Author: Lee M. Webb -- Date:1999-02-22 10:38:18
Subject: Street Wire
Winspear Resources Ltd -
Winspear hat parade
Winspear Resources Ltd
WSP Shares issued 33,721,333
1999-02-19 close $3.35
Monday Feb 22 1999
by Stockwatch Business Reporter
George Albino, author of the Feb. 10 Deutsche Bank
Securities report rating Winspear Resources "speculative
outperform", acknowledges that he is wearing a different hat
these days. In a recent interview, Mr. Albino was reluctant
to be the subject of any media attention, noting that
"Winspear is the real story." However, he did provide some
personal background and offered some comments to put the
research report "in context."
Mr. Albino says he holds a PhD in geology and was
formerly the chief geologist with SouthernEra Resources,
another diamond company active in the Northwest
Territories. At the outset, Mr. Albino wanted to make clear
that the research report was written for the benefit of his
clients and "not for it to take on a life of its own." He
pointed out that Deutsche Bank Securities is an "institutional
brokerage entirely" and that there is a different dynamic for
the institutional investor than for the individual retail investor.
An aspect of that 'different dynamic', of course, relates to
volume. Transactions by institutional investors typically
involve far more shares than those by individual investors,
both when buying and selling. That has implications for price
movement that has to be factored into risk/reward
assessments.
Mr. Albino is familiar with Winspear's property from his
tenure with Southernera and has been following the
company for some time prior to issuing his recommendation.
According to his report, Winspear's Jan. 26 release of the
caustic fusion analyses of drill core intersections and
approximately 250 kilograms of kimberlite representative of
each of the 100 tonne samples taken from the NW dyke,
was the "missing link" that he was waiting for before initiating
coverage. "Until the caustic fusion results came out, you
couldn't be sure that it wasn't fortuitous sampling," Mr.
Albino says. "Everything is consistent with the rest of the
body being a similar grade. There are no red flags." Asked
about Winspear's repeated caution against using the results
obtained thus far to predict grade, Mr. Albino noted,
"Companies have to be cautious to make sure they do not
run afoul of the regulators."
As indicated in his report, Mr. Albino still sees a number of
hurdles ahead of Winspear. Even if the grade is reasonably
established, the question of value remains to be answered.
Mr. Albino feels that "in the final analysis the value may be
closer to $200 than $300/carat." Although he seems to
waffle somewhat on value, suggesting that a $170/carat
value would allow an acceptable rate of return on
investment and possibly as little as $150/carat with grade
upside, he concludes that a combination of grade and value
equating to $185/tonne augurs well for the probability of a
mine. As his report makes clear, however, the realization of
that is still some time away.
Mr. Albino expressed some surprise and dismay that his
report had been quickly circulated on the Internet,
commenting that he was "not happy about it." He noted that
he does visit the Winspear thread on Silicon Investor but
had been "afraid to go there" for a couple of days after
issuing the report. He was not surprised that Winspear had
quickly distributed the report to shareholders who requested
it, however. He noted that companies frequently distribute
favourable research reports.
Mr. Albino is not the only analyst giving favourable
coverage to Winspear. On Jan. 26, the day Winspear
released the caustic fusion analyses, an internal
memorandum was circulated by Yorkton analyst Art
Ettlinger, also rating Winspear as a "buy for speculative
investors." Mr. Ettlinger has been wearing an analyst's hat
for many years and has been covering Winspear for quite
some time. According to Mr. Ettlinger, his coverage of
Winspear is the most thorough he has ever written on any
company in his life.
Mr. Ettlinger attended a presentation by Winspear which
coincided with the release of the caustic fusion results where
they described their macrodiamond modelling of drill assays
using the microdiamond caustic fusion data. His
memorandum notes: "The ability to use microdiamonds as a
predictive tool in estimating macrodiamond grade is
important because sampling of the dyke by conventional
drilling will not retrieve enough macrodiamonds for a direct
grade estimate." Mr. Ettlinger found it significant that several
commercial-sized stones were recovered by caustic fusion.
Using bold type for emphasis, he notes: "We did not
anticipate stones of this size to be recovered from such small
samples." In his summary, Mr. Ettlinger notes that the 6,000
tonne sample "will be critical in determining the value of
stones contained in the Snap Lake dyke." Underlining the
subsequent statement for emphasis, he writes: "Statistical
data, however, points to a population of large stones in the
NW dyke."
Newsletter writer John Kaiser wears yet another hat, one
which, according to some Winspear shareholders, he
changed along with his coat when he issued his Bottom-Fish
Tracker on Jan. 8. In that report, Mr. Kaiser raised a
number of concerns and advised his subscribers to sell 25
per cent of their Winspear holdings. Mr. Kaiser is adamant
that his change in recommendation had nothing to do with a
suspicion that the large stones may have been salted, a
possibility he was at some pains to discredit. "I'm not
fence-sitting with respect to whether the three large stones
were salted or were just a fluke," he says. "They were a
fluke." Mr. Kaiser feels that he was misled for quite some
time regarding the percentage of the parcel's value
represented by the three large stones. His change of
recommendation was in response to finding out that those
stones comprised 75 per cent of the value of the parcel, a
fact that was later acknowledged by Winspear.
Mr. Kaiser's general assessment of the Deutsche Bank
Securities report is that it is "pretty good." He does have
some strong reservations about some claims, however. In
particular, he points to a statement appearing on page four
of the report: "It is our experience, however, that 'getting
lucky' with one diamond is possible, but that with three
stones each carrying a substantial part of the parcel's value
the likelihood that the very high valuation obtained for the
Snap Lake diamonds is grossly inflated is, we believe,
small." Mr. Kaiser says, "That is complete nonsense." He
notes that diamond populations have a random distribution
and asks, "Why are the three top stones all high quality?" He
says he is "still open to the possibility of some strange stone
distribution" but it is clearly something he is not going to
assume.
Mr. Kaiser cites an analogy he offered in a speech to the
Vancouver Personal Investment Conference on Feb. 1 to
explain his concern. "A simple way to understand this is to
imagine a parcel of Smarties, M&M's and Skittles. From a
distance they all look the same. But when you look at them
closely, you can see that they came from different factories.
As the Snap Lake kimberlite magma worked its way
through the mantle, it sampled several diamond factories. As
it ascended it mixed the Smarties, M&M's and Skittles
throughout the kimberlite." According to Mr. Kaiser,
"George (Mr. Albino) is assuming this is all 'one diamond
factory'." That is something else that Mr. Kaiser is not
prepared to assume.
Another concern that Mr. Kaiser has turns on his suggestion
that the sample from pit one had an average carat value of
about 25 per cent of that obtained from pit two. "When you
mix them together, the value looks good," he says. "But
what happens if pit one is more representative of the
deposit?" He notes that Winspear has not done any genesis
studies and that an "extraordinary amount of detail work is
still required." According to Mr. Kaiser, geostatisticians will
be more important to much of that work than geologists. He
is also convinced that disclosure standards will have to be
improved and that Winspear is in a position to take a
pioneering role with respect to those standards. Noting that
Winspear has to climb a wall of scepticism, he told his
audience at the Vancouver Personal Investment Conference:
"If Winspear wants to go beyond a cult stock with a
following of blind true believers, it needs to show us
everything it has. That need not hurt the play. After all, the
worst true believer is somebody who thinks his beliefs are
based on facts and not blind faith."
Like Mr. Albino, Mr. Kaiser does not foresee any difficulty
in establishing sufficient tonnage. His estimate of the
necessary rock value at $200/tonne, however, is somewhat
higher than Mr. Albino's suggestion of $185/tonne. "The
upside will be if they find some sort of feeder that will bring
economies of scale to bear," Mr. Kaiser says, going on to
note that Winspear is now well-funded for exploration.
Commenting on the risky nature of diamond mining and the
hurdles that lie ahead for Winspear, he remarks, "Diamond
mining is either all or nothing--it's either huge or worthless."
With his hat on straight, he is clearly still hoping that
Winspear's Snap Lake project will fall into the 'huge'
category.
Committed to a $12-million exploration program, 'huge' is
obviously also the hope of Winspear's management. Even
more obviously, it is the hope of shareholders, many of
whom have been clamouring for more information,
especially positive information, from the company. Perhaps
that is what motivated Winspear to make the Deutsche
Bank Securities report available to its shareholders almost
immediately after it was issued. In doing so, however, the
company seems to have adopted the incongruous
appearance of wearing two hats at once. The company has
pointedly admonished against using the recently released
caustic fusion analyses to make predictions about grade. In
spite of the cautions, however, they were instrumental in
making the report by an analyst who does just that easily
accessible. Calls to Winspear throughout last week were
not returned.
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