Sounds like Will likes the deal too
Diamonds North expands its Nunavut gem hunt
Diamonds North Resources Ltd DDN
Shares issued 24,606,527 May 19 close $1.00
Thu 20 May 2004 Street Wire
by Will Purcell
Mark Kolebaba's Diamonds North Resources has expanded its Amaruk diamond hunt in the Kugaaruk area of Nunavut, just west of Melville Peninsula, through a deal with BHP Billiton. Mr. Kolebaba said that the agreement was beneficial to both companies, but the arrangement seems an especially sweet one for Diamonds North. The BHP agreement adds to the promotability of the expanded play, and the company's shares took a jump following the news. Diamonds North first acquired ground in the region early this year, when it staked about 170,000 hectares of ground near the community of Kugaaruk, formerly known as Pelly Bay. As well, the company picked up a 50-per-cent share of another 1.4 million hectares of ground in the area, through an initial arrangement with BHP. In its latest agreement with the Australia-based mining giant, Diamonds North has given BHP a 50-per-cent share of its 170,000-hectare property, and BHP has given Diamonds North a similar stake in another 1.4 million hectares of ground that it had acquired on its own. As a result, Diamonds North now holds a 50-per-cent share of roughly three million hectares of ground in the district. The deal allows BHP to increase its share of the project to 60 per cent by paying all of the exploration costs to feasibility, and it can boost its interest to 65 per cent by carrying Diamonds North to production. Mr. Kolebaba said that BHP would be paying for the exploration costs, and it also seems likely that BHP would elect to increase its share of the play to the full 65 per cent, should it come up with a diamond mine for its efforts. Even so, the arrangement appears very favourable for Diamonds North, as the company would have a 35-per-cent share of any diamond mine found on the three-million-hectare project, without facing the need to dilute its shareholders due to escalating exploration costs as the project progresses. As well, Diamonds North would be able to pay its portion of the construction costs of a mine out of its share of the profits, not a series of equity sales. Furthermore, BHP has agreed to reimburse Diamonds North for its land costs on the play, as well as for the costs of a geophysical survey that is now in progress over what had been its wholly owned portion of the play. "That is not a cheap survey," Mr. Kolebaba said. In all, BHP is expected to pay about $1-million to Diamonds North for its work. BHP has also agreed to add $500,000 to Diamonds North's coffers, in exchange for about 350,000 of the company's shares. The $1.40 purchase cost of those shares represents a significant premium to their recent price, which had dipped below the $1 mark just before the deal was signed. In each of the next three years, BHP has agreed to subscribe for up to $1-million worth of additional shares, at a 20-per-cent premium. In addition to being carried to production on a project that is now twice as large, the BHP deal could effectively inflate Diamonds North's treasury by up to $4.5-million, and all of that is in exchange for what amounts to a surprisingly modest reduction to its overall share in the project. Despite what might seem to be lopsided terms, Mr. Kolebaba described the agreement as a positive for BHP as well, as it gives the company access to Diamonds North's 170,000-hectare block. That is true, although to acquire what would amount to a 65-per-cent share in that block, the diamond giant gave up a 35-per-cent slice in a project area that was over eight times the size of the Diamonds North claims. Mr. Kolebaba said that although the limited amount of mineral sampling was too coarse to delineate any mineral trains, there were at least 10 separate areas that had produced anomalous levels of kimberlite indicator minerals. As a result, more detailed mineral sampling seems a likely plan of attack on the big play, and that work is expected to be quite costly. BHP will be the operator on the expanded Amaruk project, and the current plans call for it to shell out at least $4-million on exploration this year. Mr. Kolebaba said that the budget called for something between 3,000 and 4,000 surface samples to be collected. Those samples would be collected on a grid measuring about five kilometres square in some areas, while the resolution will likely be increased to a two-kilometre grid on some more advanced portions of the play. The current geophysical surveys will add to the data that has already been collected, and BHP and Diamonds North could have some priority targets in place by later this year. Mr. Kolebaba said that if suitable targets are found in a timely fashion, he expected that BHP would elect to drill them right away. Coming up with targets over the large project might take some time, but the chances seem good that there are an abundance of kimberlites lurking in the region, based upon the mineral samples to date. With the first clues pointing toward over 10 areas, it is conceivable that there are several clusters of kimberlites on the mammoth project that stretches from Rae Strait to Committee Bay, a distance of about 270 kilometres. The project also spans a distance of nearly 200 kilometres from north to south.
Turning up kimberlites is always a far easier task than finding
significantly diamondiferous bodies, but there have been some hopeful signs from the general area surrounding the Amaruk play. BHP has been active in that part of Nunavut for several years, and the company has found promise on at least one of its hunts in the region. BHP has had diamond success on its Qilalugaq property, which runs from Repulse Bay to Committee Bay and is roughly 50 kilometres to the southeast of the Amaruk project. BHP has been typically quiet about its hunt, but at least nine kimberlites are believed to have been found on Qilalugaq. One of them was worthy of a mini-bulk test. BHP processed about nine tonnes of kimberlite from that find, coming up with 70 diamonds larger than a 0.85-millimetre cut-off. Those stones weighed 2.4 carats, a haul that indicated a sample grade of about one-quarter of a carat per tonne. BHP was sufficiently happy with the result that a larger test is thought to be in the works. As well, some of the other finds could be in line for a small mini-bulk test this year. Another sign of BHP's enthusiasm for the region was the deal it made for a
minority interest in Stornoway Diamond's Aviat project on Melville
Peninsula, about 150 kilometres to the east of the Amaruk project. BHP bought its way into a 20-per-cent stake in the play last year, and over $10-million is slated to be spent on the hunt this year. Aviat has produced a few kimberlite finds so far, and one of them has delivered a particularly promotable mini-bulk sample grade. Stornoway scraped up about 7.4 tonnes of kimberlite from the surface of its outcropping AV-1 kimberlite body, and the rock yielded 6.52 carats of diamonds that were larger than a 0.85-millimetre cut-off, or about 0.88 carat per tonne. As well, there are signs that a somewhat higher grade exists in a separate phase of kimberlite. In any case, the AV-1 result and some roughly comparable diamond counts from some nearby finds clearly indicates that the Melville area is favourable for finding potentially economic diamond grades, and the result at Qilalugaq extends that hope farther to the west. Kennecott Canada has also managed to drill up some intriguing diamond counts on the northwestern part of Baffin Island, well to the north of Amaruk, and Diamonds North can also glean glimmers of promise from its play to the west, on Victoria Island. The diamond counts from Stornoway's AV-1 seem a near match for what Diamonds North produced from its Sculptor kimberlite, and that suggests that Amaruk could be in a prime diamond area that covers much of central Nunavut. The deal with BHP is the second agreement that Mr. Kolebaba has worked out with a major. Diamonds North has an arrangement with Teck Cominco covering much of its Victoria Island diamond play. BHP once had a stake in the Victoria Island play through its takeover of Dia Met Minerals a few years ago, but it had little interest in pursuing that option arrangement. Nevertheless, BHP has become an important partner for Diamonds North. Mr. Kolebaba was once a senior geologist with BHP. In the early 1990s, he worked on the company's gold play near Hope Bay, about 550 kilometres west of the Amaruk project, and after gaining gem experience through a stint with a junior in Venezuela, Mr. Kolebaba managed to land a job with BHP Diamonds in the mid-1990s. Mr. Kolebaba continued to work for BHP until 2002, when he left to take the top job with Diamonds North, which was being spun off from Commander Resources as a diamond explorer. Mr. Kolebaba has managed to craft an effective promotion out of some encouraging diamond counts from the company's Victoria Island play, and the deal with Teck has made the region a busy place in recent years. That should now be the case with the Amaruk play as well. Mr. Kolebaba said that the latest BHP agreement was in the works since late in March, and although it took nearly two months to work out the details, he continues to be enamoured with his former employer and new partner. "I like BHP," Mr. Kolebaba said, "they are really aggressive." With BHP now paying the Amaruk bills, Diamonds North will now be able to become more aggressive on its own dime, developing some of its other plays that have yet to reach project status, including one that is believed to be on Banks Island. The initial enthusiasm carried Diamonds North to a peak of $1.15, but the stock has since settled a bit, closing at $1 on Wednesday, unchanged on the day.
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