Will Purcell's take. Will P who I'm sure will show up in person, would I think be viewed as a conservative commentator. By all accounts the DB results(not Drunken Bileki) look very encouraging.
Mountain Prov.'s Hearne delivers hope
Mountain Province Diamonds Inc MPV
Shares issued 63,883,100 Nov 6 close $1.39
Wed 6 Nov 2002 Street Wire
by Will Purcell
Mountain Province Diamonds Inc. got some good news with the results of the
latest bulk sample from the Hearne pipe at Kennady Lake, which is one of
two key kimberlites that the company hopes that will become another
Canadian diamond mine. It is still too early to say if the latest batch of
diamonds will provide enough of a boost for De Beers, the company's
partner, to push the Gahcho Kue project forward to the feasibility stage,
but the chances seem significantly improved, based on the latest results.
De Beers processed 665.5 tonnes of kimberlite from the Hearne pipe, the
largest sample to date, and the rock yielded 1,174 carats of diamonds, for
an indicated grade of 1.76 carats per tonne. The first large sample was
taken from Hearne in 1999, when 846 carats were recovered from 469 tonnes
of kimberlite, indicating a grade of 1.80 carat per tonne. That was
followed by a second test in 2001, which extracted 334 tonnes of
kimberlite, from which 751 carats were recovered, suggesting a grade of
2.25 carats per tonne. Based on the 1999 and 2001 sampling programs, De
Beers had modelled a grade of 1.71 carat per tonne for the pipe, which is
well in line with the result of the latest sample. Although the grade of
the latest sample is actually less than any of the earlier tests, the real
encouragement is not in the grade of the sample, but the size distribution
of the diamonds that were recovered.
Prior to this year, the two largest diamonds recovered from Hearne weighed
3.4 carats each, which was a far cry from the two 10-carat stones that had
been recovered from the AK-5034 pipe, which is the flagship pipe at Kennady
Lake. As well, there were other clear signs that Hearne did not have as
favourable diamond size distribution curve as did its sister pipe. That
still appears to be the case, but Hearne has come a significant way in
closing the gap.
The three largest diamonds in the 2002 sample from Hearne were
significantly larger than had been recovered in earlier years. The largest
stone weighed an impressive 8.7 carats, and diamonds weighing 6.4 carats
and 4.9 carats could also have a favourable impact on De Beers's updated
projections of diamond value. Speculators are easily wowed by a few large
diamonds, but isolated occurrences of large stones can be very misleading.
That does not seem to be the case at Hearne however, as the diamond size
distribution improved across the board. That improvement is likely much
more significant than the presence of the larger diamonds on their own, as
the earlier tests clearly suggested that such larger stones would be found
in further samples.
There were 207 diamonds larger than 0.50 carat recovered in the latest
sample, and those stones probably accounted for about 17 per cent of the
total weight of the diamond parcel. That was significantly better than the
1999 result, when 130 diamonds likely accounted for a bit less than 15 per
cent of the total weight of the diamonds. Even that was better than the
2001 test, which provided 101 diamonds larger than one-half carat, likely
accounting for a bit more than 12 per cent of the total diamond weight. In
all, diamonds larger than 0.5 carat increased by nearly 25 per cent over
the combined results of the earlier programs.
A similar situation prevailed with still larger stones. The 50 diamonds
larger than one carat in the 2002 sample probably accounted for about 8 per
cent of the total weight of the parcel, which was a bit better than what 40
diamonds had provided in 1999. Once again, the 2001 program was a bit of a
disappointment, as just 27 one-carat stones were recovered, and they
probably accounted for less than 6 per cent of the weight of the diamonds.
The effect was stronger with the largest diamonds, helped by the greater
number of diamonds larger than three carats. The 13 diamonds that weighed
at least two carats likely accounted for just under 4 per cent of the total
weight of the diamond parcel collected this year, which is a significant
improvement over the earlier samples. The previous best came in 1999, when
just less than 3 per cent of the total weight of the parcel was contributed
by nine two-carat diamonds. That figure dropped to roughly 2 per cent in
2001, when just six diamonds weighing at least two carats were recovered.
With the latest test, the size distribution at Hearne now seems closer to
that at AK-5034. Based on the 2001 sample, about 14 per cent of the weight
of diamonds recovered from the eastern lobe were provided by stones
weighing at least 0.50 carat, while one-carat diamonds may have accounted
for about seven per cent of the total weight, and two-carat stones appear
to have accounted for less than 4 per cent of the total parcel weight. As a
result, Hearne could well be a match for the eastern lobe at AK-5034.
Nevertheless, the western lobe of AK-5034 still seems to be the best of the
Kennady Lake lot at this stage. Based on the 2002 program, half-carat
stones likely accounted for about 19 per cent of the total weight of the
diamonds, and one-carat stones may have contributed 10 per cent of the
weight, or a bit more, while diamonds weighing at least two carats
accounted for over 5 per cent of the parcel. As well, the central lobe of
AK-5034 has a similar size distribution as the western portion.
Although the diamond size distribution at Kennady Lake is looking much
better after the latest program, the results are still eclipsed by a number
of other deposits in Canada's North. In 1999, Winspear Diamonds Inc.
completed a 6,000-tonne test of the Snap Lake dike, about 90 kilometres to
the west of Kennady Lake. That program indicated that one carat stones
provided at least 20 per cent of the total diamond weight, and 4.8 carat
stones contributed just over 4 per cent of the weight. The Jericho pipe of
Tahera Corporation has an even healthier size distribution. A 9,000-tonne
test was completed in the mid-1990s, and one-carat diamonds provided about
one-third of the total weight of the parcel, while five carat stones
contributed about 7 per cent of the parcel weight. Not surprisingly, the
largest diamond from Jericho weighed just over 40 carats, and no less than
23 diamonds were recovered that weighed at least 10 carats.
Size matters with diamonds, but there are other important factors that
influence the value of the stones. The Snap Lake stones were valued at $118
(U.S.) per carat, considerably more than the Kennady Lake diamonds, but the
Jericho gems were appraised at $88 (U.S.) per carat, and a value of $75
(U.S.) was used in Tahera's feasibility study. As a result, the proportion
of quality gems at Kennady Lake seems higher, as the diamonds were
estimated to be worth about $70 (U.S.) per carat in 1999.
As a result, the improved quantities of larger diamonds could be great news
for investors hoping for a Mountain Province diamond mine at Kennady Lake,
if the quality holds up. De Beers has said it needs a minimum internal rate
of return of 15 per cent to advance the project to a feasibility study, and
Mountain Province has indicated that that would take an increase in revenue
of about 15 per cent. With an increase of more than 15 per cent in the
contribution provided by diamonds weighing at least one-half carat, the
chances of that happening would seem to have improved dramatically,
although there is no such thing as a sure thing with De Beers and its
modelling program. The diamond giant is undoubtedly proficient at modelling
diamond grades and values, and as a result, the company may have already
projected at least a portion of the increase in larger stones that was
suggested by the latest sample, however, it seems unlikely that the bulk of
that increase had been factored into the 2001 update of the De Beers model.
Another factor that will likely lead to an increase in the projected
diamond value is the increased confidence provided by significantly larger
parcels of diamonds. The two earlier tests, combined with a much smaller
sample in 1998 provided 1,802 carats from Hearne, but that number has now
grown to just under 3,000 carats, which should provide a sufficient range
of stone sizes and qualities to allow De Beers to come up with an accurate
assessment of the value of the Hearne diamonds.
That value has changed through the years. The tiny 1998 sample indicated a
value of less than $50 (U.S.) per carat, but the following year's program
saw that figure grow to $71.50 (U.S.) per carat. The projected value
dropped after the 2001 program to $63.50 (U.S.) per carat, probably due in
part to the lower number of larger diamonds, but also due to the lower
prices commanded by rough diamonds at the time. If the quality of the
diamonds is equal to that of earlier years, the value of the Hearne stones
could show a significant increase, due to the increase in size and the
recovering diamond market.
The improved size distribution at AK-5034 should also result in an improved
value, if the stone quality remains constant with earlier years. Several
mini-bulk tests had provided just over 2,300 carats of diamonds from the
pipe, and the 2002 sampling program increased that number to over 3,500
carats. That is greater than the haul from Hearne, and De Beers should be
able to remove much of its conservatism when coming up with a revised
projection for AK-5034.
So far, there has been no real indication of the quality of the diamonds
recovered during the latest program. In 2001, De Beers recovered a
9.9-carat stone from AK-5034 that was valued at $60,000 (U.S.), and that
was actually more than the projected value for the entire parcel of
diamonds recovered from AK-5034, leaving speculators grumbling about De
Beers's methods. Apparently stones of such high quality are rare at
AK-5034, and the company wisely discounted nearly all of the value of that
one stone as a result. Nevertheless, if additional top-quality stones were
recovered this year, the value of the AK-5034 diamonds should take a
significant jump. There has never been any firm indication that Hearne
contains any diamonds of a similar quality, but it seems likely that the
pipe would contain a similar population as its sister, as the two bodies
appear quite similar in most other respects. If so, the value of the Hearne
diamonds could conceivably be modelled as having a significantly higher
value as well.
An increase of 15 per cent in revenues would be achieved if the average
diamond values increased by roughly $10 (U.S.) per carat over the 1999
projections, given a stable estimate of grade. That would require a value
of just under $80 (U.S.) per carat at AK-5034 and just over $80 (U.S.) at
Hearne if the gains were across the board, although increases at AK-5034
would have more impact on the bottom line as the pipe is significantly
larger than Hearne. As well, there are other bodies that could have an
impact. A significant amount of work was completed on the Tuzo pipe this
spring, in the hopes of finding a way to bring a substantial portion of its
kimberlite into a mine plan. In addition, there are several smaller
kimberlites in the immediate vicinity that could be incorporated into a
Gahcho Kue mine.
For years, many investors have believed that it is only a matter of time
until De Beers decides to build a mine at Kennady Lake. Some have suspected
that the diamond giant was intentionally lowballing its projections to
stall the project, but that concern seems unwarranted. De Beers is required
to update its estimates regularly, and it must proceed to a feasibility
study once the required rate of return is achieved, or be diluted to a
30-per-cent interest. Since the 1999 disappointment, De Beers has twice
gone back, spending several millions of dollars to complete additional
mini-bulk tests that would allow the company to eliminate much of the
conservatism built into its projections.
Conspiracy theories notwithstanding, the latest results appear to reward
investor's faith in Gahcho Kue, but to what extent will not be known until
De Beers actually updates its estimates of grade and value. Nevertheless,
speculators were clearly hopeful. Mountain Province shares jumped on the
news, hitting an intraday high of $1.53 on Wednesday morning, before
settling back a bit, closing up seven cents, at $1.39.
(c) Copyright 2002 Canjex Publishing Ltd. stockwatch.com |
