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.
(c) Copyright 1999 Canjex Publishing Ltd. canada-stockwatch.com
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