Kaiser Bottom-Fish Tracker 2003-05
Copyright 2003 John A Kaiser
March 20, 2003
Mountain Province Diamonds Inc (MPV-T: $2.06)
Kelvin and Faraday dyke systems extended
During the past couple weeks Mountain Province Diamonds Inc (MPV-T: $2.06)
has made two announcements reporting kimberlite intersections hit by a
recent De Beers drill program on the Kelvin and Faraday bodies. The results
indicate that the Kelvin and Faraday bodies appear to be associated with
kimberlite dyke systems, each of which has a strike of at least 400 metres
and 600 metres respectively. Both dyke systems track a northeast-southwest
trend that intersects the Kennady Lake cluster to the south. The Kelvin and
Faraday bodies are 3 km part; it remains to be seen if kimberlite exists in
the 2 km section between them that has not yet been tested. Drilling has
revealed that the Kelvin body also has an east-west orientation of at least
110 metres, further supporting the theory that it may be a significant
blow. Not enough drilling, particularly at depth, has been done to allow us
to attempt tonnage estimates, but the results do indicate that potentially
meaningful incremental tonnage is present in the Kelvin/Faraday area. This
is important to the Kennady Lake project because initial micro diamond
analysis indicates a high grade comparable to that of the Hearne and 5034
pipes, a statement De Beers makes in the Gahcho Kue information sheet it
handed out at PDAC. (Gahcho Kue is the aboriginal name De Beers has chosen
for the Kennady Lake project in the spirit that Diavik and Ekati were
chosen for Canada's first diamond mines.)
Kelvin and Faraday dykes interpreted as steeply dipping
The way Mountain Province reported the Kelvin/Faraday results has left some
people scratching their heads. De Beers conducted ground gravity surveys on
roughly 600 metre sections covering both the Kelvin and Faraday bodies,
which are located 9 km and 12 km northeast of the Kennady Lake pipes. De
Beers drilled 5 holes in the Kelvin area and 2 holes in the Faraday area.
All holes but one in the Kelvin area intersected kimberlite over intervals
ranging 2.4 metres to 25 metres. The intervals reported by Mountain
Province are described as "horizontal projections" rather than actual
intercepts. These intervals are supposed to represent true widths and
reflect a conservative approach, but it does strike me that De Beers and
Mountain Province are giving their audience less credit than is due.
According to Jan Vandersande, De Beers has interpreted the hypabyssal
kimberlite bodies as near vertical dykes, and because all holes were
drilled at a 45 degree angle at a perpendicular to the strike inferred from
past drilling and geophysical surveys, De Beers has adjusted the intercepts
so as to reflect the true width of the dykes. In other words, the actual
intercepts are 41% longer than the "horizontal projections" reported by De
Beers. To what extent De Beers is justified in its assumption about a near
vertical dip for the Kelvin and Faraday dykes I cannot judge, but if these
dykes are near vertical that is good news for any underground mining
scenario.
De Beers assigns US $111 rock value to Snap Lake kimberlite
A shallow dip of 30 degrees for the Snap Lake dyke De Beers bought for
nearly Cdn $500 million has turned out to be somewhat problematic. In its
Snap Lake information sheet De Beers has dropped the mining grade to 1.46
ct/t, down from the 2 ct/t measured through earlier bulk samples. This
lower figure does not mean the diamond grade of the kimberlite is lower
than reported by Winspear; it reflects the inclusion of waste rock which
has to be taken out along with the kimberlite in an underground mine. This
amounts to a mining dilution of about 27%. The mineable resource is
described as 22.8 million tonnes, which De Beers proposes to mine at a rate
of 3,000 tpd or 1,050,000 tonnes per year. Snap Lake is presently in the
permitting stage and will be the guinea pig for the new Mackenzie Valley
Environmental Impact Review Board. De Beers does not expect its permits to
be granted until the first quarter of 2004, which means it will miss the
2004 winter road window to transport construction materials to the site.
The Snap Lake project will be in "site preparation" mode for most of 2004.
Production is not expected to start until the last quarter of 2006. The
permitting delay, however, may suit De Beers just fine. The Snap Lake carat
value has been slashed from the measured US $105 per carat reported by
Winspear to a modeled US $76 per carat. This drops the rock value down to
US $111 per tonne for projected annual gross revenues of US $117 million.
De Beers has not published projected operating and capital costs, but one
does not have to be a mining engineer to recognize that Snap Lake will
probably do more for the Canadian economy than De Beers' bottom-line.
Did De Beers grossly overpay for Snap Lake?
The wildcard with Snap Lake, as it is with Kennady Lake, is that commercial
production could yield high quality large diamonds whose value is not
incorporated in bulk sample based modeling but which could end up having a
big impact on the bottom-line. After all, it was a couple of large high
value stones in Winspear's mini bulk sample that jump-started the Snap Lake
play in 1998. My guess is that De Beers is quite content to let the Review
Board use the Snap Lake project to figure out its project approval
mechanism so that when in a year or so it comes time to submit Gahcho Kue
for permitting it will take considerably less than four years to start
construction. What strikes me as interesting is that the 5034-Hearne-Tuzo
pipes as they are presently modeled have a rock value and tonnage similar
to what De Beers has modeled for Snap Lake. But while the Snap Lake
resource is pretty much defined and amenable only to underground mining,
the Kennady Lake resource lends itself to open pit mining and has plenty of
room for the development of additional near surface dyke tonnage amenable
to underground mining. Assuming that De Beers is using the same standards
to model Kennady Lake as it has done with Snap Lake, Mountain Province's
Kennady Lake project envisioned as an open pit mining scenario appears to
represent much better value than Snap Lake. When you consider that at
Mountain Province's current price the Kennady Lake project is carrying an
implied value of only $310 million compared to the $500 million De Beers
paid for Snap Lake, it is not hard to conclude that Mountain Province's
price is set to at least double if the upcoming desktop study prompts De
Beers to proceed with a full feasibility study. And if we see improvement
in the modeled revenues and additional evidence of a sub-population of
"super diamonds", a tripling or quadrupling from current levels is entirely
conceivable. The danger with this argument is that De Beers may have made a
huge blunder and grossly overpaid when it bought Snap Lake from Winspear
and Aber for just under $500 million, though I have a hard time seeing
Randy Turner or De Beers supporting that conclusion.
Trying not to read bad news between the lines
Seeing Snap Lake plod towards production and Kennady Lake shift to the back
burner does not make much sense if you believe De Beers is eager to develop
a secure supply of Canadian diamonds. But this fear continues to haunt the
Mountain Province market, which remembers all too well the kick in the
chops it received in 2000 when the Tuzo bulk sample valuations were
revealed. With that in mind, the March 11 news release did include a
comment that took me aback. When Mountain Province stated that "the
additional data obtained from the 2001 and 2002 bulk samples has added some
complexity to the geological model of the 5034 pipe" and "there appears to
be have been several different kimberlite intrusions during the emplacement
of the pipe and different size frequency distributions for the diamonds
might be needed to properly model the different lobes and possibly
different zones in one of the lobes of the pipe", alarm bells started
ringing. Could this be a veiled warning that bad news about lower grade
estimates was on the horizon? Judging from the feedback I have received
from others, all of whom remember the 2000 Tuzo bombshell when an
inconveniently situated lower grade unit came to light and forced all but
the upper high grade 140 metres of the Tuzo pipe out of the mining
equation, and dropped Kennady Lake below De Beers' economic threshold, I
was not alone in this perception. But when queried, Jan Vandersande
insisted that this negative interpretation was not at all his intention,
and suggested that the likelihood for a revision was greater for the upside
than the downside. In particular he pointed out that the Center Lobe of
5034, which had previously been modeled at 2,740,000 tonnes of 1.3 ct/t
compared to higher grades for the other lobes, was the focus for half of
the 6 bulk sample holes drilled into 5034 during 2002. The Center Lobe has
a lower average grade because of a lower grade phase in the western
portion. Carat recoveries were in line with expectations, but the number of
large diamonds recovered was better than expected. As De Beers'
understanding of the Kennady Lake pipes' complexity improves through the
acquisition of additional data, it ends up with more work incorporating the
extra detail into its revenue model for the pipes. Whether the additional
information hurts or benefits the overall value of the 5034 pipe remains
unknown, and one should not read anything between the lines other than that
it is taking De Beers longer to complete its revenue modeling than
expected. Vandersande suggested that the desktop study is essentially ready
and is waiting for the updated valuations which are expected by the end of
March. I continue to maintain a Spec Cycle 100% Hold for Mountain Province.
*Of the above mentioned securities JK owns shares only in GGL and Camphor
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