| |
Express 2008-04
June 20, 2008
Amaruk ready to blossom, Churchill in stealth mode
Synopsis: Diamonds North Resources Ltd (DDN-V: $1.08) has published several news releases during the past couple weeks which dramatically boosted optimism that Amaruk has the potential to deliver an Ekati style world class diamond discovery. This changing attitude came to a boil on June 19 when Diamonds North announced a $10 million bought deal which was instantly oversubscribed. While I was cautious earlier in the year when the market drove up the stock price on heavy volume in response to high micro diamond counts, the latest batch of new information provides a subtle but powerful case that Amaruk hosts multiple clusters of medium to high grade diamond pipes. I am confirming my Good Absolute Spec Value Buy recommendation of Diamonds North at $1.08 and suggest that anybody who is not promptly on board is going to miss a boat that will not be back at the dock for a long time, if ever. There is, however, a somewhat related story which has docked for some retrofitting and which I am now recommending as a Good Absolute Spec Value Buy at $0.28, namely Shear Minerals Ltd (SRM-V: $0.28). Shear is in the market's doghouse because it has completed the exploration cycle Diamonds North is just starting and came up with high grade dykes instead of pipes. In the wake of De Beers' problems with the Snap Lake dyke into which it invested $1.5 billion nobody wants to hear about dykes in the Arctic. This outcome had been my concern for several years, and I was on the verge of writing off the Churchill project as a valiant but ultimately failed exploration effort. But Shear management has assembled a case for the possibility that very well hidden pipes may co-exist with the older diamondiferous dykes already found, and is pursuing a strategy to coax these pipes out of their disguise this summer. I find Shear's case intriguing, and the current $40 million implied value of Churchill offers double the upside of Diamonds North's Amaruk project whose $85 million IPV would translate into a $10-$20 price target in the event that exploration confirms hopes for an Ekati scale discovery. In this Express I first explain why my enthusiasm for Diamonds North has grown substantially during the past couple weeks, and then I explain why it is too soon to write off Churchill as nothing but a cluster of tonnage and cost challenged dykes.
In late May Diamonds North released additional micro diamond results for its Tuktu 1 kimberlite which provided support for the theory that the percussion drill used by Diamonds North for initial target drilling was destroying the larger micro diamonds in the samples. Diamonds North has used the percussion drill as a low cost target testing tool because of the sheer abundance of geophysical targets within a magnetically noisy background, and the widespread presence of good indicator minerals in till. The result has been 25 kimberlites discovered over the past 3 seasons, with the majority of them pipe like bodies. While the percussion drill is a very cost-effective way to make or break multiple targets, it does furnish a powdery sample of which only 1.6% is larger than a 4 mm sieve (0.4 kg from 25 kg). The micro diamond size distribution curves yielded by percussion drill samples, while suggesting a medium to high macro grade (50-150 cpht), did not allow whole-hearted optimism because micro diamonds in the 0.85 and 1.18 mm sizes were conspicuous by their absence despite a sample size large enough to furnish such stones for a medium to high grade kimberlite. The additional results for the Tuktu 1 kimberlite in late May preserved the height and slope of the curve while extending it into the 0.85 mm size fraction, not as much as should be the case in the absence of diamond destruction, but an improvement from the smaller earlier sample. In Tracker 2008-19 released on May 28, 2008 I argued that these results were reason to be optimistic that the percussion drill was at least partly responsible for the curve truncation.
On June 4 Diamonds North released pipe specific indicator mineral chemistry for the first time which provided further support for the "destruction theory". Pipes Qavvik 4 and Tuktu 1, whose micro diamond results suggested medium to high grade macro potential but exhibited truncation in the larger sieve sizes, both have peridotitic garnet chemistry (G10) above the "Hermann Grutter Line" viewed as highly prospective for diamond content. In contrast, the chemistry for pipes Umingmak and Qavvik 2, both of which yielded curves so weak that no larger diamonds at risk of crushing by the percussion drill would be expected in the sample sizes processed, indicated poor diamond potential. It would have been better if Diamonds North released this poor chemistry for Qavvik 1 for which micro diamond results from a core sample delivered an even weaker curve than furnished by the earlier percussion sample. However, according to Mark Kolebaba, who has just received the Qavvik 1 chemistry, while Qavvik 1 chemistry is somewhat better than for Qavvik 2, which is to be expected in light of Qavvik 2's weaker micro diamond results, it still in general reflects poor diamond potential. This supports the argument I made in Tracker 2008-07 on February 5, 2008 that core results for Qavvik 1 neither proved nor disproved the "crush theory" because Qavvik 1 simply has no macro diamonds to crush. Interestingly, the core sample for the Umingmak pipe did yield more diamonds in the larger sieve sizes than the percussion sample, though in general the macro grade indicated by the micro curve suggested a very low macro grade, which is reflected by the very poor diamond indicator chemistry for Umingmak. The series of chemistry graphs below show how the barren Umingmak and Qavvik 2 pipes compare to the potentially medium to high grade Tuktu 1 and Qavvik 4 pipes. It is also worth pointing out that the Tuktu regional composite graph, which was based on 250 m sample density compared to 1,000 m density for the rest of the property, represents only a portion of the composite chemistry residing above the Hermann Grutter Line. The positive implication is that multiple clusters of diamondiferous kimberlites exist within the 1.4 million hectare Amaruk project.
| Amaruk Project Chemistry published June 2008 |
|---|
 |
 |
 |
 |
 |
 |
On June 18 Diamonds North released additional micro diamond results for Tuktu 2 which preserved the height and slope of the curve for the earlier smaller sample as happened in late May with Tuktu 1, but did extend the curve into the hitherto missing 0.85 and 1.15 mm sieve sizes. It did not do this perfectly, with the curve dipping in these larger sizes, but that is actually a good thing because it supports the theory that the larger diamonds are undergoing preferential destruction. It cannot be expected that the percussion drill is perfect in its destruction of larger stones, with the result that as the sample size increases the number of "escapees" will improve from zero to a measurable number that still falls short of the number needed to preserve a fairly straight curve. The combination of good chemistry for Tuktu 1 and a better micro diamond curve for Tuktu 2, which is believed to be part of a large body with a 5 hectare surface footprint that includes the Tuktu 1, 2 and 3 "pipes", a belief supported by their similar micro diamond curves, provides a very good reason to believe that the Tuktu 1-3 complex will have a medium to high macro diamond grade, and that concerns about the destructive behavior of the percussion drill will be confirmed when Diamonds North receives the results from the 14-20 tonne bulk sample it is currently extracting from the Tuktu 1-3 complex. Diamonds North will also recover 14-20 tonnes from the Qavvik 4-6 kimberlites, all of which have decent micro diamond curves otherwise marred by the truncation effect tentatively attributed to crushing by the percussion drill.
The stakes are extremely high because the regional composite chemistry plot suggests high diamond potential for the Amaruk project, which potential is now reflected in specific pipes from the Tuktu and Qavvik clusters which are 12 km apart. While the Aviat and Churchill clusters have yielded solid micro diamond curves and medium to high macro grades (50-150 cpht) from mini bulk samples, these grades have been limited to dykes which could ultimately add up to a lot of tonnage, but tonnage that is very expensive to mine. In the aftermath of De Beers' nasty experience with the Snap Lake dyke, into which it has invested $1.5 billion and for which it is now struggling to achieve a breakeven mining operation, the market wants to see bulk mineable tonnage with good grades and values in the Arctic. If Diamonds North can demonstrate that the pipes in its Tuktu and Qavvik clusters have good grade and value, and are plentiful, we would have another Ekati on our hands that would translate into a $10-$20 price target for Diamonds North. The chemistry plots provided by Diamonds North last week for Tuktu 1 and Qavvik 4 accomplish something that has eluded Shear Minerals and Stornoway Diamond, namely matching highly prospective diamond indicator chemistry in till samples to the chemistry of a kimberlite pipe.
The Churchill project attained lots of momentum several years ago when the exceptional regional composite chemistry was released. Shear and its partners proceeded to pick off dozens of kimberlite pipes represented by prominent magnetic highs and lows, but the micro diamond results indicated that these pipes were barren or close to it. Chemistry plots for these pipes demonstrated not only that they had little diamond potential, but did not even come close to representing the good chemistry in the regional composite. Not until 2005 did Shear encounter a kimberlite which yielded a micro diamond curve suggesting a high grade. Unfortunately, PST300 was a dyke, as were the Kahuna, Jigsaw and Notch kimberlites discovered in 2006. A 356 tonne bulk sample from Kahuna in 2007 yielded a parcel of fairly good quality diamonds with an indicated grade of 95 cpht. These medium to high grade kimberlites had chemistry that was well represented above the Hermann Grutter Line, but Shear today languishes because the market does not see critical mass in terms of tonnage, nor is the grade so spectacular that an extremely high rock value can carry the day. The big concern that has haunted Diamonds North's exploration of Amaruk from the day BHP Billiton dropped its option is that Diamonds North will follow the path of Shear, spending millions to discover dozens of barren pipes, and finally finding the explanation for the good chemistry in the form of high grade dykes. By showing that pipe-like bodies have the right chemistry, Diamonds North has opened the market to speculation that Amaruk hosts multiple medium to high grade diamondiferous pipes that can be open-pit mined. Of course Diamonds North is still a long way from confirming that it has a world class cluster of economic pipes, but that is why the implied project value based on 79 million shares fully diluted is only $85 million, rather than the $2.1 billion value at which Dia Met was eventually bought out at by BHP, or the $4.5 billion valuation Diavik achieved through Aber's stock price. The very important point I wish to make is that Diamonds North is now clearly in the running for a $2 billion dream target, which is why I am confirming my Good Absolute Spec Value Buy recommendation as still valid at the current price of $1.08.
In addition to all this subtle but very good diamond news, on June 13 Diamonds North released good nickel-copper-cobalt grades from its initial 5 hole orientation drilling on the gossanous Tunerq outcrop within the Amaruk project. Diamonds North does not yet understand the extent and geometry of this system, but both the grades and tenor are such that there is good reason to be optimistic that a major ultramafic hosted nickel-copper-cobalt deposit is waiting to be found. It is thus no surprise that on June 19 Diamonds North announced a $10 million bought deal involving 1,905,000 units at $1.05 and 6,667,000 flow-through shares at $1.20 by Canaccord, Dundee, GMP and Haywood. It is my understanding that this offering sold out immediately and that there are some unhappy investors badgering management to increase the offering. My view is that $10 million on top of the $5 million or so in working capital Diamonds North has left is plenty to fund this summer's exploratory drilling and mini bulk sampling program. It is high time that investors step into the market and buy existing paper rather than force management to print unnecessary new paper at the dilutionary expense of existing shareholders. My recommendation to Spec Value Hunters is that they waste no more time waiting for cheaper prices. Diamonds North has already reported intersecting 3 new kimberlites in this season's drilling program which will test 60 targets on the Amaruk project. Mini bulk sample grades for the Tuktu 1-3 and Qavvik 4-6 bodies will not likely be available until late in Q3 or even in Q4, so it will be 3-4 months before the next critical news milestone is reached. Meanwhile ongoing exploration at the Tunerq nickel play could produce positive surprises that would inject extreme volatility into the stock that would annihilate any hopes bottom-fishers might have to pick up cheap Diamonds North stock during the summer doldrums.
The Churchill conundrum: why do barren Type A dykes and pipes intermingle, but diamond rich Type B kimberlites exist as dykes alone?
For those of you who prefer to watch Diamonds North from the sidelines, but would like a relatively stable position that could go up in its own right, and would benefit from a skyrocketing Diamonds North market, I would like to point out that Pam Strand's Shear Minerals Inc (SRM-V: $0.28) represents Fair Absolute Speculative Value in terms of a $500 million dream target, and Good Absolute Speculative Value in terms of a $2 billion dream target. Shear's Churchill project may look like a bust, and I had felt that way for several years, but there is a new twist which has rekindled my optimism that this project still has potential to deliver an Ekati-style homerun. As with the latest developments at Amaruk, there is a subtle new development which has Shear management very excited, one that most diamond commentators have either missed or chosen to dismiss. The realization that Shear was still in the game struck me like a lightning bolt last March during the diamond presentation Pam Strand gave at PDAC.
Shear has identified two types of kimberlites on its Churchill project it calls Type A and Type B kimberlites. The Type A kimberlite is characterized by strong magnetic signatures, a fine grained magmatic texture, abundant ilmenite, low indicator mineral counts, and poor indicator mineral chemistry that points at a warm geotherm not conducive to the formation and preservation of diamonds. Thanks to the prominent magnetic signature of this Type A kimberlite, Shear has been very successful at finding Type A kimberlites scattered all over the Churchill property, a total of 71 pipes and dykes. In contrast, the Type B kimberlite has a subtle magnetic signature, is medium grained, and has abundant indicator minerals with a chemistry that is prospective for diamonds and points to a cold geotherm necessary for diamonds. Shear has found only 8 Type B kimberlites, and they are dykes. They are, however, medium to high grade dykes with names like Kahuna, Notch, PST, Jigsaw and Meeka, and they are concentrated in the Sedna and Josephine River Corridors. If they were 100-200 metre wide pipes, Shear would not be trading below $0.30 with an implied project value of $40 million based on 85 million shares fully diluted and a 58% net interest. These imaginary diamondiferous Churchill "pipes" would be in the midst of a major bulk sampling program, and the IPV would be in the $250-$500 million range with speculators banking on an Ekati-style $2 billion outcome. In other words, Shear would be trading in the $2-$5 range.
Unfortunately for Shear, there is one more important difference between the Type A and Type B kimberlites which underlies the market's pessimism that Churchill hosts economic diamond pipes. All the Type A kimberlites fall within an emplacement age range of 170-225 million years which sounds normal enough. In contrast, every Type B kimberlite has an age of 232 million years. Because the Type A and B kimberlites occur randomly within the same general area, the most obvious implication, assuming the age dating is reliable, is that during the period 232-225 million a mantle event occurred which changed the geotherm in this area and destroyed the diamond fields in the mantle. In other words, by the time the wave of Type A kimberlitic magmas began their ascent 225 million years ago, there were no diamonds left to entrain and incorporate into the kimberlite. Hence all the younger pipes are barren, while the older diamondiferous pipes would have been eroded down to hard-to-find root zones, or the diamondiferous kimberlite would exist in the form of dykes that never broke surface. I had in fact speculated several years ago that this might be the explanation why Shear was so unsuccessful at finding diamondiferous pipes. And that is the conclusion into which the market has settled, namely that there is no remaining significant volume of highly diamondiferous kimberlite. It has all been eroded away.
While listening to Pam's presentation two things struck me. One was that 7 million years seemed to be an awfully short time to strip away 500-1000 metres of reasonably stable Archean crust, or even an overlying platform of sediments. The other was that the Type A pipes and dykes had an apparent random temporal and spatial distribution. What sort of conditions allowed a pipe to form at the current erosional level, then a dyke, and not too long afterwards another pipe? Was this region subject to extraordinarily volatile sedimentation and erosion cycles? The answer, it turns out, is considerably less dramatic. While decreasing pressure causes a kimberlite to gassify and develop explosive pressure as it nears the surface, an additional factor is the presence of water in the form of a water table. The presence of drought cycles at the earth's surface would be entirely coincidental to the ascent of a kimberlitic magma, but the depth of the water table would dictate whether a kimberlite erupts violently to form a pipe, or just fizzles out in the cracks and structures it has invaded to form dykes. So, yes, dykes and pipes can be close to each other and alternatively older or younger than each other.
I then wondered why such conditions should not have prevailed 232 million years ago or earlier when the diamond stability field was still intact, loaded with diamonds formed a couple billion years earlier. It has been suggested to me that tensional pressure in the earth's crust can make it so "tight" that intrusive magmas have a hard time ascending, but I cannot imagine such "tightness" would prevent a very explosive eruption when a magma encounters the water table. After all, the presence of the Type B dykes was ample evidence that kimberlitic magmas did ascend prior to the destructive mantle event. What crustal conditions prevailed prior to 225 million years ago, and how volcanic processes work are not the material issue. The real question for Shear and its Churchill project is as follows: are you sure that you have found only dykes older than 225 million years because that is all there is to find?
The answer Pam Strand and the rest of the Shear management team have come up with is a resounding no, a no that is being greeted with scepticism by investors who understandably wonder what is left to do after the collection of thousands of till samples. The desire to prove that the elusive Type B pipes do exist at Churchill and are just as diamondiferous as their Type B dyke cousins lies behind this year's strategy of exploratory drilling rather than further bulk sampling of the known Type B dykes. Shear has several reasons to be optimistic, in particular with regard to the Josephine Corridor.
First of all, the magnetic signature of the Type B kimberlites is much more subtle than in the case of the Type A kimberlites. While the magnetic signature is not so subtle as to render linear dyke structures invisible, the situation is different with discrete vertical pipes. Secondly, both the Type A and B dykes have had an orientation that is perpendicular to the ice direction from the northwest. As the ice sheets slowly moved across the dykes, they ground out and smeared kimberlite over a broad area perpendicular to the strike of kimberlites which extend 5 km or more. This "5 km wide" down-ice smear would mask any trains coming from pipes down ice from the dykes. It appears that Shear has not had much success pinpointing targets through discrete indicator mineral trains, and has largely used till sample results as a regional focusing tool. Once a kimberlite is found Shear conducts localized till sampling in an effort to understand the dispersal patterns of the indicator minerals. This has worked well in the Sedna Corridor (PST and Notch) where down ice indicator minerals can be readily linked to their kimberlite source. But the patterns have been less consistent and self-explanatory in the Josephine Corridor (Kahuna), and that is where Shear will be focusing much of its effort in 2008. Thirdly, Shear has not fully explained the regional composite chemistry in the Josephine Corridor with the chemistry of the known diamondiferous dykes.
Conclusion: Shear is just receiving the micro probe results for 479 till samples collected during 2007, 98% of which yielded indicator minerals. Shear expects to be finished with the probe data analysis by early July, and hopes that the increased density will reveal more discrete dispersal trains. Shear will combine this data with a structural interpretation being done with the help of high resolution IKONIS satellite imagery, ground penetrating radar, and gravity surveys in an effort to identify "hotspots" that have a likelihood of hosting a kimberlite pipe. To put it bluntly, Shear is trying to find kimberlite pipes that are either invisible to conventional geophysical methods, or they simply do not exist. To reduce the cost Shear will follow the example of Diamonds North and use a percussion drill to test very subtle targets. The company has about $1.5 million working capital left, which will be gone by the end of this field season. In recommending Shear at this stage I am suggesting that with only $1.5 million and a focused management effort to solve the mystery of the missing the Type B pipes Shear Minerals will deliver the results this year that put Churchill back into play.
*JK does not shares in any of the securities mentioned herein
|
