As requested by many and with kind respect to subscribers:
The RESOURCE INDICATOR
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Vol. 3, No. 14 staking VALUE early
May 25, 1999 (before market open)
___ Summary _______________________________________
Winspear Resources Inc. - WSP.v - Be Right and Sit Tight
Resource Indicator Index - $121,430 +21.4%
Open Positions
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___ Performance Watch ________________________________
August 1, 1998 (initiation date) to May 24, 1999
Resource Indicator Index +21%
TSE 300 0%
VSE Index -4%
VSE Mining Index -7%
DJIA (Dow) +21%
NASDAQ +33%
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The flow of critical data is about to begin for Winspear.
Time is here to manage between fear and greed.
Good company upon the road is the shortest cut.
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WINSPEAR RESOURCES LTD.
DECLARATION: I isolated profits (+200%) near $2 in mid 1998 as recommended and protected another portion with a 20% trailing stop loss, also as recommended. A small position was then established by accumulating on dips below the $1.16 level as outlined in the September 14, 1998 write-up and near $1 level as outlined in the September 1, 1998 summary. This position was sold for approximately 200% profits near $3.50. I have once again established a small position under $3. My original capital was not re-invested.
BE RIGHT AND SIT TIGHT (WSP.v/$3.85)
Last Full Write-up: March 29/99 ($3.54) - Be Right and Sit Tight
Recent High/Low: $4.85/$1.00
Trailing Mental Stop Loss on no more than 50% of Position: 20%
MANAGING THE PROVERBIAL WALL
The Boston Marathon is divided into three parts: 14 miles of fun, 8 miles of sweat and 4 miles of hell. It is a unique course for the elite with a hill to conquer just when your glycogen stores are depleted. Like the marathon, diamond exploration and thus speculating in diamond stocks, is similarly structured. Snap Lake, like the Boston Marathon, is unique and like the elite runners who respect the course, speculators have to respect and be aware of what awaits. With Winspear, the easy money has been made and the profits have been suggested and isolated along the way. It is now time for Mother Nature to speak about the value of the diamonds. It is at this stage that many will be faced with the proverbial wall of fear. Should one sell Winspear prior to the flow of critical data over the next few weeks?
The short answer, in my opinion, which is backed with my own shares in Winspear, is to continue to hold your position. This decision is based not only on the data yielded by Snap Lake to date, but on the action of the market and an understanding of the larger picture.
The market is currently valuing Snap Lake at approximately $220 million. Based on a projected 3,000 tonnes per day production rate and an ore value of $200 per tonne, the project would have a Net Present Value (at a 10% discount rate) of approximately $220 million. The value of Snap Lake will double at an ore value of $300 per tonne. $400 per tonne value yields a NPV of approximately $800 million. The mini-bulk sample yielded an ore value of $500 per tonne. Although these calculations are very preliminary and only one method of approximating future stock value, it is used here as an illustration to show that WSP has room to move forward based on results. The institutions are ready to enter the numbers into their spreadsheets once the valuation results are released. Anything over $300 per tonne will give them good reason to speculate with WSP. (These figures are in Canadian dollars and were estimated by MRDI Canada, a division of H.A. Simons Ltd., the lead engineering firm for the recently commissioned Ekati diamond mine.)
At a time when raising financing for mining ventures is tremendously challenging, Winspear raised $10.6 million, one of the largest financings in the junior resource sector. In fact, the financing was oversubscribed within hours. At a time when insiders are looking for liquidity to raise some funds from the sale of their share holdings, WSP insiders increased their holdings. At a time when expenditure commitments are looked at as a liability, Aber is fighting in court to maintain its share in Snap Lake. The larger picture clearly indicates confidence from the individuals closest to the project. The President of Winspear has successfully run marathons in the past. His actions indicate his confidence in successfully completing his seven year marathon like search for an economical diamondiferous body.
THE PACING CHART
The steady price of Winspear indicates that the program is progressing as expected with no surprises, either on the upside or the downside. Mineralization continues to be encountered at expected depth with the dyke thickening towards the north. Two drills continue to explore the dyke, on land, in a northerly direction where the mineralization appears to thicken. This gives speculators additional reason for continuing to participate in Winspear as it leaves open the possibility of locating a more valuable starter pit on the north shore if results warrant.
Information regarding uniformity, grade, tonnage, stone size, and stone value will begin to flow over the next few weeks. What results can we expect and will anyone take notice? My thoughts on these are summarized below.
* Aber's Diavik is close to full environmental approval. A strong performance from Aber will help to focus attention on diamonds and Winspear.
* Ekati and Diavik will rank among the top ten producers in the world when they both come into production. Institutions have participated in both and will be watching the information flow from Winspear closely in hopes of participating in the next potential Canadian diamond mine.
* If the 6,000 tonne bulk sample yields results similar to the 200 tonne mini-bulk sample, Snap Lake will compare very favourably with other world class diamondiferous deposits. The market and the diamond industry will not be able to ignore such value.
* Volume, or lack of it, indicates that the private placement participants, to a large degree, are holding their position in anticipation of larger gains. They are making their decisions based on collected data and its interpretation by leading industry authorities. Follow the insiders and hold for new highs.
* Winspear continues to be well received in Europe. Europe is knowledgeable about diamonds and has participated in WSP from an early stage. Institutions, including European institutions, are still reluctant to speculate aggressively in resource related stocks. It is this fear of resource stocks that is keeping them from taking a more aggressive position at this time. This is good for existing shareholders as it helps is to identify a group that will be providing liquidity for out next round of profit taking.
* Caustic fusion results from previous work, over a significant area, has indicated a relatively uniform distribution of diamonds within the NW Dyke. These results are supported by kimberlite chemistry (low volatiles, little contamination) and the hypothesized emplacement process (non-violent). There has been no indication of layering or phasing within the mineralized structure. With this evidence in mind, as a speculator, we can continue to expect similar results from the current drilling. Caustic fusion results are expected to be available over the next two to three weeks.
* As previously discussed, the initial estimate of grade based on the 200 tonne mini-bulk sample, may have been understated due to contamination during the extraction process. With this problem eliminated from the larger bulk sampling, I would not be surprised to see the grade adjusted upwards by 10 to 20 percent. This speculation is supported by the results from the non-contaminated pit and its apparent uniformity to normalized diamond counts from the drill intercepts.
* Drilling to date has already indicated that Snap Lake can potentially supply a 3,000 tonnes per day processing facility for at least 10 years. With a potential payback period of less than one year, no structural discontinuities identified to date, and the dyke open to the north and east, the existence of tonnage should not be a concern. What is in the tonnage is of more importance.
* Size class distribution modelling continues to extrapolate towards the existence of large stones within the dyke. Large stones have already been found in past drill intercepts and the mini-bulk pits. Based on this data, I am confident that large stones, able to get the market's attention, will exist in the 6,000 tonne bulk sample. If it does create some market movement, this will give speculators another opportunity to isolate some profits and adjust their risk level prior to valuations.
* Not much can be said about the quality of the diamonds based on the small amount of tonnage explored to date. I would like to see a minimum value of $250 per carat. This will imply a $450 million NPV for the project, double current valuation and enough to attract new long term buyers. The mini bulk sample yielded approximately $450 per carat.
* Approximately 10% of the recent exploration budget was allocated towards environmental studies and assessment. This is a large sum and shows that Winspear is serious and confident that the project will progress to the feasibility stage. The principals of Winspear have also spent considerable time to develop and maintain a close relationship with the native population. As I have indicated in the past, management has taken a long term view towards this discovery, we should do the same to maximize profits.
There is good reason to believe that results will be able to exceed the current market valuations of the project. Caustic fusion results should be available by the second week of June. Diamond counts from Pit 3 (approximately 3,000 tonnes) are expected to be available by the third week of June. An updated tonnage calculation from MRDI is expected by the end of June. Initial valuations from Pit 3 diamonds should be available by mid July. With the news flow about to begin, it is important to watch the price and protect your position with a trailing stop loss.
MAY THE SOURCE BE WITH YOU…I THINK
I have always been cautious in discussing the source as we cannot be certain of its size, shape or tonnage implications. Also, I consider it of secondary importance to the Snap Lake project. It is a case where one should be afraid of what one asks for as one just may get it. The source could be anywhere from a few meters wide to several hundred meters wide. One can easily miss a typical NWT pipe with 200 m spaced drilling, let alone a source of uncertain size and shape.
Recent drilling indicates that the NW dyke may be gently warped around a NE trending axis. With this in mind, Winspear will have to collect further information before refining their guess regarding the location of the source. My guess is that the source may actually be under land and thus can be drilled in the summer. As speculators, however, we should assign no value to the source until it is found.
EVIL COMMUNICTIONS CORRUPT GOOD MANNERS
The price action in Aber and Winspear indicates that the market, rightly, has not placed much importance to the court action initiated by Aber to maintain its interest in Snap Lake. Both sides have taken some punches towards each other but until discovery, whatever has been said to date can be withdrawn as it is not given under oath and has no legal standing. Not much detail has been made available to the public and until it is, I continue to assume that Winspear owns approximately 68%. All the above calculations are based on this conservative approach.
PARENTS ARE PATTERNS
Approval for Diamondex should be received by the end of the week and it should commence trading by the first week of June. I expect it to begin trading in the $0.40 to $0.50 range. It is expected to trade freely for about 10 to 15 days in order to let market forces determine its value, prior to a rights offering to raise some funds. The rights are expected to trade for approximately 21 days. This financing method is fair to all existing shareholders as it gives long term supporters an opportunity to maintain their position in the new exploration vehicle.
Diamondex will contain several properties with blue sky potential, including Hilltop and Carat, and should be able to attract speculators. The combination of cash, an experienced management, a strong insider position, a share structure conducive to good news, and several advanced exploration properties with identified drill targets, makes Diamondex an attractive dividend to existing shareholders.
APPROACH HEARTBREAK HILL WITH DISCIPLINE, NOT FEAR OR GREED
There have been very few success stories in the resource sector over the last three years. Recent disappointments in the sector, such as Lac Rocher and the English gold sale, continue to deplete the available capital pool. Experience has thought speculators that failures will always outnumber successes and that each opportunity should be considered speculative until cash flow has been demonstrated. However, very few learn that the primary risk of a product is not in the product itself, but in the way in with the product is managed. The largest risk in a speculation is represented by YOU!
It is not important for you to participate in every success story or participate in it till the end. Like a long distance run, however, it is important to be tactical in your participation. Participate early and leave with a larger pool of capital for the next race.
A marathon runner, no matter what kind of day it is, has to hit the water stations at every available opportunity and take the time to drink it, not just toss it on themselves. Drink plenty of water and you will have a better chance of bypassing others at the end of the race. With speculative plays, taking profits along the way is equivalent to, and just as important as, drinking water during a marathon. With Winspear, we are well prepared to finish the race. Profit should be and has been isolated at every opportunity. By now, most of you should be participating with profits only. This allows us to sit tight and manage our position between fear and greed as critical exploration data makes its way to the public.
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Sincerely,
Sudhir Khanna, P.Eng.
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