Express 2005-10: Tli Kwi Cho pipe reinstated as a world class diamond mine contender
    Publisher: Kaiser Bottom-Fishing Report
    Author: Copyright 2005 John A Kaiser

Express 2005-10   June 20, 2005

Tli Kwi Cho pipe reinstated as a world class diamond mine contender

Synopsis: On June 14, 2005 Peregrine Diamonds Inc released mini bulk sample results for the Tli Kwi Cho pipe that literally turn the clock back 11 years before the infamous Tli Kwi Cho bust on August 8, 1994 shattered dreams and wiped out $1 billion worth of market capitalization in Canadian juniors involved in diamond exploration. For 11 years the members of the DHK syndicate have complained that the low grade and poor carat value delivered by Rio Tinto's bulk sample was not representative of Tli Kwi Cho's potential. In 2004 a private company controlled by Eric Friedland undertook a $5 million gamble involving six reverse circulation drill holes into the heart (DO27) of Tli Kwi Cho. The 151.27 tonne sample yielded a 135.96 carat parcel of diamonds that includes 21 diamonds weighing 0.5 carats or more. The recovered grade of 90 cpht for the 2005 sample is 2.5 times the 36 cpht recovered in 1994. The recovered grade ranged from 70 to 103 cpht for the six RC holes. The four biggest diamonds weighed 1.62 to 2.93 carats. The 1994 parcel based on a 3,003 tonne sample had recovered only 188 stones weighing 0.5 carats or more, most of which, unlike the smaller diamonds, were poor quality. The smaller 2005 parcel not only contains more large diamonds on a proportional basis, but the larger diamonds appear to include high quality stones. The average carat value of the 1994 parcel was only US $21.70 per carat, which at the recovered grade of 35.9 cpht translated into a hopelessly sub-economic rock value of $7.80 per tonne for the 22 million tonne resource estimated by Rio Tinto to a depth of 300 metres. It is not unreasonable to expect the 2005 parcel to command a value in the $50-$100 per carat range. The stigma that Tli Kwi Cho has nice small diamonds but lousy and few big diamonds has been abolished. Peregrine has also drilled a core hole that bottomed in kimberlite at a depth of 465 metres, which gives the Main Vent of Tli Kwi Cho a vertical extent of at least 400 metres after accounting for the lake depth and overburden cover. Using the Main Vent's surface expression of 400 metres by 200 metres one can infer an open-pittable resource in the range of 30-40 million tonnes. It is now reasonable to view Tli Kwi Cho as a dream target with a 30-40 million tonne footprint, 70-100 cpht grade potential, and $50-$100 per carat value potential. This dream target scenario implies an in situ resource potential in a range of $1-4 billion. In other words, Tli Kwi Cho has been reinstated as a contender to become a world class diamond mine. Peregrine has initiated an angled core drilling program to delineate the internal geology of the DO27 pipe as well as the diamondiferous DO18 twin. Subject to formal diamond parcel valuations expected by September, Peregrine is contemplating a 5,000 tonne bulk sample during the summer of 2006 using a large diameter drill on a barge at a projected cost of $30 million. Peregrine is now exploring various ways to go public and consolidate the fragmented ownership of the pipe. Peregrine owns 54.475%, while DHK Diamonds Inc owns 20%, Archon Minerals Ltd (ACS-V: $1.60) owns 13.275%, Aber Diamond Corp (ABZ-T: $38.10) owns 7.35% and Southernera Diamonds Inc (SDM-T: $0.40) owns 4.9%. DHK Diamonds is in turn controlled one-third each by Dentonia Resources Ltd (DTA-V: $0.19), Horseshoe Gold Mining Inc (HSX-V: $0.29) and Kettle River Resources Ltd (KRR-V: $0.60). If we ignore the non-diamond projects of the DHK juniors, the market is presently assigning an $85-$120 million project value to Tli Kwi Cho. I believe the latest results are sufficiently robust to justify a $1 billion dream target value. On the basis of my rational speculation model the current DHK prices represent good speculative value, with fair speculative value prevailing at double current prices. The next step will be to see how Peregrine plans to go public and consolidate the various fragments to bring its Tli Kwi Cho stake to 74% or higher. Suffice it to say that Tli Kwi Cho has metamorphosed into one of the most important diamond plays on the Canadian diamond scene. Furthermore, the redemption of Tli Kwi Cho will stimulate market interest in the entire Canadian junior diamond sector.

The Tli Kwi Cho Bust wiped out $1 billion in market capitalization
Nearly 11 years ago on August 8, 1994 Rio Tinto delivered a bombshell to the nascent Canadian diamond boom when it revealed that its underground bulk sampling program on the Tli Kwi Cho pipe in the Northwest Territories had yielded a significantly smaller than expected parcel of diamonds that were poor quality and lacking in stone size. The news wiped out nearly $1 billion in market capitalization as investors bailed out of diamond juniors, including Dia Met, which would later disappear in a buyout that valued Ekati, Canada's first diamond mine, at $2.1 billion, and Aber, which had just discovered the high pipes that would become the Diavik project which the market today values in excess of $6 billion.

The large DO27 pipe (Tli Kwi Cho) had been discovered in early 1993 after only one season of grassroots targeting work. The name "Tli Kwi Cho" is a Dogrib name meaning "Dog's Balls", an allusion to the twin geophysical anomaly that represented the DO27 and DO18 pipes. Micro diamond results comparable to those reported from Dia Met's Ekati project next door coupled with the large tonnage implications of DO27 and its smaller DO18 twin fueled market expectations of a high grade multi-billion dollar world-class deposit. Rio Tinto shared that optimism, and in its zeal to beat rival BHP in bringing the first Canadian diamond mine into production, jumped right over the mini bulk sampling stage into a $25 million underground bulk sampling program.

Rio Tinto's underground program was a technical failure
The underground program was a technical failure in that the adit only partly penetrated the DO27 pipe before water problems forced Rio Tinto to abandon the program. Rio Tinto, embarrassed by this boondoggle, concluded that the pipe was sub-economic due to a low grade and poor quality diamonds, and turned its attention to the new high grade Diavik discovery made a few months earlier by Aber. Apart from several scientific papers describing the petrography and diamonds no further work was done on Tli Kwi Cho. But the three juniors hit hardest by the result, the members of the DHK Syndicate, kept up an unrelenting outcry that the Rio Tinto program had not properly tested the DO27 pipe.

 
Planned 1994 Bulk Sample Actual 1994 Bulk Sample

Rio Tinto eventually returned its stake in the project in exchange for a royalty, and over the years the property was handed first to Archon Minerals and then BHP-Billiton, who unsuccessfully tried to find other potentially economic pipes on the WO property, but managed to acquire net interests in the Tli Kwi Cho pipe without contributing a nickel to its advancement. During this period BHP, Aber and SouthernEra shared Rio Tinto's low opinion of Tli Kwi Cho even though the bulk sample had tested only a fraction of a large complex pipe. In retrospect it was clear that Rio Tinto at the time did not have the technical expertise to assess Tli Kwi Cho, and brought in people like Buddy Doyle too late to affect the decision-making process. In what almost seemed like penitential overkill, Rio Tinto went on to spend $80 million evaluating the Diavik pipes before making a production decision. In the process Rio Tinto still managed to miss the existence of a lower grade layer of mudstone diluted kimberlite at the top of A154 South pipe, a development which set back cash flow expectations by a year. But Rio Tinto never looked back at Tli Kwi Cho, a hallmark that distinguishes Rio Tinto from De Beers, which swallowed its pride and looked back at Victor, now being permitted as a world class mine.

Peregrine Diamonds: a private company with a $126 million market cap
In early 2004 BHP-Billiton transferred its interest in Tli Kwi Cho to a private company controlled by Eric Friedland which had been created to apply BHP's Falcon geophysical system in South America. Falcon is a multi-input geophysical data gathering system which has proven very adept at identifying known kimberlite pipes. Since its inception Peregrine Diamonds Inc has raised $33 million from private investors, including a recent $9 million round at $3 that brings Peregrine's fully diluted capitalization to about 42 million shares with a market capitalization of $126 million. Much of that market value has been assigned to various copper-gold projects in Chile, but the Tli Kwi Cho option gave Peregrine a relatively inexpensive shot at revisiting a sullied world-class scale diamond pipe with an excellent address next door to the world class Ekati and Diavik diamond mines. The Tli Kwi Cho deal enabled Peregrine to earn 54.475% by funding a risky $5 million mini bulk sample in the untested heart of the pipe.

Stunning 2005 mini bulk sample results
On June 14 Peregrine released results that stunned the diamond exploration industry and turned the clock back 11 years. A 151.27 tonne sample extracted through six reverse circulation holes (13.75 inch diameter) yielded 1,806 diamonds at a 1 mm screen cutoff weighing a total of 135.96 carats for an average recoved grade of 90 cpht. Five of the holes encountered a pyrope-chrome diopside rich pyroclastic facies of heavily weathered kimberlite from which 108.47 tonnes were recovered that yielded 106.03 carats for an average recovered grade of 98 cpht. The grades for each of the five holes ranged from 78-103 cpht. The sixth and southernmost hole encountered a different facies of fresh olivine rich volcaniclastic kimberlite. Of significance is that this 42.8 tonne sample yielded 29.93 carats for a recovered grade of 70 cpht. This sample includes 7 stones weighing 0.5-0.98 carats. The sample weights were determined by measuring the width of the RC holes to calculate excavated volume. The specific gravity was obtained from nearby core holes drilled to obtain corresponding petrographic, indicator mineral and micro diamond information. If the 2005 Tli kwi Cho results were for a newly discovered pipe, such as the A15 pipe in Botswana controlled by Tsodilo Resources Ltd (TSD-V: $1.28) or the Lapointe 1 pipe discovered by Arctic Star Diamond Corp (ADD-V: $0.26) and Tres-Or Resources Ltd (TRS-V: $0.28) in the Timiskaming region of Ontario, this news would spur a frenzy of market activity. But Tli Kwi Cho is an old story with considerable baggage, and therein lies an opportunity for bottom-fishers.

Explanation of why the 1994 bulk sample was such a disappointment
The 1994 bulk sample had encountered two main facies, a hypabyssal kimberlite which yielded only 16.4 carats from 1,258 tonnes for an abysmally low recovered grade of 1.3 cpht, and a pyroclastic kimberlite which yielded 1,079 carats from 3,003 tonnes for a recovered grade of 35.9 cpht. The hypabyssal kimberlite has since been recognized as a near barren earlier stage intrusion with minimal tonnage implications. The pyroclastic kimberlite was a later eruption with 30 million tonne plus resource potential. Based on an invalid diagnostic tool where grade is estimated as the total weight of micro diamonds divided by the sample weight, Rio Tinto had made internal projects of a macro grade in the range of 100-200 cpht, a far cry from what the bulk sample delivered. While Rio Tinto acknowledged that the underground program had only sampled the outer edge of the main diamond-bearing kimberlite, its conclusion that the pipe was sub-economic was based on the quality and size of the recovered diamonds. Although the 13,888 diamonds caught by a 1 mm by 3 mm sieve were described as "good quality and color", the 118 stones recovered by a 4 mm screen (0.5 carat or larger) and weighing 172 carats were very poor quality. At the time these 118 stones had an average value of only US $33 per carat. The biggest diamond weighing 9.81 carats was an industrial stone worth $10 per carat. The best stone in the bunch was a 3.6 ct diamond worth US $450 per carat. Yank out that high value stone and the average for the rest of the big stones drops to $24 per carat, an indication of very poor quality for half carat plus stones even at the prices that prevailed ten years ago.

1994 parcel: not many large diamonds, and poor quality ones to boot
Although I have never seen the diamonds nor a formal description of them, I have heard anecdotal reports that the small diamonds below 4 mm were generally clear and colorless, which is why the abrupt quality break in the larger sizes puzzled everybody. It was assumed that this was due to different diamond populations, a higher quality population with a steeply plunging size distribution curve, and a lower quality population with large stone potential. Nevertheless, in an August 30, 1998 report commissioned by Kettle River diamond expert Howard Coopersmith did observe that there was a shortage of 2-5 carat stones, which he attributed question beggingly to "natural distribution" or, much more meaningfully, to possible "theft". I do recall hearing rumours during the nineties well before Ekati was in production that NWT diamonds were available on the black market in Yellowknife, so I would not rule out that the 1994 bulk sample was robbed of its better stones. Similar rumours suggested that theft may have been a factor in the absence of better quality stones among the otherwise large diamonds in the parcel recovered from a 10,000 tonne Jericho bulk sample. The risk of theft is not necessarily a negative comment on the operator of a diamond recovery plant; De Beers has been said to lose $50 million annually to theft at its three Botswana mines despite extreme security measures by a company that has been in the business more than a hundred years. Theft estimates are based on "holes" observed in the recovery statistics of an operating mine that are not attributable to random varations. Whether the better stones were pilfered or the population of the phase sampled was complete, the overall Tli Kwi Cho parcel had an average value of only US $21.70 per carat, which in an Arctic setting represented a hopelessly sub-economic rock value of US $7.80 per tonne at the recovered grade of 36 cpht.

2005 parcel: lots of big diamonds including high quality stones
By comparison the 2005 mini bulk sample results represent a radical departure from the implications of the 1994 bulk sample. Not only has the recovered grade nearly tripled, but the picture in terms of quality and stone size potential has improved sharply. The 151.72 tonne sample yielded 1,806 diamonds, of which 21 diamonds weighed 0.5 carats or more. Although the 1994 sample was 20 times larger, it yielded only about 6 times as many diamonds above 0.5 carats than the 2005 sample. Include the fact that diamonds have a lognormal size distribution, and one can argue that the 1994 sample should have yielded more than 20 times the large diamonds recovered through the 2005 sample. Invert the arithmetic and one could argue that had Peregrine recovered 3,000 tonnes of material from the 2005 holes in the centre of the DO27 pipe, more than 400 large diamonds would have been recovered. But while it is clear that the 2005 sample reveals a much greater abundance of large stones than the 1994 sample, what about the quality of the diamonds? For that I suggest one take a look at the photo below of the parcel recovered from RC Hole #2.

The four largest stones were described as 2.93 cts (light brown flattened octahedron), 2.66 cts (off-white tetrahexahedron), 1.85 cts (clean white octahedron), and 1.62 cts (clean, white, complex tetrahexahedron). "Clean" means "clear", that is free of inclusions, while "tetrahexahedron" is the technical term for a resorbed octahedron generally known as a "dodecahedron". According to Peregrine's Jennifer Pell the 1.85 carat stone is an excellent diamond, and similar smaller stones are present. The parcel is large enough to be valued and is being shipped to Aber for valuation. Peregrine hopes to provide valuations within 3 months from BHP, Aber and WWW International Diamond Consultants. The latter may also provide modeled values. Judging from the distribution of color in the photo there is no question that the quality is not in the same league as the diamonds in Ontario's Victor pipe, a similarly sized complex pipe which languished for ten years before De Beers' realized it had a world class diamond deposit on its hands containing more than $3 billion worth of diamonds. But DO27's grade appears to be 3-4 times higher than Victor, and the pipe is also a large open-pittable situation. My guess is that the DO27 diamonds will end up with a value in the $50-$100 per carat range, higher if further bulk sampling confirms open-ended potential for large high quality diamonds. The market, however, is reluctant to change its mind until it has proof of a higher valuation.

Other questions the market has are why there is a difference in grade, and whether or not the latest results have been skewed by luck. With regard to the question of luck it is important to note that stones ranging from 0.5-2.93 carats were recovered from all six RC holes. In addition, the recovered grade for the holes ranged 70-103 cpht. Except for the southernmost hole, the holes were spaced apart on roughly 50 metre centres (see above diagram). With regard to the grade difference, there is suspicion that the pyroclastic kimberlite recovered in the 1994 sample is a separate eruptive phase Peregrine has tentatively labeled the "Northeast Subsidiary Lobe". If this interpretation is correct and the boundaries between the DO27 Main Vent and the NE Subsidiary Lobe in the diagram above are reliable, the 2005 sample tested a different and volumetrically significant phase of kimberlite. The total micro diamond weight system used by Rio Tinto (grade is the normalized weight of all recovered diamonds, a meaningless number because it includes diamonds below commercial cutoff) shows a pattern of higher "grades" in the Main Vent. It is questionable whether or not Rio Tinto ever had a proper understanding of the internal geology of DO27 before it initiated the underground sample. I have heard reports that by the time Barbara Scott-Smith was brought in to do the petrography of the original core holes the kimberlite had broken down badly. In fact, according to Jennifer Pell the first 240 metres of in situ kimberlite is so badly weathered that Peregrine had recovery problems. A couple holes had to be stopped because the hole walls had started to slump, which if allowed to continue would have distorted sample size calculations. These recovery problems were why Peregrine recovered only 151 tonnes instead of the planned 200 tonnes. In fact, Rio Tinto's original decision to extract a bulk sample through underground drifting rather than large diameter surface drilling was driven by concerns about recovery problems.

Internal geology of large Tli Kwi Cho complex never properly understood
The upshot is that the internal geology of the Tli Kwi Cho complex to this day remains poorly understood. Towards that end Peregrine attempted to drill three NQ core holes, with the first reaching a vertical depth of 465 metres ending in kimberlite, and a second hole near RC Hole #6 stopping in kimberlite at a depth of 230 metres. The deepest previous hole had been drilled to a depth of 215 metres. (The lake is about 8 metres deep, followed by 52-60 metres of overburden before an abrupt transition to weathered kimberlite.) After accounting for the lake and overburden we now know that DO27 has a depth of at least 400 metres. Unknown is the width of the pipe at depth. The two successful holes drilled near the RC holes will furnish micro diamond, indicator mineral and petrographic information that can be mapped to the mini bulk sample results. The Main Vent has a surface expression of 400 m by 200 m which represents a surface area of about 8 hectares. Rio Tinto had estimated 22.7 million tonnes of pyroclastic kimberlite to a depth of 300 metres, or 240 metres of actual kimberlite, using a specific gravity ranging 1.8-2.2. By pushing the Main Vent to a depth of 465 metres one can estimate tonnage potential in the range of 30-40 million tonnes.

DO27's twin, DO18, also deserves to be revisited
A $500,000 program funded by Peregrine is now underway to drill angled delineation holes to rebuild the DO27 database and provide the basis for a major 5,000 tonne bulk sample in 2006. Peregrine is looking at using something like the 1.1 metre diameter Bauer rig pictured below which Shore Gold is using on its Star project in Saskatchewan. This rig produces too much vibration to be used on ice, which means the next bulk sample would have to be taken from a barge during the summer of 2006. Peregrine hopes that the self-contained nature of the Bauer rig's recovery system will facilitate permitting. The $500,000 program will be quickly followed by additional delineation drilling designed to demarcate the boundaries of DO27 at depth. Peregrine will also revisit the 200 metre wide DO18 pipe which had yielded encouraging micro diamond counts through core holes, but which yielded a grade of only 9 cpht from a single 15 cm diameter core drill hole in 1996 that recovered 6.88 tonnes. The footprint for DO18 suggests tonnage potential in the 15-20 million tonne range to a depth of 300 metres.

Tli Kwi Cho deserves to have another $30 million spent on it
Not only is the grade nearly three times what Rio Tinto reported, but the parcel contains an abundance of large stones that includes high quality diamonds with a frequency unlike anything observed in the 1994 bulk sample. My initial assessment is that DO27 hosts a 30-40 million tonne resource with a grade range of 70-100 cpht and a carat value range of at least $50-$100 per carat, higher if bulk sampling reveals the presence of large high quality diamonds such as occur within the Gahcho Kue pipes of Mountain Province Diamonds Inc (MPV-T: $2.64) where De Beers is completing a prefeasibility study on an 11 year mine plan for a multi-pipe high grade resource in the order of 20-25 million tonnes. The DO18 pipe represents additional diamondiferous tonnage in the order of 15-20 million tonnes with unknown grade and value. The speculative numbers for DO27 alone represent an in situ gross value range of US $1-$4 billion worth of diamonds. Mining economics would involve a single open pit operation whose economics would benefit from the proximity of the Diavik and Ekati infrastructure. There is no question that Tli Kwi Cho now deserves a new round of exploration involving proper delineation of the internal geology and a major bulk sample at an overall cost likely to exceed $30 million over the next two years.

Who has a stake in Tli Kwi Cho?
So why have the prices of the associated juniors not exploded? The market has not reacted strongly to the reinstatement of Tli Kwi Cho as a world-class diamond mine contender because the 54.475% owner, Peregrine Diamonds, is still private, and the rest of the ownership is badly fragmented. The primary gateway through which the market can value Tli Kwi Cho are the DHK Syndicate members which together own 20% of Tli Kwi Cho. They are: Dentonia Resources Ltd (DTA-V: $0.19), Horseshoe Gold Mining Inc (HSX-V: $0.29) and Kettle River Resources Ltd (KRR-V: $0.60). Other holders include Aber Diamond Corp (ABZ-T: $38.10) with 7.35%, Southernera Diamonds Inc (SDM-T: $0.40) with 4.9% and Archon Minerals Ltd (ACS-V: $1.60) with 13.275%. The latter all have other significant projects whose value dominates their market capitalizations and thus are not suitable as vehicles for speculation on Tli Kwi Cho.

Peregrine's merger with Dunsmuir no longer makes sense
There definitely is excitement at the management level of Peregrine Diamonds which has just seen a $5 million gamble parlay into a 54% stake in an advanced diamond project that could turn out to be worth $1 billion at the end of the day. The plan at Peregrine Diamonds is to split off the non-diamond South American assets and go public with the Tli Kwi Cho diamond project as soon as possible. Last year Peregrine had explored going public through a merger with Frank Giustra's Dunsmuir Ventures Inc (DVV-V: $0.105), but this plan was suspended earlier this year in favour of a plan to stuff a bunch of uranium projects into Dunsmuir and then spin off the diamond subsidiary as a merger vehicle for Peregrine. But now that Peregrine's Tli Kwi Cho gambit has paid off Dunsmuir is no longer suitable as a merger vehicle except on brutal 20:1 or worse terms. Peregrine now has the fundamentals to go public by way of an IPO or a reverse takeover of a shell.

Consolidating Tli Kwi Cho fragments an important but difficult step
The obvious next step is for Peregrine Diamonds to go public and consolidate as many of the Tli Kwi Cho fragments as possible. The exit strategy for Peregrine is to fund Tli Kwi Cho to the prefeasibility level and then get bought out by one of the diamond majors, or possibly even one of the gold majors who have been sniffing around the diamond sector (Newmont with Shore Gold, Barrick with Diamondex, and Teck-Cominco with Diamonds North). Peregrine does have the prerequisite operatorship for such a buyout, but the 54% stake is too low to attract a major. While one would think that consolidating the fragments would benefit all participants, the situation is not as straightforward as it might seem. Peregrine's Eric Friedland will be inclined to assign a significant premium to Peregrine's operatorship and fund-raising clout that could translate into unappealing terms for the fragment owners. Aber, which has strategic reasons down the road to acquire control of Tli Kwi Cho even though its management sided with Rio Tinto in dismissing Tli Kwi Cho as worthless after the 1994 bulk sample, will likely keep its 7.3%. SouthernEra's 4.9% interest is so small and acquired quite by accident that the company may keep it just to stay involved. Archon is 97% controlled by Stew Blusson and owns 30% of the Buffer Zone where BHP is about to resume heavy bulk-sample related expenditures this winter. Blusson personally receives 10% of the Ekati cash flow and has been funding Archon's Buffer Zone cash calls through cash advances. It makes economic sense for Blusson to securitize Archon's 13% Tli Kwi Cho stake and use it to fund BHP's Buffer Zone cash calls, but Blusson makes so much more money than he can bring himself to spend that simply keeping the 13% and meeting Peregrine's cash calls may be his choice.

From rags to riches to rags to riches again?
That leaves the 20% owned by DHK Diamonds Inc, which in turn is owned one-third each by the three DHK juniors which have busied themselves with early stage non-diamond exploration projects after a decade of squabbling and animosity. Getting the DHK principals to agree on a course of action is no small task. Thirteen years ago the DHK juniors were broke and sorely in need of a destiny when a chain of university connections translated into a deal to grubstake closeology staking in the vicinity of the new diamond discovery made through Dia Met by an eccentric called Chuck Fipke. At the time I was research director for a small Vancouver brokerage firm and knew next to nothing about diamonds and diamond exploration. But I knew enough on that day in November 1991 when Dia Met's news release about the Point Lake discovery hole rolled off the fax to realize that something momentous was underway. Dia Met very quickly achieved valuations well ahead of disclosed fundamentals and stayed that way until BHP bought out Dia Met on terms that left many shareholders wondering if they had been ripped off thanks to inadequate disclosure. During 1992 the market was divided into fanatic Dia Met true believers and everybody else, which resulted in comparatively cheap valuations for the surrounding juniors. At the time I did not "know" Fipke was spouting nonsense when he declared Dia Met had done enough work to "get it all", but I ignored him anyway and recommended a four-point strategy of buying all the cheap juniors surrounding Dia Met. This area play strategy proved hugely profitable when the satellites discovered diamondiferous pipes outside Dia Met's property limits. The DHK group, whose claims had been optioned by Rio Tinto, saw their share prices soar up to 6,000% from their 1992 lows when Rio Tinto discovered the diamondiferous Tli Kwi Cho pipes. Everybody was convinced that Rio Tinto had found something equivalent in value to Dia Met if not better. But this Cinderella story of rags to riches went to the heads of the DHK principals, especially when marriage maker Peter Brown tried to cobble together a merger between the DHK members and Aber. The squabbling among the DHK members became so painful that red-faced Rio Tinto executives penning the Tli Kwi Cho Bust news release purportedly consoled themselves with comments along the lines of "I can't wait to see their faces when they read this news".

Misleading use of micro diamonds created meaningless assessments
Well, it wasn't just Adolf Petancic, Jim McInnes, George Stewart, and Ellen Clements who had long faces when the news toppled them from the top of the world back into the gutter of penurious obscurity. About $1 billion in diamond junior market capitalization evaporated the next day, dealing a body blow from which the diamond exploration sector never fully recovered despite the subsequent discovery of significant diamond deposits in the Slave by Aber, Mountain Province and Winspear. Post mortems concluded that to blame were misleading reporting standards for the diamond exploration sector, in particular a nonsensical concept called macro to micro diamond ratios based on an arbitrarily defined 0.5 mm longest dimension. Thanks to bad experiences like the Tli Kwi Cho Bust the industry has come a long way in developing meaningful reporting standards. Unlike the Torrie pipe of Fibre-Klad and Tanqueray which became a false star on the basis of the longest dimension macro-micro ratio which subsequent bulk samples dashed to smithereens, the Tli Kwi Cho Bust acquired an aura of conspiracy as DHK representatives questioned whether or not the 1994 bulk sample was truly representative of the Tli Kwi Cho pipe.

Rio Tinto never had a sound basis to map 1994 results t the entire pipe
In 1994 there was little appreciation for the complexity of large pipes, and the use of micro diamonds as a modeling window for macro grade was generally dismissed as either a phenomenon that applied uniquely to Argyle or as a delusion of statistics acrobats like Luc Rombouts. Rio Tinto's own use of total micro diamond weight based grade estimates shows what a feeble grasp even the majors had with regard to the use of micro diamonds as an exploration tool. George Stewart was the first to protest the 1994 bulk sample, and then Adolf Petancic grabbed the torch, but their contentions that the 1994 bulk sample did not really test the heart of Tli Kwi Cho were dismissed as the ravings of victims who could not come to terms with their loss. The DHK principals even hired outside experts like Felix Kaminsky to study the diamonds and make pronouncements about diamond size potential. But at the end of the day the Tli Kwi Cho story boiled down to this: Rio Tinto had sampled only a fraction of the Tli Kwi Cho complex without having an empirical basis to map the macro diamond results to the rest of the complex. (Ironically, the same can be said about the Star kimberlite where Shore Gold's underground bulk sample has tested only a fraction of the overall inferred Star resource, albeit with positive results. Shore Gold does not yet have the empirical basis to map the bulk sample results to the larger volume needed to make Star potentially economic. The $40 milion program now underway is designed to establish that "connection". This appears to be quite the opposite situation where Newmont does not really appreciate the risk that the bulk sample results from the heart of Star may not map to its peripheral but critical tonnage.)

Rio Tinto screwed up big time in the way it evaluated Tli Kwi Cho
Adolf Petancic and George Stewart's assertions that the Main Vent was better were a leap of faith, because the micro diamond data was in a useless format to justify such assertions. But they, and this was backed up in 1998 by Howard Coopersmith, were right in asserting that the 1994 bulk sample taken from the shallow fringes of the Tli Kwi Cho complex could not and should not be mapped to the rest of the pipe. And now the 2005 bulk sample results speak for themselves; Rio Tinto was empirically and scientifically wrong in dismissing Tli Kwi Cho as a lost cause.

For now the three DHK juniors are the eyes through which the market must value Tli Kwi Cho, and if we discount 100% the other exploration projects in the portfolios of Dentonia, Horseshoe and Kettle River, the current implied project value ranges from $85 million for Kettle River to $120 million for Dentonia. Horseshoe's $110 million IPV is already close to Dentonia's, but Kettle River needs to jump another 40% to about $0.85 to be even with the others. Kettle River has only 9.5 million shares fully diluted compared to 42.2 million for Dentonia and 25.3 million for Horseshoe. Dentonia is an old extreme risk bottom-fish buy recommendation below $0.10 dating back to January 5, 2000, while Horseshoe has an ancient open $0.30-$0.49 bottom-fish buy recommendation dating back to November 28, 1994. Kettle River was a $0.50-$0.75 bottom-fish buy dating back to December 1, 1997 which I closed out at $0.18 on October 11, 2004 when I updated Kettle River's KBFO profile. Because their net 6.7% interest is so small the DHK juniors need to figure out some way to cash in their Tli kwi Cho stakes, and the most obvious route is to sell DHK Diamonds Inc to Peregrine Diamonds in exchange for stock.

Watch for DHK juniors to double in the short term
Given the history of bitterness and frustration over the DHK synidcate's inability to do anything about their shared conviction that Tli Kwi Cho had not been done justice, agreeing on a strategy that would transfer ownership to a third party would seem hopeless. But on March 10, 2005 Kettle River's George Stewart unexpectedly passed away, never to experience the vindication which a bulk sample program already underway would deliver a few months later. That certainly has given all the DHK parties pause to think about the shortness of life and what is and isn't important. I suspect we will see a new spirit of collaboration emerge among the DHK members which will serve their shareholders very well. There remains a lot of exploration work still to be done, but Tli Kwi Cho once again is a legitimate dream target with a value in the $500 million to $1 billion range. Should this be borne out under conditions that avoid significant dilution it would translate into stock prices 5-10 times higher the current prices for Dentonia, Horseshoe and Kettle River. If we discount Peregrine Diamond's non-diamond projects 100% and assume the $15 million working capital will go into exploration of Tli Kwi Cho, the $3 price of the recent financing round assigns an implied project value of $233 million to Tli Kwi Cho based on Peregrine's 42 million fully diluted capitalization and 54% net interest. In other words, the DHK juniors could sustain a doubling of their current prices, at which point one would want to see a deal whereby Peregrine Diamonds emerges as a public company with at least 74% of Tli Kwi Cho.

*JK does not own shares in any of the securities mentioned herein

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