2006-12-14 13:28 ET - Street Wire

See Street Wire (C-PGD) Peregrine Diamonds Ltd
by Will Purcell
Peregrine Diamond Corp. is boosting its share of the DO-27 play after two partners decided to quit and three others failed to contribute to the current work program. The moves reveal mixed opinions about the viability of the project and point to problems within DHK Diamonds Inc., an intermediate holding company owned equally by Kettle River Resources Ltd., Dentonia Resources Ltd. and Horseshoe Gold Mining Inc. The dilution to DHK torpedoed a merger between Kettle River and Peregrine, sinking Kettle's stock.

The cash call

Aber Diamond Corp. and SouthernEra Diamonds Inc. declined to contribute and their remaining small shares of the play converted automatically to tiny royalties. Aber once held a 15-per-cent stake in the project in the 1990s and SouthernEra owned a 10-per-cent piece, but their interests shrank to less than half those levels after Archon Minerals Ltd. and Peregrine joined the project in recent years. Worries about the DO-27 diamond value are Peregrine's bulk sample proved the old Tli Kwi Cho pipe has an encouraging grade and tonnage, but worries persist about the diamond value.

The biggest surprise was that DHK failed to pay its 20-per-cent share of the fall budget. It told Peregrine in October that it would contribute, according to Larry Widmer, a director of Kettle River Resources. He said that Kettle River had the money in the bank ready to cover its share of the cash call, waiting for its two other partners to contribute. "That never happened and we all got diluted as a result."

Mr. Widmer said that the three DHK shareholders had an agreement that would allow one company to make the entire contribution. Kettle River would have taken advantage of the provision to pay the full $3.5-million amount, he said, allowing any dilution to occur within DHK itself. "We never had the opportunity," he said.

Mr. Widmer said that DHK's share would shrink to 10.77 per cent because of the dilution, and Kettle's share was barely 3.5 per cent as a result. That killed the company's merger deal with Peregrine, leaving Kettle River to ponder its next move. Mr. Widmer did not rule out legal action against its partners, but he did not seem keen, suggesting it would be throwing good money after bad.

Dentonia's president, Adolf Petancic, was also annoyed, although Peregrine seemed primarily the object of his displeasure. Mr. Petancic said he did not agree with Peregrine's cash calls, as he never knew how much they wanted at various dates.

The merger deal between Peregrine and Kettle River also sparked annoyance, as it apparently contained a standstill agreement that prevented the DHK companies from making a side deal that would allow them to sell flow-through shares. Mr. Petancic said Dentonia rejected Peregrine's claim to a greater share of the project and would seek legal counsel.

Archon Minerals quietly contributed to the new budget and it holds nearly 17.5 per cent of the project. Meanwhile, Peregrine's share will grow to 71.74 per cent, although it will now have to put up most of the cash for the bulk test. Based on the $14.9-million cash call, the full budget will top $25-million. Peregrine's treasury can handle the increased load, as the company had nearly $40-million in working capital at the end of June.

The project

The Tli Kwi Cho pipe seemed dead, after a $15-million bulk sample in 1994 was a bust. The test produced a grade of about 0.35 carat per tonne and a diamond value barely above $20 (U.S.) per carat. Mr. Petancic nevertheless championed the play for years, finally convincing Peregrine to try a mini-bulk test a few years ago.

Peregrine's two mini-bulk tests proved the core of the pipe has a grade of about one carat per tonne and expanded its tonnage potential considerably. As a result, the company thinks it can make a big mine out of the DO-27 pipe with rock worth $80 (U.S.) per tonne.

The latest diamond appraisals and modelled predictions fall short of that mark, but Mr. Friedland thinks a big bulk test will deliver the large and valuable diamonds needed to boost the value considerably. If he is right, Peregrine will own most of a valuable project. If he is wrong, DO-27 will again be a big bust.