Nice Buffalo Hills write up:
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Author: WillP -- Date:2002-02-04 18:46:21
Subject: Street Wire ASHTON HAS RENEWED HOPE FOR ALBERTA PLAY
by Will Purcell Most investors, with the exception of newsletter writer John Kaiser perhaps, seem to have all but forgotten Ashton Mining of Canada's Alberta diamond play as speculative interest in the company's two other projects continues to heat up, but the Buffalo Hills region remains Ashton's most advanced diamond property. Things have slowed a bit from the hectic days of the late 1990s, but as a result of some encouraging work last year, the company is expected to pick up the pace this year, despite the increasing demands upon the company's treasury by the Nunavut and Quebec plays. Coming up with cash has been surprisingly easy for Ashton, thanks to a major shareholder with deep pockets. As well, Ashton's president, Robert Boyd, came to the company with a background in corporate finance, as well as exploration. For eight years prior to taking the $200,000-a-year Ashton job, Mr. Boyd was a principal of a private investment banking firm, Geographe International MFS Inc., which provided advice to resource companies. Mr. Boyd, who had previously been vice-president of exploration with Homestake Canada, said that the three Alberta partners were still plugging away in that province, although he acknowledged that the Alberta play was almost lost in the excitement triggered by the company's other two projects. While the market may have written off Alberta as old news, Ashton and its partners still have high hopes for the region. Mr. Boyd was reluctant to delve into the specifics of the planned budget for the 2000 exploration program, but he stated that the cash outlay by the partners would be in the same order of magnitude as what was spent last year, or possibly a bit more. If things go as hoped, it certainly does seem likely that the partners will wind up spending more than what they shelled out last year, an event that should soon produce a well-researched missive by the area's chief ear bender, Mr. Kaiser. The key plank in Ashton's current plans appears to be a delineation drilling program on the K-252 kimberlite, which has continued to produce very encouraging results through the caustic dissolution and mini-bulk sampling stages. Although the numbers appear to be the best that have come from any of Ashton's Alberta pipes, the size of K-252 now seems to be the main concern. The surface area of the kimberlite could be as large as two hectares, but Mr. Boyd said that there remained a lot of uncertainty about just how big K-252 actually is. There are some concerns that the pipe may actually be considerably smaller than hoped, and as a result, the delineation drilling program will be designed to accurately define the areal extent of the pipe and the amount of kimberlite that it might hold. Although the areal extent of K-252 is potentially a problem, the geometry of the body is not viewed as a concern. Nearly all of the Alberta pipes have steep walls, unlike the Saskatchewan kimberlites, which flare out considerably at the top. Mr. Boyd described one or two of the Alberta kimberlites as "champagne glasses," but he confirmed that most of them were steep-walled bodies. If the rosier estimate holds up, the size of K-252 would be quite similar to the Diavik A-154 South pipe, which contains up to 15 million tonnes of kimberlite, to a depth of about 350 metres. If the drilling shows that K-252 is sufficiently large to warrant more work, Ashton and its partners are expected to proceed with a larger sampling program, extracting as much as 400 tonnes of kimberlite from the pipe in what would be the first real attempt to determine the commercial diamond grade of the pipe. If Ashton does proceed with a larger sample, it would be reminiscent of 1998, when the company took a similar sample from the K-14 pipe. That sample was extracted early in the year by two reverse-circulation drills, but it was not processed until later that year at Ashton's new dense media separation plant. Most resource stocks slumped in the summer of 1998, and the processing delay added to Ashton's woes. The company's stock had traded for more than $6 early in the year, but it dipped below the $1 mark in August. Things turned around once processing of the sample began, and Ashton's shares recovered to a high of $2.75, just before the results were released, as speculators expected encouraging numbers. Unfortunately, the news was bad. The 479-tonne sample produced diamonds weighing just 56.45 carats, which suggested a grade of about 0.12 carat per tonne for stones larger than the 1.2-millimetre cutoff. That sent Ashton's shares tumbling again, as the stock lost more than half its value, dropping $1.32 to close at $1.13. Since then, the market has been reluctant to embrace the Alberta play again, despite the initial encouragement from K-252. That could well change if Ashton does proceed with a larger sample. One thing that remains an unknown is just what diamond grade will be required to make an Alberta diamond mine a reality. Ultimately, it is the rock value that matters, not the diamond grade, and the other half of that equation, the diamond value, is still an unknown. Mr. Boyd said that although Ashton "had people look at the diamonds," the company never had any formal valuations of the stones completed. One of the reasons is the small size of the parcels of diamonds that were recovered. Even the 479-tonne sample did not produce a large enough haul of diamonds to result in a meaningful estimate of the value of the stones. Mr. Boyd said that he believed that Ashton would need at least a few hundred carats before one could start to get a feel for the diamond value. That seems a reasonable stance. Other explorers have bandied about valuations based on samples smaller than Ashton's haul of stones, but the results are prone to a large degree of error. The value of a parcel of diamonds is largely controlled by the quality and quantity of the larger diamonds, and a tiny parcel would provide little meaningful information about such stones. In fact, Ashton did not recover any one-carat diamonds from its larger K-14 sample, although one was obtained from an earlier, smaller batch of kimberlite. Although no formal valuations were completed, the bits of information available from K-14 do not seem all that encouraging. In addition to the generally small size of the K-14 diamonds, Ashton's vague description of the stones seemed somewhat lacklustre as well. The diamonds were described as clear to grayish in colour, with some pale brown, and a few yellow stones present as well. As well, many of the larger stones were described as composite crystals, rather than octahedral diamonds. Whether any of that will be pertinent at K-252 remains to be seen. Ashton has recovered diamonds weighing just over 13 carats, which is far too small from which to draw any conclusions, although a 22.8-tonne sample did produce some encouragement in the form of some larger stones, including a 0.94-carat colourless stone that was described as a composite crystal, along with a 0.65-carat stone that was also colourless. None of that is sufficient to provide any clear indication of what the diamond value is likely to be, but the larger stones may be a good start. Clearly, an Alberta mine would not require the high rock values that mines in the North require to be profitable, but just how low the threshold for profitability might be is unknown, and Ashton has had little to say on the matter. Mr. Boyd said that Ashton preferred to do its economic analysis based on facts, not speculation. Unfortunately, Alberta has produced much more of the latter, through the years. It certainly was a good dose of speculation that sent Ashton's shares to their high of $8.05 in the spring of 1997, on the strength of little more than microdiamonds and hope. If enough ore can be found for a larger operation, the threshold for profitability could be quite low indeed. In fact, Ashton still has not formally written off some of its earlier discoveries as dead, such as K-14. If Ashton can come up with a few clearly profitable kimberlites, it might be economically feasible to process at least some of the rock from K-14. Mr. Boyd said he would be a little uncomfortable saying for sure that K-14 would be profitable, but Ashton does still have hope that K-14 might be profitable to mine as additional feed for an existing operation. If nothing else, that hope would suggest that even a modest combination of grade and value might fly in Alberta, under the right circumstances. The right circumstances would likely require the discovery of additional kimberlites with potential to equal or surpass that of K-252. As a result, Ashton will likely drill a few new targets this year. Ashton plans to conduct ground geophysics over a number of targets, and although Mr. Boyd was reluctant to say just how many, he did say that the ground program would investigate more than one new target, although it remains to be seen if the work will result in the identification of a target worthy of drilling. Meanwhile, the company plans to keep looking for new kimberlite targets, based on what it learned from K-252. Ashton discovered more than 30 kimberlites in the Buffalo Hills region, largely using magnetic data, and it seemed that the company had all but exhausted its supply of priority targets. As a result, the exploration program appeared to be winding down for a time. The identification of K-252 through the use of electromagnetic data changed that however. Mr. Boyd said that the discovery of the pipe had opened their eyes to the possibility that possibly better targets existed that did not have much of a magnetic signature. As a result, the region might still host a number of large, but nonmagnetic kimberlites. Ashton is now taking an integrated approach to its geophysical work, using a combination of magnetic, electromagnetic and gravity data in its hunt. Ashton is now a big believer in electromagnetic data, thanks to the K-252 success, and the company has plans to conduct an electromagnetic survey over a portion of the Buffalo Hills region. Mr. Boyd said that the company had good coverage in the limited area where most of the kimberlites were discovered, but it had less data to the north of that region. As a result, the electromagnetic survey will be centred in that area. For now at least, Ashton is placing less reliance on gravity data. The company has completed some gravity work, but it has not yet done any systematic ground gravity assessment over the property. All three Alberta partners seem sufficiently hopeful to contribute their respective shares of the cost this year. Ashton and Alberta Energy Company Ltd. each own 45-per-cent stakes in the Buffalo Hills project, with Pure Gold Minerals holding a 10-per-cent share. Don Sheldon's Pure Gold hopes to raise about $2-million from the brokered sale of 10 million units, which was scheduled to close last week. In addition to the Alberta play, Pure Gold also holds about a 10-per-cent interest in part of Ashton's Nunavut project, which will also chew through a significant amount of cash this year. Coming up with the cash for the two plays will result in significant dilution for existing Pure Gold shareholders, but the good news has given the existing shares of the company a good market boost. Pure Gold's shares traded for just six cents late last summer, but the steady flow of encouragement took the stock to a high of 31.5 cents in mid-January. Ashton's treasury has been feeling the strain as well. The company has raised more than $10-million over the past several months, as it seems likely that the company will be completing mini-bulk samples of different sizes in Alberta, Nunavut and Quebec, as well as continuing the hunt for additional kimberlites. Ashton does have one big advantage over Pure Gold, as the company has had the benefit of a well-heeled majority shareholder. Rio Tinto owns more than 60-per-cent of Ashton's shares, and it may have changed its mind about offering its stake in Ashton for sale. The company acquired the Ashton shares when it bought Australia-based Ashton Mining, but last May, Rio Tinto said it wanted to sell its stake in Ashton Canada. At the time, Ashton's shares were languishing near the 80-cent mark, which was less than one-fifth their current market value, and the good news that has sparked the rally may have induced Rio Tinto to change its mind. Mr. Boyd said that Rio Tinto had indicated that they were considering all their options, which he interpreted to mean that the company had taken the Ashton shares off the market. In fact, Rio Tinto has consistently participated in Ashton's private placements, buying about $6-million worth of Ashton's shares since August. That would seem to suggest that the company has decided to keep the shares. If Rio Tinto is indeed willing to keep putting up cash, Ashton should have little trouble in advancing its three projects. Ashton lost 21 cents on Monday, closing at $4.25.
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