September 5, 2002
Mountain Province Diamonds Inc (MPV-T: $1.42)
Tel #: (909) 466-1411
Web Site: www.mountainprovince.com
5034 bulk sample yields big diamonds
Mountain Province Diamonds Inc (MPV-T: $1.42) reported carat recoveries on
the morning of September 4, 2002 for the 2002 bulk sample taken from the
5034 pipe on the Kennady Lake project in the Northwest Territories.
Although the results were in line with reasonable expectations, the market
reacted very positively, trading 1,061,301 shares on the TSE to close up
$0.31 at $1.42, and 576,100 shares on the OTC BB for a gain of $0.16 to US
$0.90. Trading was volatile as Mountain Province swung within a range of
$1.22 to $1.55 before finishing the day on an uptick. Even Camphor Ventures
Inc (CFV-V: $0.34), which has 11,822,665 shares fully diluted and a 4% net
carried interest, gained $0.10 on 484,200 shares. In Tracker 2002-23 issued
August 30 I presented the opinion that the recently rising interest in
Mountain Province had little to do with anticipation of spectacular results
and was more a sign that the market was starting to realize De Beers was
serious about developing Kennady Lake and that such a development would be
worth at least $500 million and possibly $1 billion in net present value
terms. In view of Mountain Province's 36% net carried interest and
55,029,048 fully diluted capitalization, such a valuation range would
translate into a price target range of $3.25 to $6.50. (For Camphor,
assuming no additional dilution through cheap options and financings, the
price target range would be $1.70 to $3.40). The pie-in-the-sky target,
which would require discovery of significant new high grade tonnage,
demonstration of which would take several years, is that the Kennady Lake
project achieves a resource status equivalent to that of Dia Met's Ekati
project, which achieved an implied project value (IPV) of $2 billion, and
Aber's Diavik project, whose IPV has touched $4 billion. Such a valuation,
which I view as unlikely to be demonstrated by De Beers in the near term,
but which I do believe the property is capable of yielding with sufficient
exploration, would generate price targets of $13 and $26 for Mountain
Province. Realistically, however, De Beers will likely be completing a
feasibility study by this time next year that incorporates the 5034, Hearne
and Tuzo pipes into a mining plan whose net present value cannot be worth
more than $3-6 per share for Mountain Province based on what we know about
grade and tonnage even if the "super" diamond sub population turns out to
represent a significant percentage of Kennady Lake's big diamonds. A buyout
from De Beers is an inevitability, not a mere possibility. Now that De
Beers is private the company has even less interest in dragging along a
junior public company and fulfilling the junior's disclosure requirements.
Because it is operator De Beers cannot mount a hostile takeover bid for
Mountain Province as it did for Winspear, and because Mountain Province
insiders control 25-35% of the fully diluted capitalization, De Beers would
have a hard time pulling off a lowball buyout that preys on shareholder
fatigue and apathy. My view is that De Beers is eager to reach the
feasibility window during which it is entitled to make a buyout offer, and
that a time horizon of one year and a $3-6 price target will do the trick.
The only thing that could upset this scenario is news that a new discovery
like the MZ Lake sill has spectacular value potential which De Beers is
willing to aggressively pursue at the expense of postponing a feasibility
study. Such a development would inject a new speculative dimension into the
Kennady Lake project that could price Mountain Province stock well beyond a
level De Beers would be willing and perhaps even able to pay. Which begs me
to ask the question, is De Beers really going to do anything on the
exploration front which would make a buyout of Mountain Province more
expensive than the minimum $500 million to $1 billion a world class diamond
mine would be worth? It is these considerations which lead me to believe
that the surge in market interest reflects a shift in perception of Kennady
Lake as a going-nowhere De Beers project to the idea that De Beers wants to
turn Kennady Lake into a diamond mine sooner than later. The 5034 bulk
sample results do not signal that something new and wonderful has been
discovered about the 5034 pipe; they signal that De Beers has obtained the
information it needs to make a decision. We do not yet know if the decision
is positive, which of course is why the IPV for the Kennady Lake is still a
fairly modest $217 million.
New 5034 sample yields 1,215 carats from 836 tonne
De Beers recovered 1,215 carats from 836 tonnes extracted from the Center
and West Lobes via two clusters of three holes. The recovered grade for
three holes into the West Lobe ranged 1.7-2.19 ct/t, which is consistent
with the 1.85 ct/t grade modeled by De Beers. The West Lobe is estimated to
have a resource of 2.74 million tonnes, while the Center Lobe is modeled at
2.85 million tonnes. The Center Lobe includes a lower grade zone which
resulted in a previous modeled grade of 1.30 ct/t, higher than the
recovered range of 0.79-1.02 ct/t for the latest three holes. If there is
anything negative in the Mountain Province news release, it is the lower
recovered grade, though at this stage we do not know if this is consistent
with De Beers understanding of the internal geometry of the Center Lobe.
The East Lobe, from which the 2001 bulk sample was extracted, has a modeled
resource of 2.52 million tonnes and a modeled grade of 1.7 ct/t that has
not been updated since De Beers published a recovered grade of 1.44 ct/t
for the 2001 bulk sample that yielded 914 carats from 635 tonnes. There is
no fresh information for the East Lobe, which has yielded the two biggest
stones for the Kennady Lake project, a 10 carat "crap" diamond worth little
and a 9.9 carat "super" diamond worth US $60,000.
West Lobe has a coarser distribution than the East Lobe
The recovered grades are not important at this stage of the Kennady Lake
project's exploration cycle. More important is the number of stones greater
than 0.5 carats recovered through the latest bulk sample. It is difficult
to make a direct comparison with past results because the 1999 bulk sample
was reported as a blend of West, Center and East Lobe kimberlite, and the
2001 sample was taken only from the East Lobe. What I can say is that West
Lobe big stone recoveries are better than the 1999 blended recovery, and
that the West Lobe has a coarser diamond distribution than the similar
grade East Lobe. In addition, the lower grade Center Lobe will yield as
many stones bigger than 1 carat on a per tonne basis as will the East Lobe.
This is the only fresh information, and it alone does not explain the surge
in market activity. The latest news does not guarantee that the Kennady
Lake project is moving closer to the economic threshold, but it does
demonstrate that at least for the 5034 pipe De Beers has obtained the
information it needs to model the presence of a sub population of "super"
diamonds within the diamond population of the 5034 pipe. I can say this
because the recovery of big stones is better than before, and if De Beers
felt it needed more stones, it would have extracted a a bigger sample.
There is now a very good chance that the modeled carat value for the 5034
pipe will undergo an upwards revision from the US $60-$70 range after De
Beers completes valuations. How much, and if it will be enough to
eventually justify a production decision, is anybody's guess at this stage.
Watch for evidence of "super" diamonds in the Hearne pipe
Next to come are the bulk sample results for the Hearne pipe, expected late
September or early October. Although the Hearne pipe is higher grade than
5034, past bulk sampling has not yielded stones bigger than 3.4 carats, and
there is no evidence yet of a sub population of "super" diamonds. If
speculators should look anywhere for positive surprises in the near term,
it would be in the possibility that the 684 tonne Hearne bulk sample
delivers bigger stones that include specimens similar to the "super"
diamonds of 5034. The really important news, namely revised modeled carat
values for 5034 and Hearne, will not come until De Beers has completed
valuations and Johan Ferreira has incorporated the new data into his
models. If past history is any indication, this news is not likely due
until December. Because the Hearne results are more likely to improve than
get worse, and the most we can hope for the MZ Lake sill complex are
"exciting" micro diamond results that are not going to prompt De Beers to
put everything else on hold, the Kennady Lake project faces a three month
holiday from potentially negative project news. During this window Mountain
Province stock will become a volatile trader as bulls, bears and traders
all try to work public sentiment to their advantage. For bottom-fishers who
accumulated stock in the top priority $0.50-$0.75 accumulation range
Mountain Province is now a Spec Cycle 100% Hold with a partial sell a
prudent strategy to consider somewhere between here and the $3-6 buyout
target range.
Big stones dragged up Winspear's carat value only 22%
Why do I expect the revised modeled results to improve, and how much of an
improvement can we hope for? We are going through the same process
Winspear's Snap Lake project did in 1999, except in reverse. The story
starts with the high quality, top colour 9.9 carat stone valued at US
$60,000 recovered last year from the East Lobe. A low quality 10 carat
stone was also recovered from the East Lobe in 1999. That makes the score
50% "super" diamonds, 50% "crap" diamonds for the big stone population in
the 5034 pipe. Similar "super" diamonds have been observed in the smaller
size categories, but the percentage is much lower than 50%. The next
biggest stone previously recovered from the 5034 pipe was 4.9 carats. The
newest results include three stones weighing 7.0, 6.6, and 5.9 carats
recovered from 437 tonnes extracted from the West Lobe. These are the
biggest stones so far found in the West Lobe of 5034. Mountain Province has
not revealed anything about the quality of these stones. Will half be high
quality, top colour and worth thousands per carat, or will the percentage
be lower? These new diamonds remind me of the three stones (10.82, 8.42,
and 6.04 carats) recovered by Winspear in 1998 through a 199.7 tonne sample
from the Snap Lake dyke, a sample half the size of the current West Lobe
sample. Those Snap Lake stones averaged US $2,024 per carat and helped the
initial Snap Lake sample boast a rock value of US $343 per tonne. If you
removed those three stones as statistically insignificant, the Snap Lake
parcel's average carat value plunged from US $301 per carat to US $83.26
per carat. The big controversy in 1999 was where between $83 and $301 would
the average value of a much larger sample settle. A subsequent 6,000 tonne
bulk sample yielded 10,708 carats (1.15 mm sieve) that averaged US $105 per
carat for a recovered grade of 1.8 ct/t and a rock value of US $189 per
tonne. Had the grade not improved the outcome would have been a disaster.
Although the larger bulk sample parcel included 191 stones greater than 3
carats, clear confirmation that Snap Lake contains big stones, they dragged
up the average value of the smaller stuff by only 22% to a number that was
65% lower than the $301 value created by including Winspear's initial
"super" diamonds.
Winspear style logic would double the East Lobe's carat value to US $130
Whereas Snap Lake started with extraordinary valuations that collapsed as
sample size increased, the Kennady Lake project started with modest
valuations that have gradually crept up as De Beers obtained bigger
parcels. We have never seen measured values for the 5034 diamonds, but De
Beers has modeled them in a range of US $60-$70 per carat, with a $65.50
value assigned to the East Lobe in December 2001. The East Lobe parcel
consisted of 914 carats, which at $65.50 would have a total value of US
$59,867, almost exactly the value of the 9.9 carat $60,000 super diamond.
Clearly De Beers did not give much "weight" to that super diamond, because
if you remove that diamond you end up with 904 carats worth zero. This zero
value seems very unlikely, for De Beers had modeled $65 per carat for the
East Lobe in 1999 when the biggest stone was the 10 carat "crap" diamond
and the next biggest was 4.9 carats. If we used Winspear diamond logic we
should assign a $58,760 value to the 904 carats of small stuff, and then
add $60,000 representing the 9.9 carat "super" diamond for a grand total
value of $118,760 or US $130 per carat. We then convert that to rock value
using the 1.7 ct/t modeled grade and we get kimberlite worth US $221 per
tonne, which starts to look a lot like the Diavik pipes. But we cannot
really do that because at this stage for all we know the outcome of the
next 1,000 tonnes from the East Lobe could be another worthless "crap"
diamond like that initial 10 carat stone. The question for the 5034 pipe is
where in the range of $65 to $130 per carat will the modeled value settle
once the value of the stones greater than 0.5 carats has been statistically
quantified.
The latest news does not reveal if the big stones include high quality, top
colour stones
The latest results have produced a better distribution of big stones than
previously available, so there is a very good chance that the average value
will improve. But at this point nobody knows to what extent high quality
"super" diamonds are present in the new parcel. The primary basis for
optimism is the fact that De Beers is looking to firm up for feasibility
purposes something it already believes, not kill off the outside chance
that really nice diamonds might be present. While Winspear management was
stuck trying to demonstrate that 100% of the big Snap Lake diamonds were
top quality as was the case in the original mini bulk sample, De Beers is
trying to elevate the "super" diamonds in 5034 from a statistically
insignificant percentage to a solid 10-30% of the overall big diamond
population. The only way to do this is to get more big diamonds, and in
this regard the 2002 bulk sample for 5034 has been successful. It remains
to be seen if the 2002 bulk sample for Hearne is also successful.
How many tonnes before you get a 1 carat diamond?
The question for De Beers is how does the frequency and value of diamonds
greater than 0.5 carats behave in the 5034 and Hearne pipes. Mountain
Province has provided a detailed breakdown of the size frequency, but the
numbers on their own do not make much sense. It is perhaps more intuitive
to ask how many tonnes does it take before you recover a 1 carat diamond,
or how big does your parcel of diamonds have to be before you can expect a
1 carat stone in it? For the East Lobe the results so far indicate that a
stone bigger than 1 carat shows up every 19 tonnes, or in every 27 carat
parcel recovered with a 1.5 mm sieve. A stone weighing 0.5-1.0 carats shows
up every 6 tonnes of East Lobe rock, or in a parcel of at least 9 carats.
The 1999 bulk sample, which was a blend of all three lobes that yielded
1,005 carats from 573 tonnes, included 113 stones weighing 0.5-1.0 carats
and 42 stones greater than 1 carat. In other words, a 1 carat stone showed
up every 14 tonnes or in every 24 carat parcel, while a stone weighing
0.5-1.0 carats showed up in every five tonnes, or in every 9 carat parcel.
In the latest results the recoveries are broken down for the West and
Center lobes. The West Lobe yielded 843 carats from 437 tonnes which
included 49 stones greater than 1 carat and 111 weighing 0.5-1.0 carat. For
the West Lobe that translates into a 1 carat stone every 9 tonnes or every
17 carat parcel, and a 0.5-1.0 carat stone every 4 tonnes or 8 carat
parcel. The Center Lobe yielded 372 carats from 399 tonnes which included
21 stones greater than 1 carat and 50 stones weighing 0.5-1.0 carats. For
the Center Lobe that translates into a 1 carat stone every 19 tonnes or,
and this is very interesting, one in every 18 carat parcel. A 0.5-1.0 ct/t
stone in the Center Lobe shows up every 8 tonnes, or in every 7 carat
parcel. One immediate observation which Mountain Province also emphasizes
in its news release is that the West Lobe, although of similar grade to the
East Lobe, has a coarser size distribution than the East Lobe. When we look
at only stones greater than 3 carats, the difference becomes more obvious:
a stone bigger than 3 carats shows up every 318 tonnes in the East Lobe,
but it takes only 62 tonnes from the West Lobe to produce a stone bigger
than 3 carats. The comparison is valid because the sample base of 437
tonnes for the West Lobe is smaller than the East Lobe (635 tonnes). We
cannot judge the Center Lobe, which yielded only one stone bigger than 3
carats (4.6 ct), because its lower grade furnished a diamond parcel half
the size those furnished by the West and East Lobe samples. But it is very
interesting to note that in terms of how many carats must be recovered
before you get a 1 carat stone, the West and Center Lobe kimberlite are
very similar.
Was Hearne's dearth of really big stones just a matter of bad luck?
Results for the 684 tonnes extracted from the Hearne pipe through five
large diameter holes (24 inch flood reverse system) are expected late
September or early October. Last year a 334 tonne bulk sample recovered 751
carats that included 27 diamonds larger than 1 carat, and 74 diamonds
between 0.5-1.0 carats. The two largest stones weighed 3.4 and 3.1 carats.
Although the recovered grade of 2.25 ct/t for Hearne was higher than the
2.05 ct/t previously modeled by De Beers, no updated modeled grade has been
published by De Beers. The Hearne pipe consists of a North and South Lobe
modeled at 5.41 million and 1.45 million tonnes respectively as of January
31, 2000. Except for a portion of the North Lobe that modeled at 0.6 ct/t
(1,610,000 tonnes), the Hearne phases have all modeled at 2.05 ct/t. On
December 18, 2001 De Beers provided an updated modeled value of US $63.30
per carat for the Hearne pipe. The last two bulk samples from Hearne
yielded 1,597 carats from 803 tonnes for a recovered grade of 2.0 ct/t. The
combined Hearne parcel included 164 stones weighing 0.5-1.0 carats and 67
stones weighing more than 1 carat. The four largest stones from Hearne have
weighed 3.1-3.4 carats. If I restate these numbers for the combined sample
in the same way I did with the 5034 pipe, I can say that in the Hearne pipe
a stone larger than 1 carat shows up in every 12 tonnes, or in every 24
carat parcel (using a 1.5 mm recovery sieve), while a stone weighing
0.5-1.0 carats shows up every 5 tonnes or in every 10 carat parcel. These
numbers are not as good as the West Lobe, but better than the East Lobe.
Less encouraging is the number for stones greater than 3 carats, with one 3
carat or bigger stone showing up every 200 tonnes in the Hearne pipe
compared to 62 tonnes for the West Lobe. The Hearne number for 3 carat
stones, however, is better than 317 tonnes of East Lobe kimberlite it takes
to get a stone bigger than 3 carats. This suggests that De Beers has
perhaps been unlucky in recovering bigger stones from the Hearne pipe, an
observation consistent with a comment Jan Vandersande made to me some time
ago that better things had been expected from Hearne. Nevertheless, it is
intriguing that the modeled value for Hearne is very similar to that of the
5034 pipe, which makes me wonder what would happen if the new bulk sample
yields some bigger diamonds.
Mountain Province and its Kennady Lake project strike me as the most
obvious way to profit from a diamond play during the next three months |
