Here is the report off stockwatch in two parts it wont fit all at once
Winspear Resources Ltd -
Deutsche Bank Securities says buy
Winspear Resources Ltd
WSP
Shares issued 33,721,333
1999-02-17 close $3.3
Wednesday Feb 17 1999
George Albino says why
Highlights
Winspear's principal asset is an approximately 68 per cent interest in the Camsell Lake diamond
project (32 per cent - Aber Resources) located in the Northwest Territories.
Exploration over the past two years has focused on the Snap Lake portion of the property,
where a subhorizontal kimberlite sill (with an average thickness 2.7 m) has been encountered in
drill holes over an area of 200 ha.
A portion of the sill has been drilled in detail, outlining a likely 1.35 MM tonnes of kimberlite
(650,000 t open-pittable).
A mini-bulk sample of approximately 200 tonnes, taken from two pits 250 m apart, yielded an
average grade of 1.14 carats/tonne.
An evaluation of the 227 carats from this sample was made by several diamantaires, giving an
estimated average value for the parcel of $301/carat.
Widely spaced drilling suggests the possibility of well in excess of 10 MM tonnes of kimberlite.
Microdiamond results from drilling are consistent with those from the mini-bulk samples,
supporting extrapolation of grade to the larger tonnage.
A 6,000+ tonne bulk sample is planned for this winter, and the company and Aber are more
than adequately financed for this program.
Despite the stock's strong performance over the past four months the possibility of a large,
high-value orebody at Snap Lake leaves potential for significant upside for WSP.
Snap Lake - History
Winspear and its joint venture partners have been exploring the Camsell Lake property for seven
years, and previously discovered a significant diamondiferous kimberlite pipe (CL 25) that
ultimately was judged too low grade to warrant further work. The area came back to life in late
1996, however, with the company's announcement that it had discovered highly diamondiferous
"green clay" as well as kimberlite boulders near Soap Lake, located near the western edge of the
Camsell Lake property.
Subsequent drilling at Snap Lake was, on the face of it, disappointing, with no large kimberlite
pipes located, although an apparently blind pipe-like body was encountered at anomaly CL 186
(the kimberlite is diamondiferous and the story may not be over there yet). Most of the
kimberlite intersections were narrow (less than 3-4 m) - apparently dikes. It was only after
geological interpretation by the company suggested that a large number of these intersection on
the west and north shores of Snap Lake seemed to hang together, that the idea of a large,
continuous flat-lying "sill" came to the fore. Winspear then had the confidence, based mainly on
encouraging microdiamond counts from drill core, to pursue exploration of the sill in the face of
widespread skepticism (the stock traded down to 43 cents in June 1998). This mainly involved
collecting and processing approximately 200 tonnes in two "mini-bulk" samples from the sill
(from sites now referred to as "Pit 1" and "Pit 2").
Interest in Winspear began to pick up with the announcement, in mid-June 1998, that the 200
tonne sample had an average grade of just over one carat/tonne - encouraging, certainly, but
given the nature of the kimberlite (i.e. a sill as opposed to a larger pipe) this news did not ignite
the market despite the company indicating that three large gem diamonds were included in the
sample. The next news release, however, did get people's attention. In this release (June 22,
1998) Winspear indicated that the 226 carats recovered from the mini-bulk sample had an
average value of over $300/carat. This - suggesting as it did, possible "ore" with a value over
$300/tonne (U.S.) - made the market sit up and take notice, and the stock quickly reached
$2.00 before settling back to about $1.00 where it stayed through most of the fall of 1998.
We began following the stock closely at this point, but were waiting for some key data before
formally beginning coverage, namely microdiamond data that could tie together the mini-bulk
samples and the rest of the sill. What we were looking for was reassurance that the two sites that
had yielded the 226 carats were representative of the drilled extent of the sill. We knew that
Winspear had taken approximately 500 kg of samples from Pit 1 and Pit 2, and were planning to
process these using "caustic fusion", the technique typically used for microdiamond sampling of
drill core. These data would put the mini-bulk samples and those from the exploration drill core
on a level playing field, and allow direct comparison between the two types of samples.
Unfortunately the 500 kg of kimberlite was behind the gate at the strike-bound Con mine
(owned by Miramar Mining) in Yellowknife, and the company was forced to negotiate with the
union to "liberate" the samples. Between this delay and the long time taken to process and then
interpret the samples, we have waited almost six months for the microdiamond data.
Several weeks ago the company released the microdiamond data for the mini-bulk samples and
for 87 core drill holes. As we discuss in detail below, the new data suggest that the sill is
remarkably uniform in its microdiamond content, and that the size distribution of the diamonds is
also very uniform. The drill hole data, which we believe represents a kimberlite body well in
excess of ten million tonnes, agrees well with the data from the mini-bulk samples. If anything,
comparison of the drill hole data with that from Pits 1 and 2 suggest that diamond grades could
increase.
1999 Plans
We will know the answer to the grade question, probably by May or June. Winspear and Aber
have committed to a $12-million (Canadian) program to take bulk samples totalling
approximately 6,000 tonnes from three sites (two on the northwest peninsula, and a third on the
north shore of Snap Lake). The kimberlite will be trucked to an off-site processing facility, which
we suspect may be the idle Lytton Minerals plant located at the Lupin mine site. We estimate
that the sample will be taken and processed by May or June, and the diamonds valued by July
or August. We are unsure if the company will release grade data as soon as it is available, to be
followed later by the diamond valuation, or whether it will release all the information together in
July or August.
The Snap Lake Sill System - Tonnage Potential
Approximately 90 core holes have been drilled to date at Snap Lake, defining a shallow-dipping
sheet (sill) over an area of 1,000 (possibly up to 1,600) by 2,000 m. Within this body the nature
of the kimberlite (including rock texture and mineralogy) as well as information on geometry (e.g.
thickness, depth in the drill holes) are all consistent with the body which Winspear has christened
the "northwest dike" being a single, continuous sheet. In part of this area of Winspear has drilled
79 holes on the western shore of Snap Lake, providing an average spacing of about 70 m, and
confirming the sill's continuity in this section (the northwest peninsula).
The area of detailed drilling is estimated by MRDI (part of Symons Engineering) to contain a
resource of approximately 1.35 MM tonnes of kimberlite (all on land). The big prize, however,
is the much larger part of the sill projected under Snap Lake. If the sill is continuous between the
existing drill holes we estimate that a total resource of 15.5 MM tonnes is possible (1,000 m by
2,000 m by 2.7 m thick, and assuming a density of 2.9 tonnes/cubic meter).
A second dike/sill set located under the southeastern part of Snap Lake (referred to by the
company as the Southeast dikes) seems to be geologically similar to the Northwest dike. The
dikes located thus far could contain several million tonnes of kimberlite based on the limited
drilling to date. As noted below, the microdiamond population of the Southeastern dikes seems
to be indistinguishable from that of the Northwest dike. The Southeastern dikes dip to the
northwest (i.e. the opposite direction to the Northwest dike), and it has been suggested that the
different dikes could have a common source. The CL 186 area (where drilling in 1997
intersected kimberlite breccia) lies more or less where the Southeastern and Northwest dikes
would be projected to intersect, and potentially represents the source area or feeder for the
kimberlite sills.
Leaving aside any discussion of the known bodies forming part of a much larger "cone sheet",
we believe that the drilling through the end of 1998 suggests a tonnage of kimberlite in excess of
15 MM tonnes, and possibly in excess of 20 MM tonnes if the Southeast sills are considered.
This is clearly sufficient to support a 3,000 tonne/day mine (the geometry of the kimberlite and
the issue of the lake would make anything larger difficult) - the key variables that are tougher to
define are: 1) the grade of the kimberlite (i.e. carats/tonne), and; 2) the value of the diamonds
($/carat). We think that there is already good reason to be optimistic on the first point, but that
establishing the value of the diamonds to the extent that the kimberlite can be classed as reserve
will be difficult. This has implications for timing of project advancement, how the project can be
financed, and therefore the ultimate value of Winspear shares.
Mini-Bulk Sample Results - Grade and Valuation
As Winspear reported in June of last year, the mini-bulk sample at Snap Lake involved
collection of 105.7 tonnes from Pit 1, and 94 tonnes from Pit 2, the two sites separated by 250
m. The two sites yielded 90.7 and 138.2 carats from Pits 1 and 2, respectively, giving grades of
0.86 and 1.47 carat/tonne.
Although full details of the stone size distribution have not been provided, the company did
report that three diamonds larger than 5 carats (10.8, 8.4, ad 6.04 carats) were recovered. An
additional 22 stones greater than one carat, with a total weight of 42.4 carats (for an average of
1.0 carat/stone) were also found. Winspear indicated that of the large diamonds (the 10.8 carat
stone) was found in Pit 1, and the two other in Pit 2. Seven of the 1-5 carat stones came from
Pit 1, and 15 from Pit 2.
Using this data we infer that in each of the pits between 25 per cent and 35 per cent of the total
carats come from the +1 carats diamonds, with an average of about 30 per cent for the two pits
combined. This is indicative of a stone population weighted towards the very coarse side, but is
not unprecedented. A reasonable parallel is Klipspringer project of SouthernEra Resources,
where the original exploration results from the Leopard Fissure (28 per cent > one carat), the
Sugarbird Blow (30 per cent > one carat), the Kudu Blow (38 per cent > one carat), and the
M-1 Pipe (38 per cent > one carat) are comparable with those from Snap Lake.
Notably both Klipspringer and Snap Lake are "Group 2" kimberlites (as are all of the other
South African "fissure" diamond deposits), which commonly have a high proportion of large
diamonds.
The market has focused on the high proportion of the total value of the Snap Lake diamonds that
is carried by the three largest stones. In its release of January 15 Winspear notes that those
stones, which make up slightly more than ten per cent of the weight recovered, carries
approximately 75 per cent of the total value of the 226 carat parcel (from Winspear's figures we
infer a value for those diamonds of $2035/carat). The average value of the remaining 201 carats
is given as $83.25/carat, which we believe likely breaks down into something like
$175-200/carat for the remaining +1 carat diamonds, and $50-55/carat for those diamonds less
than one carat (compare this to an average value for diamonds from the Diavik project of around
$60/carat).
We feel it is useful to focus more closely on the valuation data for the Snap Lake and how it
compares with other kimberlite diamond deposits. As shown in the table below there are a few
kimberlites with average values in excess of $200/carat, but at this point none are known with
values exceeding $285. Again it is worth noting that most of the very high value kimberlites, like
Snap Lake, belong to Group 2.
Table - Parcel Values of other Group 2 Kimberlite Deposits
Deposit Value(/carat)
Bellsbank (Rex) $285
Kofflefontein $211
Koidu $200+
Kudu (exploration sample) -
Klipspringer $203
Ardo $200+
Betisbank (Messina) $185
M-1 (Marsfontein) - Klipspringer $170
Leopard - Klipspringer $130
Star (Rex) $114
Sugarbird - Klipspringer $112
Sources - Company reports and DBS estimates
To look at the concentration of value in the small number of >5 carat stones we have fewer
comparable data. Rex Diamonds reports a general breakdown of revenues and values by
diamond size from their South African operations, indicating that about 77 per cent of their
revenue comes from diamonds over 0.85 carats, which represent 32 per cent of their production
by weight.
It is generally accepted that the value of diamonds recovered from exploration samples tend to
underestimate the actual value of the diamonds in the deposit as a whole. This is because the
scarcity of the larger (and more valuable) diamonds leads them to be underrepresented in small
samples (and we would consider 226 carats small). The flip side of this is the danger that one (or
a few) large diamonds can bias the valuation results upwards quite substantially in a small
sample. Were the Winspear valuation strongly dominated by a single large, high-value diamond
we would be significantly more cautious. It is our experience, however, that "getting lucky" with
one diamond is possible, but that with three stones each carrying a substantial part of the parcel's
value the likelihood that the very high valuation obtained for the Snap Lake diamonds is grossly
inflated is, we believe, small. When we say this, it is still with the feeling that, in the final analysis
the value may be closer to $200 than $300/carat. Possible upside in grade (see below) may
largely compensate for a likely lower value, however.
New Caustic Fusion (Microdiamond) Data
In our opinion, through WSP's run-up to almost $5.00, the big gap in the story was the
availability of data that allowed comparison between the two mini-bulk sample sites (Pits 1 and
2) and the much larger inferred kimberlite body. The January 26 release provided this "missing
link", and in our opinion the data could hardly have been more positive. The market response
has been the opposite, however, which we feel is mostly due to the opaque nature of the new
data.
Diamond Abundance
The data (see table) show that in terms of diamond abundance (as stones normalized to sample
weight) the drill hole results are fully comparable with those form Pits 1 and 2, and are in fact
better, on average, better even than the higher grade Pit 2. This comparison applies to all areas,
including the northwest dike samples, the down-dip drill holes, the north shore samples, as well
as the geologically distinct southeast dike. It also applies to diamonds in all size classes, from the
1.08 mm. In this connection we note that looking just at the data for the two pits, the total
diamond abundance (calculated as stones/tonne) correlates very well with grade of the two
samples, and that with a greater stone count in the drill core samples the possibility of a ground
grade of 1.5 carat/tonne is real. This may serve to compensate should the diamond values not be
maintained at the present estimate of $300/carat.
Macro:Micro Ratio
The other important variable in assessing the significance of caustic fusion data, in addition to
absolute stone abundance, is the ratio of larger to smaller diamonds. Because most drill samples
are too small to expect commercial-size diamonds to occur, this ratio provides critical
information. Since the diamond exploratin boom began in 1991, it has been traditional in Canada
to report "micro" and "macro" diamonds, with macrodiamonds defined as those with a maximum
dimension greater than 0.5 mm. In other Canadian kimberlites the micro:macro ratio typically
ranges between 2:1 (very good) to more than 10:1 (not so good). In this current release
Winspear has broken with this tradition, and reports diamond abundance in terms of square
mesh size (which is more defensible on technical grounds). Looking at the table it is clear that for
the ratio of diamonds
0.30 but less than 1.08 mm, that the populations represented in the pit samples is similar to the
drill core data. For the larger stones (>1.08 mm) there is more scatter in the data, but this is not
unexpected, as the odds of finding a +1 mm stone in some of the very small samples (less than
40 kg) are small. Nonetheless, if we take all the drill hole data together and compare it to the Pit
1 and 2 data the proportion of larger diamonds is actually somewhat higher in the drill hole
samples. All this comes together to suggest that there is no reason to expect any fewer large
diamonds in the dike as a whole as compared to the original mini-bulk samples.
Commercial-Size Diamonds in the Samples
Looking closely at the recent Winspear release brings up another point we see as very favorable,
and one that seems to have been mostly overlooked by the market. In the approximately 1.7
tonnes of the northwest dike treated by caustic fusion and discussed in this release, at least 6
diamonds larger than 0.1 carat (and therefore certainly of commercial size) were recovered.
These include two diamonds larger than 0.5 carats (0.75 and 0.69 carats), and have a total
weight of almost 2.5 carats - therefore on these stones alone the samples had an average grade
of 1.45 carat/tonne, in line with the higher grades encountered in Pit 2. We also remind the
reader that because of the log-normal distribution of apparent grades in kimberlite samples, small
samples (such as the drill cores) are more likely to understate, rather than overstate, diamond
grade. |
