The gloves are off, the chit has hit the fan. What a great country! (ggggggggggggg)
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From: Winspear Diamonds Inc. (WSP)
winspear.com
mailto:info@winspear.com
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Re: Open Letter to Shareholders - Thursday, July 20, 2000
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Many of you will have read a press release from De Beers dated July 13,
2000, articles relating to the press release and an "Offer Update" that
appeared on the De Beers website on July 14, 2000. These materials called
into question the results of the first phase of Winspear's Value
Recognition Program - the Snap Lake Diamond Project July 2000 Scoping
Study. While De Beers would likely argue that their intention is to
"illuminate" Winspear's Shareholders as to the risks, we would suggest that
De Beers underlying intention is to undermine confidence in your
management, confuse Shareholders and detract attention from the underlying
value of the Snap Lake Diamond Project, including the excellent results
that Winspear is generating under the Value Recognition Program.
De Beers makes a number of "observations" in their press release and on
their website. Let's examine the facts:
De Beers: "The initial pre-feasibility required several years of work to
generate mineable resources of 12.6 million tonnes."
Not true. Yes, work has taken place for several years at Snap Lake, but
that effort has not all been on a pre-feasibility study. The development of
a mineral resource begins with very detailed exploration. The bulk of work
in the early stages of discovery is centered on understanding what the
potential of the land is and developing a geological model. Large scale
bulk sampling at Snap Lake was first undertaken in February 1999.
Following the accumulation of information from 1996 through 1999, a
Pre-Feasibility Study was begun in December 1999. The results were released
in April 2000, a period of only five months. De Beers is fully aware of the
time required to complete a pre-feasibility study and to imply that it took
"years" is ill informed, at best.
De Beers: "Winspear now implies that the addition of limited new data has
managed to increase the level of mineable resources by a factor of more
than three."
The September 1999 Resource Estimate announced a mineral resource estimate
of 20.7 million tonnes of kimberlite greater than 1m in thickness. The
April 2000 Pre-Feasibility Study was restricted to the dyke area greater
than 2 m in thickness and to a depth of 370 m below surface to demonstrate
project viability. This area included 10.8 and 1.6 million tonnes of
indicated and inferred resources respectively. The July 2000 Scoping Study
builds on these two studies and incorporates data from later drill holes
and mining in an expanded area and at greater depth. The study is based on
an estimated mineral resource, greater than 1 m in thickness and to a depth
of 750 m below surface, of 37.8 million tonnes. It was completed quickly in
reaction to an undervalued bid, but to call the data limited is to ignore
the facts.
Thirty-five holes completed since June 1999 are included in the July 2000
Scoping Study, and have only now been fully analyzed. These holes cover a
large area. Also, a number of holes completed prior to June 1999 were not
used in compiling the Pre-Feasibility Study, because they were outside the
area considered for mining in that study. All of these data have now been
included in the July 2000 Scoping Study, which incorporates the result of
224 drill holes, analysis of micro-diamonds, 6,000 tonnes of bulk sampling
and significant engineering analysis.
It is important that Shareholders understand that the Scoping Study is not
done to the same standard as the Pre-Feasibility Study. Having said this,
the work incorporated in the Scoping Study is of very high quality. It was
completed by MRDI Canada (MRDI), a division of AGRA Simons, a leading
international mining consulting company with substantial experience in
underground mining and in evaluation, development and construction of
diamond projects in the Northwest Territories. Among other projects in the
Northwest Territories, AGRA Simons designed and constructed the process
plant and site infrastructure for the EKATI? Diamond Mine owned by BHP
Diamonds Inc. and Dia Met Minerals Ltd. AGRA Simons was awarded the
Engineering Excellence Award by the Canadian Council of Professional
Engineers in 1999 for Design, Construction and Management of the EKATI?
Diamond Mine. In Winspear's opinion, AGRA Simons is the best-positioned
group in the world to assess the Snap Lake Diamond Project.
Further, De Beers knows that it is common for mining companies to be able
to expand mineral resources very quickly once a data base of understanding
of the resource has been developed.
De Beers knows, better than most, the nature of diamond deposits and that
the predictive nature of grade distribution, when properly understood and
analyzed, allows for very confident analysis of large areas of kimberlite
and large step outs. This information takes a long time to develop into a
predictive model, but once in place is a very powerful tool.
De Beers: "The implications of the (July 2000) scoping study data were not
disclosed in the June 20 preliminary prospectus to raise $20 million..."
All material results available to Winspear at the time of filing the
Preliminary Prospectus were previously released, as required by law and
securities regulations. Additional material information became available or
was commissioned by the Company only after the De Beers offer.
De Beers: "...through the issuance of shares and warrants when the stock
was trading at around $2.50. It might have been expected that this
information would have been released before proposing a dilutive equity
issue."
On the day De Beers announced its offer, Winspear was to begin the first
day of a three week "roadshow", primarily designed to showcase the Snap
Lake Diamond Project and Winspear to institutional and retail Shareholders
in Canada, the United States and Europe. Indeed, Winspear was scheduled to
visit significant institutional investors the Company had not met with
before.
Despite De Beers' attempt in the July 13 press release to have the market
believe that the company was trying to sell stock for $2.50 per share, De
Beers fails to note that the offering price was not included in the
preliminary prospectus. This is because the preliminary prospectus is just
that - preliminary. The offering price would have been established in the
final prospectus at a time when all material information known at that time
would have been disclosed.
Further, the condition in the De Beers offer that Winspear cancel this
financing and not issue new shares has been designed to limit the Company's
access to funds and prevent Winspear from demonstrating the value of the
project, which De Beers already sees, to Winspear Shareholders.
De Beers understood the potential of the deposit prior to the Scoping
Study. Its offer has been timed to prevent that potential from being more
fully understood by the market. Winspear believes showcasing the Company in
the offering process could have very significantly impacted Winspear's
share price and hence eliminated the ability of De Beers to "credibly"
offer such a low price, while still appearing to have offered investors a
"significant premium."
De Beers: "De Beers is also surprised at the speed at which a significantly
more complex mining plan has been developed."
In the Pre-Feasibility Study and an earlier Scoping Study, MRDI discussed
several alternatives for mining that were not included in the
Pre-Feasibility Study, including the potential for increasing mine
throughput by accessing kimberlite via a shaft. These options were not
included in the Pre-Feasibility Study because the area considered for
mining was limited to that accessible from the ramp developed from the NW
Peninsula and to an area of resources classified predominantly as
indicated. However, the Pre-Feasibility Study did examine "potential
mining of inferred resources" (Sec. 3.3.4), including kimberlite less than
2m in thickness and more than 350m below surface. Mining of this kimberlite
was viewed as possible. The expectation of Winspear has always been that
Snap Lake could support these increased mining rates and that a more
complex mining plan than the one outlined in the Pre-Feasibility Study
would be ultimately required.
De Beers: "It remains unclear how the first and second stages of the
project are to be financed and what the implications are for equity
dilution."
The first stage of development, as described in the Scoping Study, is
little changed from the Pre-Feasibility Study and Winspear has always
remained confident in its ability to finance its portion of the first
stage. While inappropriate to speculate on the nature or terms of financing
for Snap Lake as a producing asset, the company has been encouraged by the
level of interest already expressed by participants in equity markets, bank
lenders and other sources of financing potentially available to the
company. Our news release of July 11 clearly indicated that the second
stage can be financed from operating cash flows, without the need to access
capital markets. De Beers appears to have missed this fact.
Winspear is confident that it can obtain debt and equity financing to
complete the first stage of the Snap Lake Diamond Project. Beyond that, the
project is "self-financing."
De Beers: "The underground excavation of kimberlite in the form of a thin,
flat orebody lying at a low angle of dip, at relatively low depth, under a
lake, has not been undertaken anywhere in the world, and brings with it a
number of significant risks."
De Beers' statement is true, as far as it goes, but meaningless. It is not
what is being mined (kimberlite) that is important. It is the geometry of
what is being mined (thin, flat orebody lying at a low angle of dip, at
relatively low depth) that is important. For this type of mine geometry,
experience abounds here in Canada. Several mines near Elliot Lake, Ontario
have similar geometry and have been operated successfully. As for lying
under a lake, De Beers conveniently ignores the fact that many mines
throughout the Canadian Shield (Québec, Ontario, Manitoba) and in the
Northwest Territories operate successfully under lakes.
De Beers: "De Beers considers this project to be of high risk due to a
variety of factors including lack of data confirming grade and diamond
revenue across the deposit; high capital costs and low confidence limits on
capital and mining cost estimates; uncertainty over mining rates which
could be adversely affected by a range of mining problems; and, potential
environmental and permitting problems."
De Beers should know better than to question Snap Lake mineral resource
estimates, when those for their own mines are generally not at a
significantly greater confidence level. For De Beers' total world-wide
reported carats, 31 per cent are in probable reserves, while 69 per cent
are indicated (11%) or inferred (58%) resources. For Jwaneng, De Beers'
crown jewel and the world's richest diamond mine, fully 89 per cent of the
reported carats are only in the indicated or inferred categories. Yet, De
Beers does not talk about "a lack of data confirming grade and diamond
revenue" at Jwaneng or at other mines it owns.
In terms of mining at Snap Lake, as discussed above, miners know how to
mine these types of ore bodies. It is not a great technical challenge,
mining methods are proven and the required equipment is available "off the
shelf." Costs for this work are included in the Pre-Feasibility Study and
the July 2000 Scoping Study. Finally, Winspear is confident that
environmental and permitting challenges can be dealt with expeditiously due
to the small "footprint" and the fact that the mine will not directly
impact rivers or lakes.
De Beers is intent on highlighting "risks" it sees in the project. You
should question their motives in making these statements. De Beers has
demonstrated enough confidence that Snap Lake can be mined that it is
prepared to make an offer to Shareholders of $260 million to assume those
same risks today. Furthermore, De Beers made the offer even though it did
not have access to the full Winspear database, or the subsequently released
July 2000 Scoping Study, which has nearly tripled the estimated value of
Winspear's interest in the Snap Lake Diamond Project.
Many of the risks outlined by De Beers are specific to De Beers, as they
have not asked for (and to our knowledge have not been provided access to)
the substantial work that has already been undertaken to address these
issues. De Beers is not in a position to assess these risks. Winspear and
MRDI are able to consider these matters, and Winspear must express the
value of Snap Lake to Shareholders. We believe that the results of the July
2000 Scoping Study are extremely important, are representative of the
potential for the Snap Lake Diamond Project, and demonstrate the magnitude
by which the De Beers offer undervalues Winspear.
Winspear rejects De Beers' assertion that the project is "of high risk" and
is confident that Winspear Shareholders and third parties will agree.
De Beers: "De Beers continues to believe that the offer provides value to
Winspear Shareholders..."
In De Beers' original press release on June 26th, it described the offer
price as providing "full and fair value to Winspear Shareholders". In this
most recent press release it describes the offer as providing "value."
Payment of a nickel for the purchase of a quarter is value, at least from
the buyer's perspective. If De Beers is truly concerned about the
development of Snap Lake as it would have you believe, and is intent on
paying fair value for Winspear's interest in the asset, De Beers should
have come to Winspear to gain valuable information and then made a fair
proposal. Instead, De Beers has elected to make a coercive, hostile and
undervalued offer directly to Shareholders, most of whom have not been in a
position to properly understand the full value of their Company.
Winspear's Board of Directors is intent on demonstrating to Shareholders
the potential of the Snap Lake Diamond Project and believes that the July
2000 Scoping Study only begins to express that potential.
For decades, De Beers has controlled the world diamond trade, and they know
a gem when they see one. Its interesting to note that under the practice of
De Beers' Central Selling Organization, "sightholders" are asked to
purchase packages of diamonds, at prices dictated by De Beers. Sightholders
that decline to pay De Beers' price are not invited to attend future
sessions. De Beers' usual practice is to ask you to accept their price with
limited knowledge as to what you are buying. In making its hostile,
coercive and undervalued bid for your company, De Beers is asking you to
accept their price, without full knowledge of what you are selling.
Your Board of Directors has recommended that Shareholders REJECT the De
Beers offer and NOT TENDER your shares. A Directors' Circular outlining
reasons for this recommendation, and other matters of importance, was
mailed to Shareholders on July 17th and is available from the Company or at
the Company's website, www.winspear.com.
We continue to appreciate your support as we work to obtain better value
for you than is represented by the current De Beers offer.
Yours truly,
Hugh C. Morris
Chairman of the Board
Randy C. Turner
President and Chief Executive Officer
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Copyright (c) 2000 WINSPEAR DIAMONDS INC. (WSP) All rights reserved. For
more information visit our website at winspear.com or send
mailto:info@winspear.com
Message sent on Thu Jul 20, 2000 at 4:01:51 PM Pacific Time
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