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Tracker 2008-21
November 18, 2008
Peregrine Diamonds Ltd (PGD-T: $0.34)
Chidliak pipe samples yield large macro diamonds
Synopsis: On November 18, 2008 Peregrine Diamonds Ltd (PGD-T: $0.34) reported stunning results for the two samples totaling 2.28 tonnes it had collected from the CH-1 pipe during the 2008 field season on the 100% owned Chidliak project in south Baffin Island. Peregrine has recovered large gem quality diamonds from what is a very small sample, but the results are consistent with micro diamond results yielded from earlier smaller samples. The calculated grade is 156 cpht for diamonds greater than 0.85 mm. The biggest stone is a 2.01 carat white-colorless octahedron gem. Recovering a stone of this size and nature from such a small sample is on a par with discovering a 1.75 carat diamond embedded in the A154 South discovery core hole at Diavik.
Peregrine discovered the outcropping CH-1 pipe during the summer while ground checking a prominent geophysical anomaly. This kimberlite body has not been drilled, but based on the geophysical signature and the distribution of kimberlitic rubble the company is inferring a pipe-like body with a surface area of 6 ha. Such a body with steep-sided walls would represent a tonnage footprint of 25-35 million tonnes to a depth of 300 metres, which would rank among the larger pipes in Canada's Arctic. In late August Peregrine had reported micro diamond results for several roughly 100 kg samples whose size distribution curves suggested a macro grade of 100 cpht or better. One of those samples came from outcropping magmatic kimberlite and the other came from nearby boulders of similar but somewhat more coarse grained magmatic kimberlite. A third sample consisting of pyroclastic kimberlite boulders yielded a similar size distribution curve which diminished the risk that the earlier good results were a fluke. In an effort to confirm the coarse diamond distribution and get a better understanding of the macro grade potential, Peregrine extracted 1,174 kg of material from the CH-1A showing and 1,106 kg of the CH-1B boulders. SRC processed the samples with caustic fusion but screened only for diamonds larger than a 0.425 mm sieve. The CH-1A sample yielded 85 diamonds, including 7 stones caught by a 1.18 mm sieve. The CH-1B sample yielded 83 diamonds, including 9 stones caught by a 1.18 mm sieve. The combined weight of the 0.85+ mm stones was 3.55 carats from 2.28 tonnes for a calculated grade of 156 cpht. Interestingly, the CH-1B sample, which had yielded a coarser size distribution curve than the sample from CH-1A in the earlier samples, had a calculated grade of 90 cpht. The largest stone came from the CH-1A sample weighed 2.01 carats and is a gem quality white/colorless octahedron pictured above. The dark "hole" in the diamond is a window polished through the frosting on the surface of the diamond. This sample also included a 0.22 carat off-white fragment. The largest stone from the CH-1B sample weighed 0.33 carats and was an off-white aggregate, and the second stone was a 0.14 carat white-colorless octahedron. The presence of two commercial sized diamonds of apparent gem quality in a sample this small is very encouraging. The samples are too small to reliably estimate macro grade, but the presence of large diamonds in separate samples provides strong anecdotal support for expectations of a medium to high grade pipe of 100 cpht or better. Most important, however, is the association of high grade and quality potential with a pipe-like kimberlite body rather than dyke-like bodies as has been the case with other projects in the east Arctic such as Aviat and Churchill which have yielded high grades but not tonnage amenable to open pit mining.
We have recommended Peregrine as a Good Absolute Spec Value Buy three times since August 28 as the company reported new information about Chidliak that boosted our confidence that this Ekati sized project has the potential to host an Ekati style field of diamondiferous kimberlites. At Monday's closing price of $0.34 the Chidliak project has an implied value of $63 million based on 78.9 million shares fully diluted and a 42% net interest if BHP Billiton exercises its back-in right. The results justify advancing CH-1 to the next stage of delineation drilling and collection of a larger mini-bulk sample to establish grade distribution and tonnage. According to our rational speculation model the current pricing represents good speculative value for a $2 billion dream target comparable to Ekati, which was the value BHP Billiton assigned when it bought out Dia Met. Because of the broad distribution of favorable indicator mineral chemistry within two regional anomalies, within which Peregrine has identified 170 geophysical targets requiring drill testing, we think Chidliak has the potential to host multiple diamondiferous pipes. The green band in the above IPV chart shows the range of valuations Dia Met achieved during the early stages of the Ekati discovery. It is important to note that during the frenzy of the discovery phase Dia Met achieved a valuation that matched what Ekati was ultimately worth when it achieved production six years later. The information provided by Dia Met at the time was inadequate for proper assessment of Ekati's potential, and the public's knowledge about what makes a diamond project tick was far below what it is today. That said, the information available to us about Chidliak cannot get any better for this early stage of exploration. The latest Peregrine news confirms Chidliak as a major new diamond discovery which will require at least two years of intensive exploration following up the CH-1 pipe and testing other targets before any negative conclusions about economic potential can be drawn. We have on our hands an old-fashioned discovery play with strategic implications for the diamond sector because Peregrine gets back the diamond marketing rights after the first three years of production. If exploration demonstrates a field of multiple economic pipes that can supply diamonds for decades, BHP Billiton would have competition in buying out Peregrine.
Conclusion: We think this news justifies an immediate move to test the $1 level, but because of general market turmoil, broad investor disgruntlement with the diamond sector, the still unanswered question of whether or not Peregrine Diamonds will pursue the proposed merged with privately held Peregrine Metals, and if and when BHP Billliton will exercise its back-in right, the stock price may respond less strongly. In that case we recommend that Spec Value Hunters take advantage of a bargain priced new discovery play. We think these results justify canceling the merger talks. Furthermore, we think the scale of the context for these results has world class implications of the sort that will prompt immediate involvement by BHP Billiton, even if it means letting Peregrine manage the program in 2009. Observers such as myself already assume that BHP Billiton will eventually exercise its back-in if Chidliak delivers on its promise; however, doing so now would send a positive signal to the market and reinforce the uncanny similarity with the evolution of the Ekati play 16 years ago.
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