Fort a la Corne's other "Star" - Shore Gold
The speed with which the market has embraced the story of Saskatchewan's
Fort a la Corne diamond play as Canada's rising star compels me to modify
the caution I urged in Kaiser Express 2002-04 (March 22 - Saskatchewan:
Canada's rising star?) with regard to Shore Gold Inc (SGF-V: $0.85) and its
upcoming mini bulk sample results. I now believe that the peculiar way
Shore Gold has to date reported its results and set its shareholders up for
dashed expectations when the results of its Star mini bulk sample become
available will no longer be an obstacle to higher prices. Since Friday
Kensington Resources Ltd (KRT-V: $2.15) has traded about 3.4 million shares
and ranged from a low of $0.99 to a high of $2.27 with a closing price of
$2.15 on Tuesday March 26. Kensington's Fort a la Corne project is now
carrying an implied project value of about $265 million, about two-thirds
what Ashton Mining of Canada Inc (ACA-T: $2.22) was sporting for its
Kirkerk Lake, Buffalo Head and Otish plays at its peak in late January.
This valuation is still below the $500 million to $1 billion range I
believe the Fort a la Corne project can support if the upcoming results
shrink the error margin of the US $28 rock value for the 395 million tonne
#141 kimberlite without significantly reducing the rock value. My Express
is being widely credited (or blamed, depending on your perspective) for the
move, but in truth all I did was assemble the story and its nuances into a
comprehensible package at a time when the market was ready to embrace it.
We now have a situation where investors who a few days ago were content to
wait on the sidelines until De Beers actually released updated modeled
grade and value figures for kimberlite body #141 are now being stampeded
into the market for fear of missing the boat. The volatility and liquidity
in the Kensington market has attracted traders and I expect Kensington to
trade all over the map until Fort a la Corne results start to flow. The big
difference between today and a week ago is that the market now understands
the expectations associated with Fort a la Corne and how to interpret the
results when they do arrive. Because Shore Gold's adjoining "Star"
kimberlite body has similar tonnage and grade potential, but is carrying an
implied project value of only $23 million based on 100% ownership and 27
million fully diluted capitalization, it will not take long for speculators
who feel they missed the boat on Kensington to discover Shore Gold. The
changed market circumstances force me to explain my prior reservations
about Shore Gold Star kimberlite and why they are now less relevant.
Background on Shore Gold's exploration of Star
Shore Gold owns 100% of 22,592 hectares at the southern end of the Fort a
la Corne kimberlite field in central Saskatchewan where Kensington, De
Beers and Cameco have spent $22 million since 1988 to outline 69 kimberlite
bodies representing 10 billion tonnes, most of which is to some degree
diamondiferous. Shore acquired its original claims in December 1995 and
conducted geophysical surveys in 1996 that revealed a complex magnetic
anomaly over an area of 2.0 km by 1.5 km as well as a smaller circular
bullseye anomaly toward the northeast. Both targets were drilled in
September 1996. The smaller anomaly turned out to be marginally
diamondiferous but the larger anomaly, dubbed the "Star" kimberlite,
returned promising micro diamond results. Two followup holes were drilled
in 1997 and then the project stalled as the neighbouring Fort a la Corne
project floundered. In 1999 Kensington and De Beers came to the conclusion
that prior results had been negatively skewed by recovery problems
associated with the Sortex system used by De Beers and the Fort a la Corne
project gained a new lease on life. Jonathan Challis, who had been involved
with Robert Friedland in 1996 when Friedland tried to gain control of
Kensington through the vend-in of a Chinese diamond project, joined Shore
Gold in mid 1999 and spearheaded a fresh round of exploration for the Star
kimberlite. Shore drilled 15 NQ holes in 2000 that yielded kimberlite
intervals of 14 m to 146 m. As is the case elsewhere in the Fort a la Corne
kimberlite, 90-100 metres of overburden and Cretaceous shales or mudstones
overlie the stacked kimberlite pancakes. This was followed by another six
holes in late 2000, one of which encountered the diatreme feeder for the
Star kimberlite. Hole #20 was stopped in kimberlite at a depth of 627
metres, the deepest hole ever drilled through continuous kimberlite. It was
also reported for the first time that diatreme facies kimberlite had been
identified.
Diamond BooBoos: longest dimension macro counts and grade arithmetic using
micro diamonds
Unfortunately for Shore Gold, Challis brought with him a paranoia about De
Beers and a flawed understanding of micro diamond analysis that resulted in
Shore Gold publishing all of its results in the near meaningless longest
dimension format. Even worse, Shore Gold committed the ultimate mistake of
arithmetically estimating grade by dividing the total weight of recovered
micro diamonds by the sample weight. This action was later modified to
include only micro diamonds greater than 1 mm in the longest dimension, a
practice that ignores the fact that it is the volume (ie weight) of a
diamond that counts in size-frequency distribution curves. It also ignores
the fact in diamond deposits it is not the grade of all diamonds in the
rock that counts, but only the grade of diamonds above the commercial
cutoff size of a 1.5 mm sieve. Shore's handling of micro diamond data,
which reveals a double edged sword of profound ignorance about diamond
analysis or a cynical contempt for investors, turned Shore Gold into an
industry joke and explains to some degree why the stock still has a low
implied project value. This sort of silliness, which prompted Shore Gold to
project grades as high as 1.78 ct/t from a handful of micro diamonds
recovered from small samples, was a throwback to the early nineties when
Rhonda's Peter Gummer was rewarded with tremendous market action for a
similar stunt. But these are different times, and even Shore Gold's
management regrets having boxed itself into a corner. Last November while
in Saskatoon at a conference I spent some time with Shore Gold and asked
why the company insisted on publishing results that were both meaningless
to serious analysts and downright out to lunch. The rather lame answer I
got was that Shore Gold did not want De Beers to get useful micro diamond
information about the Star kimberlite, especially since a third to half of
the system may be on the adjoining ground of Kensington and De Beers (that
still leaves a resource in the 300-500 million tonne range on Shore's
property). Well, that excuse has become rather academic, because in October
2001 Shore Gold drilled a 24 inch large diameter hole that recovered a 200
metre interval of kimberlite near the feeder center of the Star kimberlite.
The 90 tonnes of wet kimberlite chips caught by a 1.2 mm sieve were broken
down into 3 metre intervals, and after petrography was done, alternating 3
metre intervals were shipped to Lakefield and De Beers for dense media
separation processing. (The theoretical mass was apparently about 130
tonnes, though the actual figure remains to be confirmed by Shore Gold).
Lakefield will use a grease table to recover diamonds while De Beers will
use a Sortex. The final concentrate will be hand sorted. Shore Gold expects
to have the results from both groups within two weeks, at which point all
of the results will be submitted to De Beers for final evaluation, probably
by its modeling expert, Johan Ferreira. So there is not much reason left to
avoid meaningful disclosure of results.
Hole 20 micro diamond results suggest a grade in the 0.2-0.3 ct/t is
reasonable
Shore Gold has reported recovery of 782 micro diamonds (0.15 mm sieve
bottom cutoff) weighing 1.244 carats through caustic fusion of about 3,400
kg of kimberlite material extracted through 20 NQ drill holes from the Star
kimberlite. Shore Gold's just published annual report for 2001 states that
this represents an average grade of 0.36 ct/t, and if only stones greater
than 1 mm in the longest dimension are counted, the average grade drops to
0.22 ct/t. There is no practical reason why Shore Gold would use the
longest dimension instead of a sieve except perhaps to hide considerably
lower grade results. And this brings me to the reason I expressed caution
in Kaiser Express 2002-04 about the possibility that Shore Gold's mini bulk
sample will deliver disappointing results that trigger a sell-off. The
bottom cutoff used for the mini bulk sample was a 1.2 mm mesh, which would
recover fewer stones than used in Shore's grade estimates. How much lower I
cannot guess, but the risk is there. On the plus side, the mini bulk sample
was extracted through a 24 inch hole drilled near hole 26, for which no
micro diamond results have yet been reported. Hole 26, however, is about 50
metres southeast of hole 20, which in turn appears to be about 100 metres
east of the Kensington boundary and is positioned in the throat of the
kimberlite's feeder system. Hole 20 yielded 626 kg that furnished 171 micro
diamonds which Shore Gold has converted into a projected grade of 0.61
ct/t. That is a nonsense number, and disclosure that 46 diamonds were
macros as defined by stones greater than 0.5 mm in their longest dimension
is not much help either. However, Shore Gold does disclose that 15 stones
were greater than 1 mm in the longest dimension, and provides the lengths
in three dimensions for the four largest stones which clearly would have
been caught by a 1 mm sieve. It is fair to assume that the other 11 stones
would have been caught by a 0.5 mm sieve, which gives us three square mesh
data points for the 626 kg sample: 156 stones 0.15-0.5 mm, 11 stones
0.5-1.0 mm, and 4 stones greater than 1.0 mm. When I plot these numbers
normalized to stones per tonne on a log scale I get a curve with a slope
very similar to that of Rhonda's Knife pipe, which I am guessing will grade
in the 0.2-0.3 ct/t range. Knife is a large multi-phased pipe with a high
degree of variability in micro diamond content; in the absence of
information about the tonnage of each geological unit one has to be careful
about assigning observed average micro diamond content to the entire pipe.
The Star curve is distinctly better than those for Tahera's Tenacity and
Major General's Snowy Owl pipes, neither of which were further explored by
their former operators, Rio Tinto and De Beers respectively, whom we can
presume knew what they were doing when they declined to submit those pipes
to mini bulk sampling. So, despite all the wild grade estimates provided by
Shore Gold to confuse De Beers and perhaps delude shareholders, enough
information has been provided to give me optimism that the Star kimberlite
is comparable in grade to Kensington's #141 kimberlite.
Star's next stage would be a much larger bulk sample
In the context of a broadened market understanding of Fort a la Corne as a
large tonnage low grade "diamond porphyry" mining operation that achieves
world class valuation status through high average carat values in excess of
US $150 per carat, I think Shore Gold's stock price will not be punished by
lower recovered grades for its Star mini bulk sample than projected by
management's flawed calculations. Unless the mini bulk sample suffered from
severe breakage problems or other unexplained factors, Shore Gold could end
up with a parcel of about 20 carats, the same amount used by De Beers'
Johan Ferreira to model the grade and value of the #141 kimberlite. When
this is combined with the micro diamond results (Shore Gold internally has
the data in the proper sieve format) from the 20 other holes in the Star
kimberlite and the associated petrographic work, Shore Gold will be in a
strong position to model the rock value. The next exploration stage would
be to recover a substantially larger parcel of diamonds either by drilling
a series of large diameter holes as Kensington and De Beers did on their
Fort a la Corne project last summer, or by sinking a shaft into the
kimberlite and extracting an underground bulk sample. The cost of an
underground bulk sample would be higher, but the volume of material Shore
could extract would also be larger. The goal of obtaining a parcel of 3,000
carats could arrive much sooner through an underground program. The problem
with an underground program is that the bulk sample may not be
representative for much of the 400 million tonne resource modeled by Shore
Gold from geophysical data and previous drilling.
Prospectus financing heading toward completion
Shore Gold is in the midst of conducting a prospectus financing of 5
million units at $0.60 or $0.70 (flow-thru). To date Shore Gold has
announced closing of 2,129,843 units, leaving another 2,820,157 units to be
snapped up. Shore Gold appears to have working capital of about $700,000,
which could grow $1.7-$2 million if the prospectus financings ends up fully
subscribed. Presently Shore Gold has 26,922,664 shares fully diluted, but
if the entire prospectus offering sells out, fully diluted would be
31,902,900 shares. This stock is free trading when issued. I think we will
see a push during the next couple weeks to get this financing done before
the price escalates so high the remainder of the offering has to be
repriced and before new results are out that required refiling of the
prospectus. Although Shore Gold's land position does not host the enormous
kimberlite tonnage present on Kensington's project, the results to date
look comparable to the best seen at For a la Corne, at least in terms of
grade and tonnage potential. What makes Shore Gold intriguing is its 100%
ownership of the Star project, which includes the marketing rights to its
diamonds. De Beers has the marketing rights for Fort a la Corne's diamond
production, and while there is a good chance De Beers might end up being
forced by the government to cut and polish some of its Fort a la Corne
production in Canada, there is no question that whoever ends up controlling
Shore Gold would control the diamond marketing rights. If Kensington's
stock price continues to improve, I would expect Shore Gold's price to
double or triple during the next six weeks simply because the market will
recognize the relative undervaluation. Saskatchewan's Fort a la Corne story
is an easy one for all manner of investors to understand, and once they
recognize that Shore Gold's Star project is a lookalike to Keningston's
#141 kimberlite, they will jump into Shore Gold. If the results are good,
then we will see much higher prices. Management is planning to start a
clean disclosure slate with the next round of results that will be reported
in accordance with the emerging standards. When that happens new money will
take the company seriously and Shore Gold will no longer have to flog its
stock on the farm circuit. And there will be some very happy farmers.
*JK owns shares of Ashton |
