Diamondex goes it alone on revived Kelsey play
Diamondex Resources Ltd DSP
Shares issued 27,939,289 Jan 3 close $1.00
Mon 6 Jan 2003 Street Wire
Also (TYS)
by Will Purcell
An also-ran property explored by Randy Turner's Diamondex Resources Ltd. is now being bumped up in priority due to two recent developments. The company has plans to spend a significant amount of cash in the hunt for diamonds on its Kelsey property, about 300 kilometres northeast of Yellowknife and about 100 kilometres to the east of the Snap Lake project, which was discovered by Mr. Turner's Winspear Resources Ltd. and is now being developed by De Beers. The Kelsey property is just to the east of Kennady Lake, where De Beers is hopeful of having a second diamond mine in the South Slave district. De Beers and its partners have been receiving some good news from that region of late, and that optimism is spilling eastward, prompting a new look at Kelsey. A second factor is that Diamondex's partner on the play, Tyler Resources Inc., is facing financial woes and will not be paying its way on the project. That will work to the benefit of Diamondex's shareholders, should things turn out well on the property. Diamondex first started work on Kelsey in the spring of 2000, just after it acquired an option to earn up to a 70-per-cent stake in the play from what was then Glen Harper's Tyler. The agreement allowed Diamondex to earn a 60-per-cent share by making token payments of stock and cash, as well as spending about $825,000 on exploration in the first year. The company also had the option to increase its share another 10 per cent by spending a total of $2-million by the end of 2003. By late in 2001, Diamondex was close to achieving that target, but the company curiously decided not to pursue the second option. As things turned out, that may have been fortunate. Tyler has been struggling for quite some time, but things have been especially tough over the past few years. Mr. Harper, the company's president since the 1980s, landed in hot water due when he sold a substantial number of shares of another of his companies, Golden Rule Resources, before it was publicly revealed that the company's results were poor. Mr. Harper was found guilty of insider trading and was sentenced to a year in jail, in addition to being slapped with a $3.9-million fine. The sentence was halved on appeal, but in any case, Tyler was the last thing on Mr. Harper's mind. Geologist Jean Pierre Jutras now runs Tyler from Calgary, but things have been slow to improve. The company has managed to poke around a bit on some of its exploration properties, but continuing cash woes have prevented the company from mounting a major effort. At the end of October, Tyler had a working capital deficiency, and it was no great surprise that the company has decided not to participate in the Kelsey program for this year, choosing to dilute its interest instead. As a result, Diamondex and its shareholders should receive a significantly greater share of Kelsey than had the company simply exercised its option. Mr. Turner has had success in the past when a partner declined to participate in a joint venture program. Early in 1998, Aber Diamond Corp. had a 43-per-cent stake in the Camsell Lake property, with Winspear owning the remaining 57-per-cent interest. Winspear was the operator, and it proposed a $2.7-million budget that included taking a mini-bulk sample from the Snap Lake dike. Aber declined to participate and its interest was diluted to about 32 per cent as a result. At the time, interest in the Snap Lake project was at an ebb, but the tenacious Mr. Turner went it alone. Aber's decision proved to be a costly one, as the Snap Lake project roared back to life with the result of the mini-bulk test. Aber gave up an 11-per-cent share of the project to save $1.2-million; and when the company ultimately sold its remaining share to De Beers for $171-million, the transaction implied a value of $56-million for the forfeited share. Mr. Turner and Diamondex's shareholders undoubtedly are hoping that their increased share of Kelsey proves to be a similar bargain. There are reasons for hope that Kelsey is prime diamond country, as there have been encouraging results from the AK claims, immediately west of the Kelsey property. Much of that optimism stems from the recent diamond counts obtained by De Beers and its partners from their Kelvin kimberlite, which was discovered in the spring of 2000, about nine kilometres northeast of Kennady Lake and just a few kilometres from Kelsey. De Beers recently processed 184 kilograms of Kelsey kimberlite, recovering 446 diamonds, including 25 stones that remained on a 0.5-millimetre mesh, 14 that clung to a one-millimetre screen and five that were larger than a two-millimetre sieve. Helping matters more was the fact that the two largest diamonds weighed nearly 0.09 carat each. Those results suggested a favourable diamond size distribution curve and a promising grade, and the result was quite similar to what had been obtained from the Kennady Lake pipes, which will likely be developed into Canada's fourth diamond mine. Two of those pipes have grades in excess of 1.5 carats per tonne and a diamond value that should be in excess of $70 (U.S.) per carat. The Kelvin news gave the Gahcho Kue project a good boost, but it has positive implications for the Kelsey play as well, as does another find in the area, even closer to the property line. De Beers actually discovered the Faraday kimberlite in 1999, about 12 kilometres northeast of Kennady Lake and one kilometre west of the Kelsey property, but the market's reaction to the find was lukewarm at best. Nevertheless, Faraday seems promising, with diamond counts from 40 kilograms of rock that were roughly similar to the numbers from Kelvin and the Kennady Lake pipes, although the small sample size was subject to a large degree of error. Both Kelvin and Faraday appear quite small and complex, which likely accounted for the limited impact of their diamond counts on the market. Kelvin measured about 40 metres by 23 metres horizontally, with a 3.3-metre dike present about 200 metres to the south, while drilling into Faraday produced a few horizontal intersections measuring up to about 20 metres in width. Nevertheless, although the size of the bodies muted the market's reaction to the Kennady play, it is the diamond content of the two bodies that is the prime factor in the renewed optimism for the Kelsey program. With several kimberlitic intersections found just to the west of the Kelsey property, the chances appear excellent that additional kimberlites lie further to the northeast, awaiting discovery by Diamondex, unless John Dupuis was incredibly fortunate when he hastily staked the rectangular AK property in the early 1990s. That seems highly unlikely, as there is no significant difference in the geology or the geography over the two properties, but there have been no promising finds so far on Kelsey, or on the ground immediately south of Kennady Lake that is held by GGL Diamond Corp. Nevertheless, it is far too soon to write off Kelsey, as there has been just a limited amount of work completed over the 80,000-hectare property since it was first staked by Tyler in 1999. Diamondex started off briskly, flying a geophysical survey and collecting till samples on the property in 2000, and more geophysics and sampling followed the next year. All that produced about 15 priority drill targets, but Diamondex managed to drill only two of them in the spring of 2001
before the ice went out. In all, the partners have spent nearly
$1.8-million on Kelsey by the end of 2001, but since then, little has been done, at least partially due to Tyler's financial woes. This year should be a far different story however. Diamondex plans to spend more than $500,000 to start, and considerably more if it mounts a drill program later this year as expected. The company will be starting detailed geophysical work over 10 anomalies in March, followed by till sampling near a number of geophysical targets. The prime area is likely to be the southwestern portion of Kelsey, along the trend line that contains all of the De Beers discoveries on the AK property. All that would lead to a late summer drilling program on any land-based targets, if the results are sufficiently encouraging. Targets under lakes would presumably have to wait until early in 2004, but Diamondex might be able to poke a hole or two this spring, if the ice holds up long enough. Although much of the diamond interest in Canada's North has been centred farther to the north, in the Lac de Gras and Coronation districts, Mr. Turner has long been a believer in the merits of the South Slave region. At least some of that potential has already been tapped; with time and a bit of luck, the region will be home for two additional diamond mines. There seem to be several key differences between the South Slave and the Lac de Gras region however. The latter district, which started the Canadian
diamond rush, now has produced something close to 200 kimberlite
discoveries, and about 10 of those have been deemed economic to mine. Over the South Slave, finding kimberlites has proven to be a much tougher task, but the odds of success appear to be much higher. In the area south and east of MacKay Lake, there have been about 18 kimberlite bodies found, but of that small number, about one-third of them may have potentially economic grades. Diamondex and De Beers seem to be the biggest believers in the region, based on their property interests, but they have recently been joined by BHP Billiton, which has picked up a significant amount of ground to the south of the Kennady Lake project. As well, Diamondex has been added to its land postiion in recent years, and that trend is expected to continue as ground comes free. Another big fan of the South Slave district is Nik Pokhilenko, who has made the hunt for diamonds a key part of his life for the past 20 years. Much of Mr. Pokhilenko's enthusiasm for the region stems from the nature of the diamonds found at Snap Lake, some of which appeared to originate at much greater depths than those from Lac de Gras. Some of those stones were of exceptional quality, and a similar situation could exist further to the east, as De Beers has recovered a number of very fine diamonds from its two key Kennady Lake pipes, including a 10-carat gem that was appraised at $60,000 (U.S.) last year. Based on petrological and mineralogical work, Mr. Pokhilenko believes that the thickness of the Slave craton increases from about 160 kilometres over the North Slave, to about 200 kilometres in the Lac de Gras area and to as much as 300 kilometres in the South Slave region, near Snap Lake. A thick cratonic root and evidence of a very cool geotherm are key reasons why Mr. Pokhilenko believes that the district was more conducive for diamond formation and preservation than the Lac de Gras or North Slave regions, and those prime conditions should increase the probability of success in the South Slave. Mr. Pokhilenko occasionally works as a consultant in Canada, but he is also the head of a diamond laboratory in Novosibirsk, Russia. As well, the Siberia-based scientist is also the chief research geologist for the main Russian diamond company, Almazy Rossi Sakha. As if that were not enough to satisfy his quest for gems, his idea of a holiday is stamping around Canada's North for Diamondex. Mr. Pokhilenko has had success over the years. He was involved in the discovery of the Archangelsk kimberlite cluster in the northwestern part of Russia, as well as three other clusters in Siberia, and that success has carried over across the Arctic Circle, as Mr. Pokhilenko was instrumental in the discovery of the Snap Lake dike, as well as two kimberlite pipes on the Camsell Lake property. Although Kelsey seems to have promise, exploring is a tougher task in the region than it is further to the northwest. The tills apparently are much
thicker making sampling more difficult, and that places a greater
importance on geophysics as a result. Unfortunately, geophysical targets abound in the region, which is much noisier than the area around Lac de Gras, complicating things further. Nevertheless, if the results at Snap Lake and Kennady Lake are any indication, the South Slave hunt could be worth the effort. Diamondex shares have been recovering of late, rebounding from a 60-cent low in early fall. The stock closed up a dime Friday, at $1. Even hapless Tyler has mounted a bit of a rally of late, closing up one cent on Friday, at eight cents, up from just three dismal pennies in mid-December.
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