Shore values its diamond parcel
Shore Gold Inc (TSX:SGF)
Shares Issued 69,295,912
Last Close 2/24/2005 $5.48
Friday February 25 2005 - Street Wire
by Will Purcell
Shore Gold Inc. produced appraised and modelled diamond values for its first 3,050-carat parcel from the Star kimberlite. There was no great surprise in the result, but investors responded enthusiastically to the news. Over 5.1 million shares traded in a Wednesday session shortened somewhat by a trading halt. Shore's shares added 74 cents, puncturing the $5 mark for the first time. Shore ended the day at a high of $5.09, as speculators bought into the notion of a Saskatchewan diamond mine. The result is encouraging, but Shore has many questions to answer over the next year or two.
The valuation
Shore's vice-president of exploration, George Read, offered a target of $125 (U.S.) per carat last fall. The former consultant never strayed from the figure as the diamond tallies grew through the fall and winter months. As things turned out, Mr. Read's speculative prophecy split the difference between the appraised and modelled values.
Shore had four companies assess its parcel. The list included WWW International Diamond Consultants Ltd., a company frequently called on by Canadian explorers with a promotable diamond haul. Shore also got an appraisal from R. Steinmetz and Sons N.V. That is no great shock, as Benny Steinmetz became a believer in the Star project a few years ago, and some of his companies have invested in Shore since then. Rio Tinto Diamonds N.V. and BHP Billiton Diamonds N.V. also completed appraisals of the Star parcel.
The result was an average of $110 (U.S.) per carat, which missed Mr. Read's target by about 10 per cent. The best guess from the WWW modelling effort topped Mr. Read's target to a similar degree. The consulting company pegged a modelled range that ran from a conservative $110 (U.S.) per carat to a rosier $162 (U.S.) per carat. The company split the difference for its best estimate, offering a value of $135 (U.S.) per carat.
That figure is nearly 25 per cent above the appraised value, but that is hardly unusual. Small parcels often produce appraised values that fall well below the comparable modelled estimates. For instance, De Beers Canada Corp. and Kensington Resources Ltd. came up with an appraised value of about $37 (U.S.) per carat for a 91-carat parcel of gems at their nearby No. 140/141 pipe. That was less than half the modelled result, which came close to $100 (U.S.) per carat.
That big gap is typical for small parcels. Diavik Diamond Mines Inc. and Aber Diamond Corp. produced an appraisal of $35 (U.S.) per carat for a 157-carat parcel of diamonds at A-154 North. When the company completed an appraisal on a much larger parcel, the figure swelled to over $80 (U.S.) per carat.
Larger parcels typically produce appraised values that come closer to the predicted numbers, but even hauls of over 10,000 carats can still lag behind what an operating mine can deliver. Diavik and Aber used a value of $79 (U.S.) per carat for their rich A-154 South pipe, but the mine is producing diamonds worth significantly more than that. Ekati's diamond production also handily topped the earlier predictions.
The better results from Ekati and Diavik were because of a better proportion of larger diamonds than the earlier samples delivered. That also could be the case with Star. Shore attributed the difference between the appraised and modelled values to a lower than expected recovery of stones larger than five carats.
That seems surprising, as the company recovered at least 28 diamonds weighing at least five carats in what is now a 3,500-carat parcel. Those stones weighed over 232 carats and account for over 7.6 per cent of the weight of the parcel from the richer early Joli Fou kimberlite. If the recoveries in the smaller size classes suggest that more five-carat diamonds were likely, that would be a pleasant surprise for investors. Most speculators found the actual recoveries to be pleasing enough.
The questions
The diamond valuation now provides another key answer to the many questions surrounding the Star project and helps peg a value to the Star kimberlite. So far, Shore has a grade of 0.165 carat per tonne for its early Joli Fou kimberlite. That would yield an encouraging rock value of about $22 (U.S.) per tonne when combined with the modelled diamond value.
There still is some room for error in the grade calculation however, as Shore likely zeroed in on the better parts of the pipe to harvest its carat crop. Most of the sample came from the 235-metre level, and the early Joli Fou material collected from the vertical shaft produced a grade of just 0.115 carat per tonne.
That could be just a fluke, or it could be more representative of the early Joli Fou phase as a whole. If so, the rock value would drop to less than $16 (U.S.) per tonne. At this stage, there is no clear reason to expect that the grade of the early Joli Fou material will differ from the rosier value determined by the full sample. Nevertheless, discovering the approximate grade across a wide part of the Star pipe will be an important part of Shore's prefeasibility work over the next 18 months.
Another concern pertains to the late Joli Fou rock that lies above the richer phase. Shore processed nearly 2,700 tonnes of the material while digging its shaft, and the rock yielded just 65 carats, good for a grade of only 0.024 carat per tonne. Combined with the modelled diamond value, the late Joli Fou rock would be worth just $3.30 (U.S.) per tonne.
Even that minuscule value could be on the rosy side. The average diamond in the upper part of Star weighed just 0.062 carat, compared with a value of 0.12 carat in the early Joli Fou phase. That suggests the diamond size distribution in the upper part of Star also lags well behind the lower material. That would suggest the diamond value could be significantly lower in the top part of the pipe. As a result, the late Joli Fou material seems clearly uneconomic.
Coming up with answers on the cost side of the equation will also be a key part of Shore's prefeasibility study. The company suggests that operating costs would run at less than $10 (U.S.) per tonne, but it will take a considerable amount of work to come up with a tangible estimate of the operating costs at Star.
Mining engineers love challenges and most problems have solutions, but most carry a cost. Making a mine out of Star will present a crew of mining engineers with some significant challenges that will require some inexpensive answers that will not chew into the potential profit margin in a big way.
Removing a layer of overburden and uneconomic rock that is 175 metres thick will present a major challenge in the design of an open pit, especially with a considerable amount of loose material near the surface. As well, there are water concerns that the prefeasibility study will have to address.
Although Shore sunk its shaft at a site believed favourable for diamond recovery, the company may look elsewhere to start its mine. One reason for that is the depth of the richer rock. Although Shore had to dig down at least 175 metres to hit the early Joli Fou material during its bulk sample, the company thinks the better rock comes closer to the surface to the east of the shaft.
Starting a mine in such an area would allow Shore access to its richer rock at a faster pace. Still, the company will first have to prove that the grade of the material is enough to yield a profit. That will take more drilling at a minimum, and perhaps another bulk sample, using the existing workings.
Another possible reason for starting a mine in another area is the proximity of the shaft to the boundary of Shore's claim block. At least a small part of Star lies west of the boundary, on claims held by De Beers and Kensington. The two rivals remained quiet about Star over the past several years, but that recently changed.
The Fort a la Corne partners now plan a delineation drilling program to determine how much of Star extends onto their ground. Mr. Read suggested that Shore owned most of the body, but the company's rivals think that "a significant portion" lies on their property.
Earlier this month, Mr. Read said that Shore was not concerned with Star's geography "at the moment," adding that there would always be an opportunity to make some kind of agreement. Deciding just where to start its mine could have an impact on any negotiations between Shore and its rivals, and the geographical answers could have an impact on both sides of the property line.
In the absence of company estimates, some brokerage analysts are beginning to prepare their own projections. Graeme Currie of Canaccord Capital Corp. got a jump on things earlier this week, with several hypothetical scenarios. Mr. Currie suggests that a Star mine running at 45,000 tonnes per day could cost $650-million (U.S.) to build, but could run with mining costs of $1 (U.S.) per tonne and processing costs of $4 (U.S.) per tonne. He also pegs other expenses and sustaining capital at a bit less than $15-million per year.
Mr. Currie's figures, which he terms very rough guidelines, are also roughly what a 1995 scoping study suggested was possible in the Fort a la Corne region. Shore's key task in the coming year will be to prove that a big Star mine can actually be built and run for comparable amounts.
Coming up with the cash required to actually build a mine will be another challenge for Shore over the next few years. At some point, the company may decide to add a well-heeled partner to help foot the bills.
Shore added another 39 cents on Thursday, closing at $5.48 on 5,406,200 shares. |
