2005-06-16 14:52 ET - Street Wire

by Will Purcell

Ellen Clements and the late George Stewart's Kettle River Resources Ltd., Adolf Petancic's Dentonia Resources Ltd. and James McInnes's Horseshoe Gold Mining Inc. received overdue vindication from their old Tli Kwi Cho project. Eric Friedland's Peregrine Diamonds Ltd. produced a grade of nearly one carat per tonne in a mini-bulk test, nearly 11 years after the large pipe delivered a big bulk sample bust.

The result came a few months too late for Mr. Stewart, who died March 10, 2005, but it was sweet news for Mr. Petancic. The pair had long tried to revive what the market distainfully termed Dog's Balls after the big bulk flop. Peregrine's long-suffering partners touted an untested core zone as a key to the project and the new 150-tonne sample drilled into the area missed by the 1994 underground test. The encouraging result brings the project new life, but Peregrine and its partners will have to answer some remaining questions.

The new test
Peregrine drilled six reverse circulation holes into the main vent of the DO-27 part of Tli Kwi Cho, extracting just over 150 tonnes of kimberlite. The rock produced 135.96 carats of diamonds larger than a one-millimetre cut-off, and that worked out to a sample grade of about 0.91 carat per tonne. Things were even better within a kimberlite phase that contained plenty of pyrope garnets and chrome diopsides. Five of the six holes tested that zone and they contributed 108.5 tonnes of the kimberlite. The rock revealed 106.03 carats of diamonds, which worked out to a grade of 0.98 carat per tonne.

One of the holes hit an olivine-rich phase of kimberlite that seemed markedly different from what the partners found in the other tests. That is intriguing, as the hole was the southernmost hole of the current tests. Peregrine produced an estimated 42.8 tonnes of kimberlite from that one hole, recovering 29.93 carats. That was good for a grade of 0.70 carat per tonne. Even that value was double what the 1994 test delivered from a phase of kimberlite farther to the north in DO-27.

There were some larger diamonds in the mix. The largest stone weighed 2.93 carats, and at least three others topped the one-carat mark, with weights of 2.66 carats, 1.85 carats and 1.62 carats. Another three diamonds came close to the one-carat mark, weighing 0.98 carat, 0.96 carat and 0.94 carat respectively.

The two-carat diamonds weighed nearly 5.6 carats, amounting to 4.1 per cent of the Tli Kwi Cho diamond parcel. The two extra one-carat diamonds added another 3.47 carats, and the three other large diamonds bring the weight of the diamonds larger than 0.94 carat to nearly 12 carats. That accounts for nearly 9 per cent of the full parcel.

Further, the Tli Kwi Cho partners recovered 21 diamonds that weighed at least one-half carat. The full weight of that parcel is unknown, but it probably topped the 20-carat mark. At about 21 carats, the one-half-carat stones would account for about 15 per cent of the total diamond weight.

The comparisons
Those proportions are a fraction of what Shore Gold Inc. found in a bulk sample of its Star kimberlite. Over 40 per cent of the weight of the Star diamonds came from one-half-carat stones, while one-carat diamonds accounted for roughly one-third of the diamond weight. Two-carat diamonds contributed nearly 20 per cent of the full Star parcel. It was no surprise as a result that two of Shore's diamonds weighed nearly 20 carats each and several more topped the 10-carat mark.

Still, the Tli Kwi Cho diamonds put up a promotable showing when compared with what De Beers Canada Inc. found at Gahcho Kue, about 100 kilometres south of Tli Kwi Cho. Two-carat diamonds accounted for about 5 per cent of the diamond weight obtained from the AK-5034 pipe, while one-carat diamonds amounted to about 9 per cent of the diamonds. One-half carat diamonds contributed about 18 per cent of the full AK-5034 parcel.

De Beers also recovered a large diamond parcel from the Hearne pipe, and about 15 per cent of the weight came from diamonds weighing one-half carat. One-carat stones accounted from roughly 7 per cent of the haul, while two-carat gems contributed about 3 per cent of the entire parcel.

The Tli Kwi Cho test and the Gahcho Kue results are not directly comparable. De Beers typically uses a 1.5-millimetre cut-off for its samples, and that would result in fewer tiny diamonds than Peregrine produced with its smaller cut-off. As a result, the size distribution of the Tli Kwi Cho diamonds compares favourably with the AK-5034 pipes.

That is encouraging, but the ill-fated 1994 test remains the most important comparison. Kennecott Canada Exploration Inc. processed 4,261 tonnes of kimberlite from the pipe, recovering 1,095 carats of diamonds. That worked out to a grade of just 0.25 carat per tonne, barely one-quarter of what Peregrine's test delivered.

A significant portion of the test came from a phase that was barely diamondiferous, but about 3,000 tonnes of the kimberlite yielded 1,079 carats. That amounts to just 0.36 carat per tonne. That modest grade was about one-third of what the Tli Kwi Cho partners were shooting for, and it effectively ended Kennecott's participation in the project. Mr. Stewart and Mr. Petancic continued to chat up their failed pipe over the next decade, but willing listeners were almost as rare as diamonds.

The questions
Grade was not the only problem with Tli Kwi Cho. Peregrine will have to prove that its DO-27 diamonds carry a much higher value than Kennecott produced. The 1994 bulk sample yielded an appraised value of just $21.87 (U.S.) per carat. That is unlikely to be economic, even with Peregrine's more promising grade.

Still, there is reason for encouragement. The Kennecott test produced over 14,000 diamonds, and that worked out to an average weight of 0.077 carat per diamond. Peregrine recovered 1,806 diamonds, which suggested a nearly identical average diamond weight of 0.075 carat. Kennecott also used a larger cut-off, and that would boost its average diamond size. As a result, there is reason to believe that Peregrine encountered a coarser diamond population with its test. Further, the latest carat crop appears superior to the stones recovered by Kennecott.

The buoyant diamond market is another source of encouragement. Current diamond prices are significantly higher than they were in 1994, and that reason alone should give the Tli Kwi Cho value a hefty boost. Peregrine plans to have the old Kennecott parcel reappraised, along with its smaller batch of stones.

As well, it is reasonable to expect that a modelled diamond value would be significantly higher than a raw appraisal would produce. The Peregrine parcel is tiny, and even the Kennecott batch is small enough that large diamonds are rare. Explorers with tiny carat crops typically produce modelled diamond valuations that are double or triple what a raw appraisal delivers.

The difference between actual and forecast diamond values can still be significant with larger batches. Shore Gold recently valued a 3,000-carat parcel from Star and the raw assessment came in at $110 (U.S.) per carat. The modelled diamond valuation was a much more promotable $135 (U.S.) per carat. Larger samples will boost the diamond valuations, and they could provide a grade increase as well.

Larger samples have a better chance of tapping into richer regions and that often leads to better grades than small samples produce. As a result, Tli Kwi Cho has a chance of topping the one-carat-per-tonne mark in another bulk test.

The size of the core region within Tli Kwi Cho is another key piece of the puzzle. Peregrine now thinks that the main vent covers about six hectares at the surface and the body appears to extend to a promotable depth. As a result, there could well be enough kimberlite to support a mine, if Peregrine can produce a sufficient grade and value.

The plan
Peregrine now plans a busy year for Tli Kwi Cho. The company will continue drilling on the big body, testing the northeastern vent at DO-27, which is the northern testicle of DO-27. As well, the partnerts will take a preliminary look at the DO-18 feature, which is immediately north of Tli Kwi Cho. Further, Peregrine thinks the area between DO-18 and DO-27 could also be of interest and the company will poke some holes in that zone as well.

A preliminary answer to the value question could add promotability to the revived play, but Peregrine must prove the grade and value to a greater degree of certainty. That will take larger samples, and that will not be an easy task on the stubborn old pipe. Much of the kimberlite is weathered material, which plays havoc with the drill bits. That makes collecting larger and deeper samples a challenge.

Peregrine has its reverse circulation drill resting for the summer at Ekati, but it expects to put the equipment back into operation next spring, drilling more holes into the pipe from the ice. That will add to the diamond parcel, but at a slow pace.

The Tli Kwi Cho partners are also thinking about using a large diameter Bauer drill rig. The equipment bores a 1.2-metre hole, which would quickly contribute carats to Peregrine's tally. The drill is too heavy for the lake ice, so the partners will have to drill its Bauer holes from a barge during the summer months. Peregrine has hopes of coming up with about 3,000 carats from the pipe, which would provide a better picture of the grade and value.

Speculators finally were hopping aboard Mr. Petancic's bandwagon. Dentonia traded over two million shares on Tuesday, hitting an intraday high of 27 cents. The stock lost two cents on Wednesday, closing at 20 cents on 984,000 shares. Kettle River slipped a penny, ending the day at 55 cents on 557,000 shares.