls in love with them. Shore Gold is now an institutional stock for which I hear at least one "top diamond analyst" is calling for an $11 target. That is how I wish the bottom-fish universe would always unfold. Bottom-fishers who bought Kensington when I issued a top priority bottom-fish buy in the $1.00-$1.25 range on February 1 when the stock was trading at $1.06 should hold their positions 100% in anticipation of a new trading level developing in the $2-3 range as the market adjusts to the new credibility of the Fort a la Corne diamond play.
De Beers gets serious about Saskatchewan diamonds
On Tuesday February 22, 2005 Kensington Resources Ltd (KRT-V: $1.50) and De Beers announced a 2005 budget for their FALC JV in the amount of $25.6 million. This astonishing jump from the 2004 budget of $7.6 million, which I understand has been exceeded by actual expenditures, confirms a major shift in the attitude of De Beers toward Fort a la Corne. By the end of 2005 Kensington and De Beers will have spent more in two years than the $30 million spent between 1989 through 2003. Unlike the $25 million De Beers spent during 2004 on prefeasibility work at the Gahcho Kue project in the Northwest Territories of Mountain Province Diamonds Inc (MPV-T: $1.93) , the proposed $26 million 2005 FALC budget will consist mainly of drilling 10 core holes in each of 13 kimberlite bodies within the south central cluster of the Fort a la Corne field. When was the last time anybody spent this much money in one year on outling kimberlites? By "advanced" I thus exclude projects whose push toward a production decision is already a foregone conclusion. According to Kensington's Robert McCallum this fairly widely spaced "geological" drilling is intended to establish the emplacement model for each body and the grade potential of the various units within each body. Although this work will generate primarily petrographic and micro diamond data for low grade kimberlite that in itself is unlikely to impress the market, De Beers has become so confident in using micro diamonds to model macro grade that it thinks it will be able to identify "units" worthy of delineation drilling designed to establish tonnage, and large diameter mini bulk sample drilling to establish macro value. And so the next major milestone for Kensington will be how much more money De Beers wishes to sink into Fort a la Corne. What sort of numbers are we talking about? At the 2005 Cordilleran Roundup De Beers' John McConnell projected $97 million as its share of expenditures over the next five years in Saskatchewan. I have since heard that the portion allocated to the first three years is $57 million, or $114 million in 2005-2007.
Kensington' 122 body has remarkable similarities to Shore Gold's Star
The critical milestone for Kensington will be the last quarter of 2005 when De Beers should be in a position to decide which "units" merit further work. The 2005 targets are in addition to the nine bodies that have been the subject of recent detailed work. Apart from disappointing micro-diamond results for the 150 body reported in October 2004, Kensington and De Beers have yet to report the results of a 752 tonne mini bulk sample from the 140/141 body and 707 tonnes from the 122 body. Using 1.5 mm as the cut-off De Beers has modeled 105 million tonnes of 9 cpht for the coarse mega-graded beds in 140/141 and 29 million tonnes for the higher grade 16 cpht breccia beds that produced the big diamonds in 2003. In the case of the 122 body De Beers has modeled 45 million tonnes of 14 cpht for the upper south pyroclastic unit and 34 million tonnes of 12 cpht for the lower unit. That is 79 million tonnes, which exceeds the tonnage footprint of the Early Joli Fou kimberlite sampled by Shore Gold's underground sampling program. If you adjust for the 1.18 mm cutoff used by Shore Gold for Star the 122 body resource looks awfully similar to the Star kimberlite grade. The bulk sample should produce a diamond parcel of just under 100 carats for 122, which should enable De Beers to provide a modeled value, albeit with a large error range. Most speculators are not aware that within the next couple months Kensington will produce grade and value results for the 122 body that have blockbuster potential. With regard to the 140/141 body which we already know has numerous eruptive centers, what we can hope for are new tonnage/grade figures. Something of a disappointment has been the 148 body for which De Beers modeled 156 million tonnes of 7 cpht. Seemingly attached to 148 is the 147 body for which De Beers modeled a grade in the range of 15-20 cpht. The 147 body, which has an impressive surface area of 135 hectares, was the focus of core drilling in 2004 and thus has the potential to yield significant tonnage at a decent grade. Keep an eye on upcoming 147 results.
The game has barely begun
It really is important to understand that Shore Gold's underground sampling program had the nature of a Hail Mary pass that was completed, except that we are not in the final seconds of the Super Bowl and the spread is not less than 6 points. What the market seems to have done is set Kensington and De Beers back to square one while Shore Gold has been pushed forward to Park Avenue. In reality Shore Gold is no more advanced than Kensington. Bottom-fishers take note, this is totally wrong! In fact, according to Shore Gold's George Read the junior is still waiting for all the detailed micro diamond analysis and chemistry he insisted upon when he came aboard more than a year ago. When I query Read about details such as the physical extent of kimberlite beyond the underground sampling footprint that has similar chemistry and micro diamond curves he begs off with the answer that Shore Gold is still awaiting the results. In other words Shore Gold has no idea how much 16 cpht Early Joli Fou it is dealing with. If you look at Shore Gold's published cross sections of the Star kimberlite, it is really hard to come up with more than 100 million tonnes of decent grade material. When pressed George Read admits that the upcoming prefeasibility study will answer such questions. Shore Gold is proposing a program which will use underground drilling to stretch the footprint well beyond the limits off the existing adits.
Shore Gold and Kensington now neck and neck
Contrary to what the market seems to suggest, Shore Gold is not much ahead of Kensington in terms of knowing what it has. Whereas Shore Gold went for the value and is now going to have to spend $50-$100 million to work backwards to grade and tonnage, De Beers is filtering its massive kimberlite grade for the magic combination of grade and tonnage where a $100 plus carat value will make a mineable resource. Shore Gold has proven the concept, but both Shore Gold and Kensington must now prove the economics. The $26 million 2005 program for the FALC JV will not deliver any carat values, but it will deliver the key to the Fort a la Corne diamond play, namely the grade-tonnage scale of the play. For Shore Gold the absolute optimistic limit is 300 million tonnes of $22 rock, representing 48 million carats or $6 billion worth of diamonds in the ground. In the case of De Beers and Kensington they are looking for at least 70 million carats in a number of bodies which could be simultaneously mined to feed an giant central processing facility. If I had to bet which project would end up with more carats, I would place my bet on Kensington and De Beers.
Clodhopper base not likely to be fooled by city slicker talk
The Fort a la Corne diamond play no longer depends on bulk sample grades or carat valuations. It is very rapidly moving to the stage where scale and scoping study economics are the numbers analysts want to hear about. The FALC JV 2005 work will not involve bulk sampling for macro grade; it will collect micro diamond and petrographic data with the goal of identifying kimberlite units that will become the focus of delineation drilling and mini bulk sampling in 2006. There is thus something of a news vacuum brewing. The news release these results produce will be in the language of "scale", a language institutional fund managers but few retail investors speak. But because both Kensington and Shore Gold have their roots in a retail audience, to a fair degree comprised of faithful clodhoppers who are in no hurry to capitulate to the city slickers, both Kensington and Shore Gold have the potential to establish very robust prices that withstand the sort of economics sniping to which this story is very vulnerable. Key to this stubbornness will be the notion that the world supply of natural diamonds is rapidly depleting, the demand from emerging middle classes in China and India is skyrocketing, and Fort a la Corne has both the volume and quality to fill the gap. Even if today's modeled values and corresponding grade based rock values fall short, within a decade soaring diamond prices will have put Fort a la Corne well into the money.
Parcel valuations within 6% of average
The graduation of Fort a la Corne beyond science project status is at least partly due to news on Wednesday February 23 that a 3,050 carat parcel recovered by Shore Gold from its Star kimberlite had a sample value averaging US $110 per carat. This number was lower than the $125 per carat value the market had come to expect, and initially triggered a sell-off in Shore Gold before a wave of buying at 11:30 AM PST reversed the downtrend and pushed Shore Gold to a new high at the close. The market may have been confused by the difference between sample value and modeled value. The sample value was based on actual valuations by four different parties (Steinmetz, WWW, Rio Tinto and BHP) which, according to George Read, were within 6% of the average sample value. A modeled value is a statistically generated number which involves extrapolation and gap filling within the parcel's size distribution curve. A sample value is simply what the diamonds in a parcel would fetch. WWW International Diamond Consultants came up with an "average modeled value" of $135 per carat within a range of $110 "minimum" and $162 "high", which is consistent with expectations.
Low sample value of $110 per carat not relevant to $135 modeled value
The jargon is somewhat strange; "average modeled value" is apparently similar to the "best fit" term used by De Beers. During the past few years De Beers has published several modeled value ranges for 140/141 kimberlite parcels which have had a very large range because of the small sample sizes (less than 100 carats), but it is worth noting that De Beers' "best fit" figures have generally been near the upper end of the range. While 140/141 is admittedly not the same body as Star, it is very encouraging to Kensington shareholders to see the narrower modeled range of the Star diamonds fall within the upper part of the 140/141 range. Modeled values tend to be higher than sample values because they account for under-sampling in the larger size categories where good quality stones can have a per carat value many times higher than for equivalent quality smaller stones. One might be tempted to think that with a 25,000 tonne sample the Star parcel should not have under-sampling problems, but that would be to forget that the grade is only in the 10-20 cpht range. The sampling risk applies to the parcel size, not the bulk sample size. For example, consider that the 12,800 carats recovered by Rio Tinto and Aber from their 11 million tonne 420 cpht A154 South pipe is equivalent to a 100,000 tonne bulk sample from Star.
The big question now for Shore Gold is the tonnage potential of the Star kimberlite. In a Daily Letter analysis published February 22 Canaccord's Graeme Currie presents a discounted cash flow analysis for a 15,000 tpd 20 year mining operation using US $150 per carat and 15 cpht that generates a net present value of US $206 million at a 5% discount rate. If Currie's numbers are valid his analysis indicates that at $5 Shore Gold is more than fully valued. The key here is the 110 million tonne resource this scenario assumes for the Star kimberlite. Shore Gold management has talked about a body representing 300 million tonnes of kimberlite, but if the most recent sections published by Shore Gold which distinguish Early Joli Fou from lower grade Late Joli Fou are any guide, it is hard to see where more than 100 million tonnes of 15 cpht kimberlite might be located. Although Graeme Currie concluded that Shore Gold was a "Hold", anybody who knows anything about brokerage firm research would have translated that "Hold" as a "Sell". But as Currie conceded, Shore Gold has not provided much information to help with an economic analysis, so his conclusions are tentative at best. I sympathize with Currie's analysis, which does include several optimistic scenarios involving 200 and 300 million tonnes of 15 cpht kimberlite. It is critical to keep in mind that the bulk sample parcel was recovered from a portion of the Star kimberlite whose footprint represents less than 30 million tonnes. Extrapolation of the bulk sample parcel's grade and value to a 100 million tonne or greater resource is at this highly speculative. Anybody reading between the lines of Currie's analysis would have interpreted it as a sell recommendation. What he did not point out was that Kensington was a major alternative to Shore Gold for speculators.
*JK does not own shares of any companies mentioned