Shore Gold Inc (SGF-V: $1.53)
Understanding the Star bulk sample program
Synopsis: Shore Gold Inc (SGF-V: $1.53) has cleared the first major hurdle in its campaign to obtain a 25,000 tonne bulk sample from its 100% owned Star diamond project in the Fort a la Corne region of central Saskatchewan. On October 9 Shore Gold reported that its shaft had reached the uppermost kimberlite horizon after passing through 89 metres of Quaternary overburden and another 18 metres of Cretaceous shale. Shaft sinking began in early July and was accomplished with the help of ground freezing technology that stabilized the unconsolidated sediments. Shore Gold is now sinking its shaft through the Star kimberlite at a rate of 2-3 metres per day. By the time the shaft reaches the target depth of 250 metres, about 5,000 tonnes of kimberlite will have been hauled to the surface. Bateman's 350 tpd dense media separation plant arrived from South Africa in late August and is now being assembled on the Star project site. The plant is expected to be ready for commissioning by mid-November and processing kimberlite by early December. Raw diamond recovery results for the initial 5,000 tonnes could be available in late January, though because this material will have sampled the entire 140 metre vertical column at a rate of 35 tonnes per metre, much of which may be very low grade, the most one can hope for from the initial diamond parcel is several hundred carats. This may disappoint some speculators, but not those who understand that the glamour results will not be due until mid 2004 after the rest of the 25,000 tonne sample has been processed. I recently completed a field trip to the Star project site, and the most distinct impression the trip left on me was that developing a large scale diamond mine in central Saskatchewan will be a piece of cake. I expect Shore Gold's stock price to establish a new trading base in the $2-3 range fairly quickly just to achieve valuation parity with Kensington Resources Ltd (KRT-V: $0.99), whose Fort a la Corne project has slipped into bystander mode, and test $5 once Shore Gold starts reporting diamond recoveries in the new year. The speculation cycle will enjoy "cup half full" psychology until at least half the 25,000 tonne bulk sample has been reported, after which the market will start to take a hard look at the numbers. Final results will probably not be available until late summer of 2004. Shore Gold, which was declared a medium priority bottom-fish buy in the $0.76-$1.00 range on May 24, 2002, and upgraded to a top priority buy on May 22, 2003, no longer qualifies as a bottom-fish buy and is hereby elevated to a Spec Cycle Hold 100% status. The rest of this Tracker describes my property visit and analyzes the structure of this play.
The short and sweet version of Shore Gold's story
The short version of Shore Gold's story is that the company will extract 25,000 tonnes from the Star kimberlite through an underground program which will yield a parcel of at least 3,000 carats whose value will indicate a rock value in excess of USD $15 per tonne. Assuming this number can be matched to the 500 million tonnes of kimberlite inferred from drill holes and aeromagnetic surveys, this result would suggest an in situ diamond resource with a gross value of at least USD $7.5 billion. By applying a low cost, large scale strip mining plan the Star kimberlite could conceivably be turned into a cash cow with a net present value of at least $500 million, and possibly $2 billion as was achieved by Dia Met with its Ekati Mine. But that is not how the story will play out over the next 12 months, and in what follows I take pains to make sure my readers understand the purpose of the bulk sampling program and the nature of the information it will generate.
5,000 tonne shaft sample to provide evaluation tools
The final outcome of the entire bulk sample program in terms of recovered diamonds and their value will probably not be known until late summer of 2004. In other words, Shore Gold's speculation cycle is not going to die overnight. Validation of the play, however, will also not come overnight. The real value of the initial 5,000 tonnes extracted through the shaft sinking will be the information furnished about the relationship between petrography, micro diamonds and macro diamond content in the various lithologies of the Star kimberlite. Although the Star kimberlite does not seem quite as complex as the billion tonne 140/141 kimberlite on Kensington's property, it also is not one thick, homogenous pancake. The all important logging task will be overseen by George Read, whose recent appointment as Shore Gold's exploration vice president will give the junior's in-house diamond expertise a substantial boost. In a similar development Kensington has retained John Gurney's Mineral Services Inc to assist Brent Jellicoe with the interpretation of the data generated by De Beers for the neighboring FALC JV. The Fort a la Corne kimberlite field is starting to be recognized as a complex puzzle with a world class diamond solution, and its erratic disclosure history may soon be a thing of the past. The Fort a la Corne kimberlites have a scale similar to that of low grade porphyry deposits, except that the value part of the equation remains elusive. The economics of mining the estimated 500 million tonne kimberlite resource on Shore Gold's property will eventually be determined by the internal geology of the Star kimberlite, an understanding of which will ultimately be established through extensive delineation drilling, be it from underground or from surface. In this regard the 5,000 tonne shaft sample will be critical. The biggest challenge in evaluating the Fort a la Corne kimberlite field has been the problem of measuring a complex low grade resource buried beneath more than a hundred metres of glacial till. De Beers, Kensington and Cameco have spent more than $20 million over the past decade assessing the 69 kimberlite bodies on their adjacent property, and still are not sure whether they are dealing with a geological curiosity or a world class diamond deposit.
The FALC Problem: is it worth measuring and how do we measure it?
Through its $7 million underground gambit Shore Gold is trying to kill two birds with one stone: getting the tools to measure the Star kimberlite efficiently and proving that the Star kimberlite has a meaningful population of large and beautiful diamonds whose "measurement" is worth pursuing. The 5,000 tonne shaft sample will serve the first goal, and the second goal will be served by the 20,000 tonnes Shore Gold plans to extract through horizontal drifting at the base of the shaft. One thing must be made very clear. Neither of these achievements will allow Shore Gold to declare that the Star kimberlite has so and so much tonnage with such and such average grade and carat value. This bulk sample program is all about legitimizing the Star kimberlite as a world class target and setting the stage for a very aggressive sampling and delineation program that will probably not be in full swing before 2005.
A bulk sample snapshot of a fraction of the Star kimberlite
Once the Star shaft has reached target depth Shore Gold will drive three horizontal drifts in northeast, east and southeast directions for a distance of 100 metres each. The precise level will be determined by rock competence conditions, but the general 250 metre level does appear to be the horizon where Shore Gold has obtained the best diamond results. In other words, this program has not been designed to disappoint the market. Because the Fort a la Corne kimberlites have been shown to have complex vertical and horizontal zonation of both grade and stone frequency, a 20,000 tonne sample extracted from one horizon within a 100 metre radius cannot possibly tell us what a giant kimberlite system with a diameter of nearly 2,000 metres that may represent up to 1 billion tonnes is all about. Speculators should hope to see several thousand carats come out of the horizontal drifting, which will qualitatively, not quantitatively, tell us if the Star kimberlite is populated with the right stuff. Assuming the parcel gets valued, the market will want to see a rock value of at least USD $15 per tonne. Because crushing of the bulk sample will be done by the plant under controlled conditions rather than by the grinding heads of a reverse circulation drill, there should be no issues about diamond breakage or loss. The recovery of big diamonds, however, is not what speculators should be worried about in the short term. The next major milestone for the Star bulk sampling program will be sinking the shaft successfully to the target depth without encountering insurmountable water problems.
Sinking shaft into kimberlite was first major milestone
Headframe
At the time of my site visit on October 3 the shaft had not yet reached the kimberlite. The layer of Cretaceous shale that separates the uppermost kimberlite horizon from the overburden was more compacted than expected and had slowed down progress. On October 9 Shore Gold did report that the shaft had penetrated kimberlite at the anticipated depth of 107 metres as established by a pilot core hole drilled earlier in the center of the proposed shaft. Sinking the shaft through the overburden into the kimberlite marks a major milestone for the Star bulk sampling program.
Freezing technology stabilizes overburden
Ice Plant
The unconsolidated glacial till that covers the Fort a la Corne kimberlite field to a depth of up to 130 metres has been a big hassle for both large and small diameter drilling, and also posed problems for sinking a shaft. Should development of the Fort a la Corne kimberlite prove feasible, stripping the overburden would be a straightforward earth-moving exercise, but during the exploration stage it has been an obstacle. To deal with the thick and unstable overburden Shore Gold first had to freeze the ground where the shaft was to go down. This was accomplished by drilling 20 closely spaced holes along a perimeter one metre beyond the proposed 4.5 metre wide shaft to a depth of 125 metres, slightly deeper than the kimberlite-shale interface. A 5.5 inch wide pipe was inserted into the holes, followed by a smaller 2 inch wide pipe through which a salt brine chilled to minus 20 degrees Celsius by a freeze plant was pumped. The circulating brine froze the overburden surrounding the shaft to minus 10 degrees Celsius for a distance of 5 metres beyond the shaft's perimeter. Although the ground freezing will prevent water leaking into the shaft, the main purpose was to stabilize the ground during sinking of the shaft. The water table starts at 8 metres, but does not extend deeper than 12 metres because of a clay seam at that depth. The company is not expecting to encounter water once in the kimberlite, but has in place a pumping facility should water become a problem. Nevertheless, there is concern that hydrostatic pressure will create water problems, and proving that this is not the case will be the next major milestone for the bulk sample program.
DMS plant to be operational by December
Excavation and construction of the concrete-lined shaft began in early July. A small concrete plant was set up at the site to ensure a continuous supply of concrete. The modular diamond recovery plant designed and built by Bateman Engineering arrived from South Africa on August 28. When fully assembled the plant will have a footprint of 30 metres by 100 metres. At the time of my site visit footings were still being poured, installation had begun, and the plant pieces were spread out on the ground awaiting assembly like a gigantic Meccano set. The entire plant will be shrouded in a fabric membrane to help maintain even temperatures during the winter. Although winter temperature can drop to minus 35 degrees Celsius, the region is fairly dry and experiences only a couple feet of snow. The plant is expected to be ready for commissioning in mid-November, and processing kimberlite by early December. The shaft should also have reached the target depth of 250 metres by then, with roughly 5,000 tonnes of kimberlite stockpiled. Three horizontal drifts heading northeast, east and southeast will be initiated near the bottom of the shaft. The precise level chosen will be determined by rock competence considerations. The drift will be slightly inclined to allow any water to flow to the bottom of the shaft from where it can be pumped to the surface and stored in settling ponds.
Star shaft will yield 35 tonnes per metre
Although the horizontal drifts will extract about 20,000 tonnes that could yield several thousand carats, particularly if the higher stone counts obtained at this depth through earlier drill holes turns out to have a horizontal control, the first 5,000 tonnes will yield the most valuable information about the Star kimberlite. The Fort a la Corne kimberlites are characterized by complex emplacement histories which have resulted in graded beds where diamond grade and stone count frequency not only vary vertically, but also horizontally as one moves away from inferred feeder vents. While a very thick "mega graded" bed consisting of airfall pyroclastic kimberlite has been observed within the 140/141 kimberlite, multiple stacked graded beds have also been observed in the 140/141 kimberlite. Because the Fort a la Corne field was emplaced at the edge of the Canadian Interior Seaway during a period of repeated marine transgressions and regressions, the kimberlite "pancake" horizons are interspersed by layers that can be barren or enriched. The kimberlite systems have been further complicated by younger vents that cross cut existing kimberlite beds. The largest diameter hole used by De Beers to extract a bulk sample has been 36 inches in three holes, with the rest of the mini bulk samples obtained through 24 inch diameter holes. The only bulk sample taken from the Star kimberlite was through a single 24 inch diameter reverse circulation hole that recovered 82.7 tonnes which yielded 8.52 carats. Given the extensive vertical zoning within the Fort a la Corne kimberlites and the generally low diamond grade, these 24-36 inch wide snapshots of the stratigraphy which yield a theoretical mass of less than 1.6 tonnes per metre in the form of small chips cannot shed much light on how macro diamond populations relate to petrography and micro diamond results obtained through core drilling. In contrast, the 4.5 metre wide shaft will recover about 35 tonnes for every vertical metre. Shore Gold will be able to log the lithology precisely, run representative samples for micro diamonds, and correlate the results with macro diamonds recovered through the dense media separation plant. Because the first 5,000 tonnes will sample the entire 140 metre vertical column, the recovered grade will probably be less than 500 carats, but the geological information obtained will be invaluable when it comes to delineating the internal geology of the Star kimberlite.
Excellent location for logistics and infrastructure
In terms of location one could not ask for a better situation. The drive from Saskatoon to Prince Albert was literally a 2 hour beeline through flat ranch land whose endless sky is interrupted only here and there by smelly pulp and paper mills that process the region's stubby jack pines. Prince Albert is a sprawling, major outfitting centre for mining and logging activities in northern Saskatchewan that could easily service diamond mining operations at Fort a la Corne. North of Prince Albert we headed east towards the Fort a la Corne area along a sandy road past herds of buffalo that have become the livestock of choice for ranchers. The road passes the De Beers camp from which the Fort a la Corne joint venture with Kensington and Cameco is operated. Within an hour we had completed the 60 km drive and arrived at Shore Gold's Star camp where the shaft's headframe dominates the skyline. The Shore Gold camp will have a capacity for 18 people, though the average number on site will be 10 people. Most of the workers will make the one hour commute from Prince Albert. The project's electricity needs are being met by a 1,000 horsepower diesel generator.
As much as half the Star kimberlite lies on Kensington's ground
Star Mag
Map
Star Drill
Map
The entire affair will be closely watched by De Beers, Kensington, and Cameco, whose FALC JV property may cover as much as half of the Star kimberlite's overall extent. There is a good reason Shore Gold is only drifting in an easterly direction. The shaft is within a hundred metres of the boundary, and the feeder diatreme, which has been drilled to a depth of 627 metres, straddles the boundary. Shore Gold has not published any data beyond its property, and its aeromagnetic map seems to suggest that the kimberlite system sprawls eastward. But the 3-dimensional model Shore Gold has presented for the Star kimberlite, which is based on core hole logging, portrays a giant, long stemmed champagne glass cut in half by the property boundary. De Beers has not done any exploration of note at the southern end of its property, but has no doubt monitored Shore Gold's results closely. Following the ambiguous results of the 2002 bulk sample on its 140/141 kimberlite, De Beers has postponed further bulk sampling in favor of delineation core drilling designed to yield a better understanding of this pipe's internal geology, especially in the southeastern portion where coarse grained kimberlite associated with a younger vent yielded bulk sample results superior to those obtained from the "mega graded beds" that were the primary focus of the 2002 bulk sample. The FALC JV controls the lion's share of the 9 billion tonne Fort a la Corne kimberlite field, and will not live or die by the results of the Star bulk sampling program, but it can gain a lot of useful information. If the Star program proves a technical success, De Beers may very well adopt a similar approach to sorting out the economic potential of the 140/141 kimberlite.
Exposure to Star still available at half the price of the FALC JV
In terms of speculative value, Kensington's FALC JV is still carrying an implied project value double that of Shore Gold's Star project, which is currently at $73 million compared to Kensington's $141 million. (Implied project value is fully diluted capitalization multiplied by stock price and divided by the company's net project interest.) In terms of the rational speculation model Shore Gold represents fair speculative value for a $500 million dream target and good speculative value for a world class $2 billion dream target. Speculators who are not prepared to accept either of these targets as reasonable should stay away from Shore Gold and Kensington. The similarity between the Kensington and Shore Gold plays is that presently we are uncertain if either of these dream targets is valid, and the difference is that Shore Gold will live or die according to the extent that Star ends up qualifying for either dream target, while Kensington could spend many more years prioritizing its numerous kimberlite bodies. I don't expect Kensington to sink much lower over the next six months, so it would seem more likely that Shore Gold will double from current levels just to achieve parity with the Kensington valuation, and climb higher still if interim results indicate that the program is on track with delivering the target 3,000 carat parcel.
From a speculation cycle standpoint the play has an ideal structure in that it is immune from negative result news for at least the next four months, while a strategy of subsequent incremental disclosures will prevent the market from being whacked by a Tli Kwi Cho style bust.
Shorts beware, the structure of this play will eat you alive
Unless some technical problem disrupts the underground program, I expect Shore Gold to establish a new trading level in the $2-3 range by the time kimberlite processing starts, and test $5 once Shore Gold starts reporting diamond recovery. Because the first 5,000 tonnes are mainly of geological significance, a negative market reaction is only to be feared in the event of truly lousy results like the recovery of less than a hundred carats. The potential, however, exists for spontaneous upside market action triggered by the recovery of unusually large diamonds. Disclosure of such news of questionable materiality would be at the discretion of Shore Gold's management, so the absence of such news would not necessarily mean anything. But the possibility of such news will keep the bears on their toes during this phase of the Star speculation cycle. Short sellers would be wise to steer clear of Shore Gold while less than half the bulk sample remains unreported!
Shore Gold upside ranges $10-$40 depending on dream target size
Thanks to a recent round of financing Shore Gold has more than enough capital to fund the bulk sample program, and full dilution, all of it at exercise prices below $1.50, would raise at least $6 million more. The next round of major financing will not be necessary if the 25,000 tonne bulk sample has not demonstrated the validity of a $500 million or higher dream target. But if it does, Shore Gold will be able to raise the necessary capital at much higher prices with minimal dilution. A $500 million dream target translates into a $10 target price for Shore Gold based on its current 47.6 million shares fully diluted and 100% interest, and a $40 target if the Star kimberlite achieves the economic value of Ekati at the time BHP bought out Dia Met. The fact that Shore Gold owns 100% of the Star project and retains all diamond marketing rights makes premium pricing of the Star play a very likely outcome if the news flow meets or exceeds expectations. At present it is impossible to predict on the basis of published data whether or not the Star kimberlite will qualify for an ultimate project value in excess of $500 million, but the scale of the play and its current valuation are such that Shore Gold offers fair to good speculative value. Shore Gold, which was declared a medium priority bottom-fish buy in the $0.76-$1.00 range on May 24, 2002, and upgraded to a top priority buy on May 22, 2003, no longer qualifies as a bottom-fish buy and is hereby elevated to a Spec Cycle Hold 100% status.
Implications of Star's success for Kensington
FALC
Map
For the moment Kensington is sidelined as a market play, though it does stand to benefit from good news arising from the Star kimberlite. The junior is pretty much at the mercy of the FALC JV operator De Beers, an organism whose timeline consists of decade increments for which the average human lifespan is too short. De Beers, however, may have to be careful. If Shore Gold's bulk sample establishes world class potential for the Star kimberlite, a good portion of which rests on the FALC JV ground, the market will probably assign a fairly hefty value to Shore Gold. Because it makes a lot of sense to develop the entire Star kimberlite rather than just the eastern half, Shore Gold would have to negotiate a deal with the FALC JV. The operator De Beers, however, might prefer to concentrate on the 140/141 kimberlite and have other strategic reasons not to cooperate with an independent diamond miner like Shore Gold. But what if Shore Gold makes a paper based takeover bid for Kensington, a move that would give it a 42.5% stake in the western half of the Star kimberlite and a 42.5% stake in the rest of the Fort a la Corne kimberlite field? This would give Shore Gold insurance against the risk that the Star kimberlite itself does not quite make it to feasibility. Assuming, however, that Star is feasible, how would the merged Shore-Kensington entity overcome possible resistance from the operator, De Beers? The answer lies with Cameco, which holds both a 5% working interest and a 10% carried interest in the FALC JV that could be turned into a swing vote if a showdown over operatorship were to ever develop. Cameco, the world's largest uranium producer which mines most of its uranium from the Athabasca Basin deposits in northern Saskatchewan, has close ties to the Saskatchewan government, which has demonstrated a keen interest in the development of diamond mines. If the Star kimberlite turns out to be a viable diamond deposit that is most efficiently exploited in its entirety, it isn't hard to imagine a squeeze play where the Shore-Kensington entity and Cameco take operatorship away from De Beers and work out a development plan for the Star kimberlite. De Beers could turn to the courts in an effort to paralyze the play, but that would not be a particularly good public relations strategy. A cleaner solution would be for De Beers to buy out Shore Gold before it starts to court Kensington, or wait until the pair get married and then gobble them up to end up with control of the entire Fort a la Corne kimberlite field. Although Kensington presently appears to hold a weak hand, its hand would be strengthened considerably by any success Shore Gold has with the Star kimberlite. The upshot is that Kensington's fortunes are temporarily tied to those of Shore Gold. |
