Wed Jan 18, 2006
Express 2006-01: Peregrine Diamonds set to trade on January 18, 2006
    Publisher: Kaiser Bottom-Fishing Report
    Author: Copyright 2006 John A Kaiser

Express 2006-01

January 18, 2006

Peregrine Diamonds set to trade on January 18, 2006

Synopsis: The reverse takeover of Dunsmuir Ventures Ltd by Peregrine Diamonds Ltd (PGD-V) has been completed and the new company is set to start trading on January 18, 2006. Dunsmuir shareholders will receive 1 Peregrine share for every 20 Dunsmuir shares. The new company will have 48,672,625 shares issued and 64,707,396 shares fully diluted. The stock is expected to trade at $5 or higher based on the $50 million financing completed by Canaccord, Dundee, Orion, TD, and Westwind at $5.00 per unit. Although Peregrine has inherited various diamond projects through its RTO of Dunsmuir, all of these Dunsmuir projects pale in comparison to Peregrine's 55% stake in the WO project in the Northwest Territories. The WO project hosts a pair of twin pipes known as DO27 and DO18 which have a combined tonnage footprint in the 40-60 million tonnes range. These pipes were the subject of a major underground bulk sample in 1994 that delivered grade and quality well below expectations. The pipes were mothballed during the subsequent decade until 2005 when Peregrine's Eric Friedland decided to revisit the story with a 151 tonne mini bulk sample that used reverse circulation drilling to target the heart of DO27 which the underground program never reached due to technical problems. The results reported in June 2005 stunned the market with a grade of 98 cpht for one sample and 70 cpht for the other, considerably higher than the 35 cpht reported in 1994. The 136 carat parcel exhibited better quality and size distribution on a proportional basis than the 1,079 carat parcel recovered in 1994. Valuations ranged $58-$77 per carat, much better than the $21.70 per carat reported for the 1994 parcel. The 1994 parcel was cleaned and revalued at today's prices, which boosted the value to $53-54 per carat. The new valuation comes close to that of the 2005 parcel, but a direct comparison is not appropriate because of the difference in parcel sizes and concerns that the RC sample suffered a higher degree of breakage. Micro diamond results for core holes that twinned the mini bulk sample RC holes reveal size distribution curves that are consistent with the 100 cpht grade yielded by the mini bulk sample. Peregrine is now undertaking a $16 million bulk sampling program designed to test the DO27 footprint with a grid of large diameter holes. A news release updating plans is expected shortly, with additional micro diamond results in another week or so. The trading debut of Peregrine Diamonds promises to be a high profile event with potential positive price impacts on the other juniors with minority stakes in the WO project.

The following table lists the participants in the WO project and their respective net project interests. The implied project value figure represents the value of the WO project on a 100% basis as defined by each company's fully diluted shares, stock price and net interest (Fully diluted times stock price divided by net interest). Peregrine's flagship project is the WO project, and if we assume Peregrine will use up all its cash developing the WO project and that all its other projects will fall by the wayside, then we can treat the IPV as seen through the Peregrine market as the benchmark valuation of the WO project.

The Peregrine Parity Price is the price each of the other participants should be trading at if one were to view all their other projects as worthless. In the case of Aber, which owns a 40% stake in the Diavik Mine, the Peregrine Parity Price is the incremental value of Aber's stake in the WO project. Because the value of Diavik dwarfs Aber's 7.4% WO stake, the latter is irrelevant in valuing Aber. Southernera and Archon both have interests in other advanced diamond projects which it is not appropriate to treat as worthless. One can say that Peregrine Price Parity represents $0.22 per share value for Southernera, and $1.56 per share for Archon. Peregrine Parity Pricing in the case of Archon would result in assignment of a value of only $1.46 for Archon's 31% stake in the Buffer Zone. Given that the Buffer Zone already hosts potentially economic diamond resources awaiting the attention of BHP Billiton once the main Ekati pipes are depleted, and that a major bulk sample will be undertaken this spring on the large tonnage high grade Jay pipe, it is obvious that the market is significantly undervaluing Archon. The main reasons for the market's reluctance to pay a higher price for Archon are the lack of liquidity and the near private status of Archon thanks to Stew Blusson's 96% ownership of issued stock. In my view Archon should be trading over $5 to properly reflect the value of its Buffer Zone and WO stakes.

Of the three DHK members Dentonia and Horseshoe both have other active non-diamond exploration projects in which they have majority interests. Management holds these non-diamond projects in high esteem, an outlook that I do not share because I view their 6.7% interests in the WO project as their key stories. Both Dentonia and Horseshoe have open bottom-fish buy cycles, with Dentonia initially recommended as an extreme risk buy below $0.10 and Horseshore recently confirmed as a medium priority buy in the $0.30-$0.49 range. Both stocks are trading above their bottom-fish buy ranges and thus no longer qualify as bottom-fish buys. Horseshoe and Dentonia are each formally upgraded to the status of Spec Cycle Hold 100%.

Since the untimely death of George Stewart last year Kettle River's non-diamond Greenwood projects have lost relevance in the eyes of management. Kettle River is thus the purest Peregrine Parity Pricing play in the bunch. The table makes it clear that as an alternative to Peregrine Kettle River is the best buy. Kettle River is also the most likely candidate to serve as a valuation benchmark for the minority WO stakes in any consolidation proposal Peregrine might make.

Although the Peregrine Parity Pricing model assumes all slices of an asset should have the same value on a proportional basis, Peregrine management would argue that its majority interest and operatorship deserve a premium. I would agree, but the premium should be less than the 67%-157% differential prevailing at $5 Peregrine.

Speculators should also treat the Peregrine Parity Pricing strategy with caution because Peregrine has raised far more money than it currently needs to fund its share of the $16 million bulk sampling program in 2006. It is conceivable that Peregrine has been bankrolled as a blind pool for the acquisition of other advanced diamond projects. Should this happen it might not increase the price of Peregrine significantly, in which case the effect would be to shrink the value attributable to the WO project. If Eric Friedland is at all like his brother Robert, he will strive to pull other "rough" diamonds into Peregrine Diamonds he can polish up and present as being worth much more than was paid for them. With $53 million working capital Peregrine has lots of flexibility to pursue other projects. Doing so would make it difficult to assign value to the WO project.

Micro Diamond Results shed light on grade potential of DO27
Peregrine Diamonds has not formally published micro diamond results for DO27, but it did slip into its December 2005 technical report the results for the #2 and #3 core holes that twinned the 2005 mini bulk sample RC holes. These holes respectively correspond with the chrome diopside rich facies that yielded 106 carats for an indicated grade of 98 cpht, and an olivine rich facies that yielded 29.9 carats for an indicated grade of 70 cpht. The former parcel was valued as high as US $78 per carat while the latter parcel was valued as high as $35 per carat. The micro diamond results for both holes exhibit some variation at different depths, but in general produce micro diamond size distribution curves similar to those for other pipes with grades reported at the 100 cpht level such as the Lynx dyke of Ashton and the AV1 dyke of Stornoway. The size distribution chart below brackets the DO27 curves between the curve for the 30 cpht Knife pipe and the curve for the 200 cpht Snap Lake dyke (the downdip extension on Diamondex's King property). The successful mapping of the DO27 micro diamond curves to both the mini bulk sample grade and curves for other pipes known to have a similar grade offers a strong argument that the mini bulk sample results were not a fluke. If anything, the curve for hole #3 which twinned the RC hole with the olivine rich facies suggests a grade potential equal and perhaps better than that for the chrome diopside rich facies. In other words, the lower 70 cpht grade obtained for the olivine rich material may have been hurt by plain old bad luck.

Additional micro diamond results for delineation holes drilled during the summer are still pending. These holes were drilled to test the "Northeast Lobe" sampled by Kennecott and the Main Lobe of the DO27 body. Positive news would be micro diamond results which signal a lower grade for the "Northeast Lobe" and a higher grade for the Main Lobe consistent with the 2005 results. This would explain why Kennecott's underground sampling program yielded a grade of only 35 cpht. Peregrine is also awaiting results for six strategically drilled core holes on the DO18 pipe, a somewhat smaller body to the north of DO27. Drilling in 1993 suggested grade potential similar to DO27, but a mini bulk sample hole in 1995 by Kennecott yielded a grade less than 10 cpht. That hole may have been drilled in a portion of the pipe heavily diluted with country rock. Obtaining evidence that the bulk of DO18 also has high grade potential would be a tremendous boost for hopes that the WO project may have the critical mass needed for a standalone mining operation. Positive micro diamond results for DO18 would encourage speculators to view a dream target for the WO project in the $1-2 billion as plausible.

*JK owns shares of Kettle River