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Tracker 2008-20
August 28, 2008
Peregrine Diamonds Ltd (PGD-T: $0.34)
First Chidliak pipe micro diamond results indicate macro grade potential
Synopsis: Peregrine Diamonds Ltd (PGD-T: $0.34) has made a significant diamond discovery and is recommended as a Good Absolute Spec Value Buy at $0.34. Based on 73.2 million shares fully diluted and a 42% net interest after BHP Billiton backs in to fund all costs to a bankable feasibility study, the current implied project value for the Chidliak project on Baffin Island is just $41 million, which at the micro-diamond testing stage represents good speculative value for a $2 billion dream target of the sort assigned to Ekati when BHP bought out Dia Met's 29% interest. All things considered, the scale of the Chidliak project and the nature of the results are better than what was presented to the market in early 1992 when Dia Met unveiled its Point Lake discovery. The results are significantly better than those delivered by Sanatana Diamonds Inc (STA-V: $0.405) for its Dharma and Uttar pipes on the MacKenzie craton in the western Arctic. Peregrine has been beaten up this year because its 72% owned DO-27 pipe lacks the critical mass for standalone development, but DO-27 is a long term asset which will one day be developed into a mine. We thus have a junior with a long term asset and an emerging story with plenty of bluesky. The only stickler is that Eric Friedland wants to merge Peregrine Diamonds and the privately held Peregrine Metals which was spun off before Peregrine conducted an RTO of Dunsmuir. Peregrine Metals owns the Altar porphyry copper deposit in Argentina for which a resource estimate was published on August 13 (1,309,000,000 tonnes of 0.39% copper measured+indicated+inferred at a 0.02% cutoff). The merger terms have not been set yet, and the merger plan was concocted while Peregrine Diamonds was stuck as a junior with a mothballed diamond deposit and a grassroots exploration play in the tonnage challenged eastern Arctic. The merger no longer makes sense in light of the latest results, because now we have an apple and orange situation. However, because there is considerable overlap between the shareholders of the two companies, with more money having recently been put into Peregrine Metals than Peregrine Diamonds, there will be a push to create liquidity for Peregrine Metals. In fact, we should assume the weaker the Altar asset, the likelier a merger will be consummated, though in the long run the copper asset may prove valuable and be spun out again if Chidliak does indeed evolve into an Ekati style diamond field. Anybody thus relying on the rational speculation model as a speculative decision making tool should assume a doubling of Peregrine's fully diluted capitalization, which would convert the implied project value to $82 million based on the current stock price. The good news for Spec Value Hunters is that this figure still represents fair speculative value for a $2 billion dream target. (For those of you who need a refresher, I suggest reading Understanding the Rational Speculation Model.
On July 24, 2008 I had published a Diamond Comment (Sizable pipe found on Chidliak play in southern Baffin Island) which pointed out that the facts surrounding the Chidliak diamond play of Peregrine on south Baffin Island were of such a promising nature that in 1993 the stock price of Peregrine would have soared. Through till sampling Peregrine had established several regional kimberlite indicator mineral anomalies within a 983,833 hectare area far removed from known districts of diamondiferous kimberlites. Furthermore, the peridotitic garnet chemistry suggested a geotherm very prospective for diamonds. On top of that, within a couple weeks of initiating an airborne geophysical survey whose data was being processed in "real time" with prompt on the ground field followup, Peregrine had discovered an outcropping kimberlite loaded with indicator minerals and associated with a magnetic anomaly that suggested a pipe-like body 250-300 metres in diameter (5-7 hectares, 20-30 million tonnes to a depth of 250-300 metres). The market ignored this development, partly because the junior diamond sector has been in a funk since April 2007, and partly because the eastern Arctic has delivered high grade dykes but no significantly diamondiferous pipes with the tonnage needed to develop a diamond mine in this remote region. I suggested that we watch Peregrine closely for signs that pipes on the Chidliak property have potential for a decent macro grade. It was perhaps too much to hope that the first pipe found through geophysical methods within a general smear of promising but widely spaced till sample results would have macro grade potential, but if CH1 delivered a decent micro diamond size distribution curve, it would be time to take Peregrine seriously, despite management's plan to dilute the share structure through a merger with the private base metals division that had been spun off when Peregrine tackled the DO27 diamond project near Lac De Gras.
On August 25, 2008 Peregrine released micro diamond results for small samples from two distinct phases within the CH-1 pipe, one of which has a coarse distribution that suggests a macro grade in the 50-100 cpht range. While the CH-1 kimberlite does not have the high micro counts of the Tuktu-2 kimberlite from the Amaruk project of Diamonds North Resources Ltd (DDN-V: $0.80) in the smaller sieve sizes, it has comparatively higher counts in the 0.6 mm plus sieve sizes than Tuktu-2 despite a smaller sample. The jury is still out on whether or not Tuktu's deficiency in the larger sieve sizes is due to diamond destruction by the RC scout drilling rig used by Diamonds North; Peregrine was able to collect its sample from outcropping kimberlite and its results are thus not clouded by the destruction issue. The majority of diamonds caught by the 0.3 mm or larger sieves are described as having a "colourless/white colour". Most unusual, the 94.9 kg CH-1B sample included 6 diamonds larger than 0.85 mm, including 2 caught by the 1.7 mm sieve. This results in an upward kink in the size distribution curve that gives us reason to be very hopeful about the results of an additional 1,000 kg Peregrine has collected from CH-1 and submitted to SRC for micro diamond processing. If these results confirm or improve the initial results, CH-1 will very likely advance to the mini bulk sampling stage.
To appreciate the significance of the Chidliak results take a close look at the above microdiamond size distribution graph which features several benchmark curves such as Peregrine's DO-27 pipe whose 89 cpht grade was established through a 2,520 tonne bulk sample (pink), the Knife pipe for which a 30 cpht grade was established by De Beers (purple), Stornoway's AV1 kimberlite for which a 88 cpht grade was established with a 59 tonne mini bulk sample (yellow), and Shear's Kahuna dyke for which a 95 cpht grade was established through a 356 tonne mini bulk sample (emerald green - oddly, the Kahuna micro diamond curve suggests a better macro grade than achieved). Finally look at the Tuktu-2 curve of Diamonds North which starts out great but plummets in the larger size fractions. The curve to focus on is the black CH1-B curve which floats higher than those of Sanatana's Dharma (red) and Uttar (orange) pipes from which much larger samples were tested for micro diamonds. It compares favorably to the AV1 curve. Most importantly, the sample size of 95 kg is a fraction of the samples processed for the other kimberlites. A 100 kg sample can be misleading on the plus or negative side, but a 1,000 kg sample provides a fairly definitive portrait of the macro grade potential. Our optimistic outlook is that the 1,000 kg sample for CH1 will straighten out the black curve upwards for CH1-B indicate a macro grade approaching 100 cpht, and extend the CH1-A curve towards the right to indicate a macro grade in the 20-30 cpht range. What ultimately happens to CH1 is not as important as evidence that large kimberlites are present at Chidliak which have evidence of macro diamonds. In these terms the Chidliak play is much more robust than the Amaruk play at the present stage of information. At a $41 million IPV the Chidliak is also cheaper than the $67 million current IPV of Amaruk.
In addition, Peregrine has discovered another kimberlite outcrop 1.5 km from CH-1 that is on the edge of a geophysical anomaly with an area estimated at 3 hectares. The kimberlite from CH-2 is described as similar to CH-1 and includes both magmatic and breccia facies. A 300 kg sample has been collected and submitted for processing. These results this early in a diamond project's exploration cycle are extraordinary, and suggest that we finally have a major new diamond play on our hands with world class potential similar to Ekati. BHP Billiton must think so also, because on August 7 Peregrine announced that it was expanding its 9,000 line km geophysical program 30% to 12,000 line km at the request of BHP which agreed to fund the extra cost out of its own pocket. This decision is important because BHP has the right to back in for up to 58% once Peregrine has spent $3 million, and at the start of the 2008 season Peregrine had spent only $2.2 million. Once BHP backs in it must spend five times what Peregrine spent to earn 51%, and then it can elect to go to 58% by funding all costs required to deliver a bankable feasibility study. BHP's eagerness to accelerate the program at its own cost should be interpreted as a very bullish sign. So far 65 geophysical anomalies have been prioritized for follow-up. Drilling will not take place until 2009, but the project's location 150 km northeast of Iqaluit, the capital of Nunavut, will facilitate earlier access than the much farther north Amaruk, Aviat and Churchill projects of other juniors.
Conclusion: The Canadian junior diamond sector has been ailing for a number of years, but its downturn accelerated in April 2007 when it started to become apparent that the star diamond juniors which had captivated the market, Stornoway Diamond Corp (SWY-T: $0.275) and Shore Gold Inc (SGF-T: $1.38), were headed for trouble. A resource estimate and prefeasibility study for Stornoway's Foxtrot project in Quebec is long overdue, and the resource estimate for Shore Gold's Star project in Saskatchewan fell short of what management had encouraged the market to expect. During this period there have not been any major new kimberlite fields confirmed by either the juniors or majors, and the market's faith in the Cinderella story with regard to diamond exploration has soured. In our effort to track sectoral trends we have created a Canadian Junior Diamond Index with a starting base of January 4, 2005. The main CJDI chart above shows that while the TSXV Index held up reasonably well until June 2008, the CJD Index has been in a steady downtrend since April 2007. The index currently has 47 TSX and TSXV listed companies as members. Membership requires the company to be primarily engaged in diamond exploration or mining. Our system not only allows us to compare the performance of a sectoral group with that of the TSXV Index, but it also allows us to track the performance of an index member relative to the overall index. For an overview of how the diamond index members have fared during the past 3 years, look at our KBFO Theme Index for Canadian Diamond Juniors. Note that the main chart shows the daily traded value for all index members, whereas the individual member charts such as the one below for Peregrine shows the percentage of the overall value traded that Peregrine itself traded on a daily basis.
The Peregrine Sub-Index Chart shows that Peregrine has badly underperformed the Canadian Junior Diamond Index since being added on January 18, 2006. We think that Peregrine from here onwards will significantly outperform the Canadian Junior Diamond Index.
*JK does not own any of the securities mentioned herein
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