Line Islands' broader Brazilian hunt paying off
KWG Resources Inc KWGR
Shares issued 74,636,959 Dec 6 close $0.20
Tue 7 Dec 99 Street Wire
See Line Islands Exploration Inc (LIN) Street Wire
LINE ISLANDS STEPS UP THE PACE
by Will Purcell
Line Islands Exploration Inc. continues to earn its interest in the Alto
Paranaiba diamond project, located in the states of Goias and Minas Gerais,
Brazil. The company recently announced the discovery of a number of
kimberlite pipes, and work is under way to test the bodies for diamond
content. The Alto Paranaiba project was originally acquired by KWG
Resources Ltd. in the spring of 1993, and Spider Resources Ltd. acquired an
option to earn a 50-per-cent interest in the bulk of the property during
1997.
In the fall of 1998, Spider was running low on funds, and KWG was in the
midst of a far greater financial turmoil of its own. As a result, the two
partners added a third, when Line Islands agreed to a deal whereby the
company could earn a 10-per-cent stake in the large southern block of
claims, and a 50-per-cent share of the much smaller northern block. In
return, the company agreed to pay $150,000 to the existing partners, and
complete $350,000 in exploration over a two-year period. In May, 1999, the
deal was amended to allow Line Islands to earn a 30-per-cent share of the
entire property. Under the terms of the arrangement, Line Islands was to
pay Spider $100,000 and issue 100,000 Line Island shares to the company. In
addition, Line Islands was now required to spend $850,000 on exploration
over the next two years. An additional arrangement would allow Line Islands
to increase its interest to 40 per cent at any point in the next 30 months,
by making payment of an additional $1-million to KWG and Spider. At that
point, the project would be owned 40 per cent each by Line Island and KWG,
and 20 per cent by Spider.
Line Islands was formed in April of 1996, and completed a $450,000 private
placement of shares to explore three mineral prospects in Quebec. Two of
these interests, located to the southwest of Sept Isles, were acquired from
St. Genevieve Resources Ltd. and began an association with Pierre
Gauthier's various mining companies. The third property was located in the
Ungava region of northern Quebec, near Kuujuak. The company began to
conduct preliminary exploration on its domestic properties, but also began
to acquire a wanderlust, looking farther afield. Late in the summer of
1997, Line Islands announced its intention to amalgamate with Amour
International Gold Mines Ltd., a private company whose mineral prospects
definitely held an international flavour. Amour held the rights to the
Mnogoverchinny gold mine, and other deposits in eastern Russia. The deal
appeared to amount to a reverse takeover, and the new company was to be
named Amour Gold Mines. Again the relationship with Mr. Gauthier's group of
companies came into play, as plans were announced to share the new gold
properties on a 50-per-cent basis with KWG. A few months later however,
Line Islands announced that the amalgamation had fallen through, and the
company drifted back to sleep.
Last fall, Line Islands roused from a yearlong slumber with the
announcement of the Alto Paranaiba deal with Spider and KWG. The infusion
of cash from Line Islands allowed the project operator to continue work,
and encouraging preliminary results were obtained. For the past few years,
much of the work has concentrated on the Contendas structure contained
within the property, and most of the work involved investigation of
alluvial gravels. KWG had acquired a small diamond recovery plant, which
was moved to the Paranaiba terrace during 1994. At the time, a total of 190
diamonds were recovered from these gravels, with a total weight of 301.5
carats. It was speculated that these diamonds came from an eroding source
within the river drainage system.
Throughout history, the Paranaiba River has produced some fine, large
gemstones. There is documented evidence that a total of 49 diamonds larger
than 50 carats have been recovered from the river and its main tributaries,
including the 727-carat Presidente Vargas diamond which was found in 1938.
Individual Brazilian diamond miners, or garimpeiros, have conducted
alluvial dredging and terrace excavations on the Paranaiba property for
years. These operators have recovered a number of larger diamonds,
including stones weighing 20, 64, 107, and 201 carats. During the summer of
1998, a garimpeiro recovered a 350.65-carat gem from the Paranaiba River,
approximately six kilometres upstream of the Rio Verde, and only four
kilometres from the Contendas structure. The diamond was a high quality
gem, described as rare white and having high clarity with no inclusions,
with a value believed to be in excess of $4-million (U.S.).
As the garimpeiros continued to dig up diamonds on the Alto Paranaiba
property, the partners stepped up their efforts to examine Contendas for
its alluvial prospects. Early this year, Spider operated the small
processing plant to recover diamonds from a series of pits located on the
Contendas structure. The primary purpose of the operation was to identify
diamondiferous zones, and some success was achieved. A total of 11 diamonds
were recovered, weighing a total of 5.52 carats, and individual stones
ranged in size from 0.19 carats to 1.06 carats, with two diamonds weighing
one carat or more. The project was continually hampered by a lack of funds,
and equipment breakdowns, and little work was performed through the spring
and into the summer.
Not all of the past work at Alto Paranaiba was confined to alluvials. KWG
did conduct a very limited diamond drill program late in 1997, on the
Contendas structure. In all, five holes were drilled on linear magnetic
anomalies. Two separate dyke intersections were noted, each about one to
two metres in thickness. It is now believed this feature represents a zone
of dykes extending from the core vent area. Analysis of the dyke material
suggested that the rock was intermediate between lamproite and kimberlite,
although it more closely resembles olivine lamproite. A second analysis
suggested the rock was orangeitic, although the partners still consider the
rock to be lamproite. In 1995, KWG identified a number of kimberlite
bodies, and a preliminary sampling program was conducted over these
targets. A two-millimetre diamond was reportedly recovered from the
material taken from one of the kimberlite dykes.
Line Islands is now the operator of the Alto Paranaiba project, and a
change in focus has accompanied the change in leadership. Line Islands
president, Scott Hogg, said: "We've started out on a two phased attack this
year. The property has been under exploration since 1995 and a lot of
effort got drawn to a particular feature there, which was a garimpo pit
with 5,000 carats production and a lot of effort had been directed to that.
This year we decided we would put part of our exploration effort into that,
but make a definite point into getting out on the property at large. It's
quite a large property, it's not square but its maximum extent is something
like 40 by 70 kilometres."
Mr. Hogg said that the exploration program to this point had not done
justice to looking beyond the Contendas feature, and added that the work
under way to explore the remainder of the property was beginning to pay
off. He went on to say, "We were quickly successful in identifying, and so
far confirming, three more pipes." Mr. Hogg said that work was progressing
quickly due to the nature of the kimberlites, and added, "These bodies come
to surface, they're only three metres below surface so they're easily
accessible."
Indeed, drill success has come quickly for Line Island. The company
announced in mid-October that it had discovered its first kimberlite pipe,
the MK-1 body. The MK-1 is described as steeply dipping, but not vertical
in orientation, and is roughly 250 metres in length, and 25 metres wide. A
month later, the company announced the discovery of four additional bodies,
MK-2, MK-3, MK-4, and MK-5. Two of these bodies, MK-3 and MK-4, are now
confirmed to be kimberlitic, and have been interpreted by magnetic data to
be 50 metres by 250 metres, and 100 metres by 200 metres respectively.
Results are still pending on the MK-2 and MK-5 bodies. Mr. Hogg expressed
satisfaction with the multiple discoveries to this point, and stated:
"We've got three that have been confirmed by diamond drilling. We're not
saying the other ones are definite until we actually have that
confirmation, but my own assessment is that I would be very surprised if
they weren't. They're all within a group, they all look the same
magnetically, everything short of actually getting a bit of core and doing
a thin section and probe and so on. We're leaving the number at three and
saying we expect more."
In the meantime, the joint venture is planning to proceed with the testing
of their finds in a novel way. Mr. Hogg said: "The diamond processing plant
has given us the opportunity to test these for commercial grade diamonds at
a fairly reasonable cost, and what we think may be a fairly short time
frame. It's a gelling of things that make the current time very
interesting." The accessibility of the kimberlite bodies makes extracting a
significant minibulk sample rather easy, and having access to their own
processing facility on the site should make for a fairly short waiting
period for results. Indeed, Mr. Hogg said that they could process a
100-tonne minibulk sample for about the same cost as a caustic fusion test
on 100 kilograms of kimberlite.
As a result, investors may not have a long wait for news. Mr. Hogg stated
that several hundred tonnes of kimberlite had been extracted from MK-1 and
brought to the processing plant. He said that the installation of a pan
separator at the plant had delayed the processing somewhat, but he added
that the upgrade had just been completed last week, and the system would
speed up the process of getting to the concentrate stage, which is then fed
to the X-ray sortex device. Mr. Hogg said that he was now hoping for a
processing rate of 10 tonnes per hour. As a result, he said: "...by the end
of the coming week we will have run a fair bit of that material through.
That gets us to some critical answers pretty quickly."
Finding several kimberlites is one thing; finding economic quantities of
diamonds is quite another. Brazil has long been a prolific producer of
alluvial diamonds, however no economic pipes have yet been discovered in
that country, out of more than 500 bodies that have been tested. This
situation may be changing shortly, as De Beers has stepped up its own
Brazilian exploration program in a major way. Mr. Hogg said: "I don't have
any strict confirmation, but there is a site where they've gone into what
has been described to me as a mini-mining operation which is a fairly
serious test. They have security in place, and they're doing a very large
sampling. When you get into a large bulk test you're actually into a
mini-mining operation. So, they have one of those going at the present
time." The body being explored by De Beers is widely rumoured to display a
medium grade, but a high diamond value. The De Beers find appears to be
well to the south and east of the Line Islands property, but the company's
claims do adjoin the Alto Paranaiba block on the south and eastern
boundaries. As well, SouthernEra and Canabrava Diamond Corp. have extensive
holdings to the east and south of the Alto Paranaiba project.
Mr. Hogg was hopeful that the company would continue to show good results
for its efforts. He said that all of the work that has been completed to
date covered a very small portion of the total property. He stated that the
joint venture had completed photo-geologic work, as well as some mineral
sampling, over about one-fifth of the property, and he said that it was
that work that led them to the current discoveries. He said: "The area that
we've gotten to so far is less than 5 per cent, we've only been at it for
three months. We've either been very lucky, or as we think, the area has
the potential of being highly productive in finding these pipes."
He appears to have a point. Within approximately 10 kilometres of the new
discoveries, large alluvial diamonds have been found, up to 300 carats
weight. Mr. Hogg said: "There's a limited section of the Paranaiba River
where alluvials start being worked and finish being worked. If you plot the
large stones they begin to appear within the property boundary, and they
taper off within the property boundary. That's kind of an indication to us
that the source shouldn't be too far away." He added that had the diamonds
originated from a distant ground source, the alluvial diamonds would be
distributed in a much more even fashion.
While the Alto Paranaiba play has been active for several years, in most
respects it is just beginning. Mr. Hogg said, "Although the total property
has been under general consideration for five years, we've just started in
terms of getting out and getting around it." As Line Islands gets out and
about on Alto Paranaiba, potential investors appear to be very slowly
warming to the prospect's potential. While investors have flocked in far
greater numbers to other emerging plays, such as Mauritania, the Paranaiba
property has so far yielded more kimberlites and more diamonds, yet has a
much smaller market value. With a number of fairly well heeled rivals
exploring in the neighbourhood, any Brazilian success would significantly
increase the profile of Line Islands and its partners. Furthermore, as Line
Islands is choosing to skip the costly and time consuming caustic fusion
stage, results could come quickly. A positive result from one of the
minibulk samples would have a significant impact on the project's profile.
Line Islands shares traded between 40 and 50 cents for much of the winter
and spring, but a rally began with summer and the news of the increased
stake in the project. The stock reached a high of $1.45 in mid-October,
with the news of the initial MK-1 find, but has tailed off somewhat in the
last few weeks, closing Monday at $1.19, up five cents on the day. With
just under five million shares outstanding, Line Islands has a market
capitalization of approximately $6-million, which implies a value of about
$20-million for the project.
Spider Resources has also shown signs of a market awakening. The company's
shares spent most of the last 12 months trading in a narrow range between
four and six cents, but a December rally carried the stock to an intraday
high of 14 cents on Monday, before falling back to close at eight cents, up
two cents on the day. The spike in share price coincided with a major
increase in volume, as over 2.5 million shares changed hands. Shareholders
of KWG have yet to experience the fruits of the good news from Brazil. The
company was suspended from trading on the Toronto Stock Exchange late in
1997, and the shares were delisted a year later. KWG shares subsequently
traded on the Canadian Dealing Network, but were again suspended from
trading in June, 1999, due to a failure to make statutory filings. The
cease trade order was lifted on Dec. 1, but the stock has not traded as
yet.
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