2007-07-27 17:13 ET - Street Wire

by Will Purcell

Eric Friedland's Peregrine Diamonds Ltd. thinks it can lower projected mining costs at its DO-27 project, but reductions will not be proportional to the amount of waste material washed away during the company's scrubbing experiment. That will be disappointing to investors expecting operating costs will be as easy to wash away as the kimberlite fines. Still, lower costs should help Peregrine avoid a bulk sample bust at the big pipe once called Tli Kwi Cho.

The plan

In a press release issued July 24, Peregrine said it managed to remove approximately two-thirds of the fine bits of material from its kimberlite by washing the rock. The effect was most apparent in the upper 60 metres of the kimberlite, where scrubbing removed 90 per cent of the waste rock, and least effective at depth. Expectations of comparable reductions in operating and capital costs are unrealistic.

Removing that waste material and keeping most of the diamonds could effectively increase the grade of the material going to a processing plant by a factor of three. Mr. Friedland offers further encouragement, stating that the scrubbing test used water at normal pressure and Peregrine now plans to experiment with using high-pressure systems to improve its waste separation. As a result, Peregrine believes it may be able to achieve an enhancement of up to five times the grade of the original kimberlite.

That could have a big impact on the economics of the DO-27 project, but operating costs are unlikely to drop more than 50 per cent. All the rock would still have to be mined, but mining costs in an open pit mine in the area are likely to be no more $4 (U.S.) per tonne. The scrubbing would introduce a new cost, but it would likely add just $3 (U.S.) per tonne to the operating expenses. The company would also face the issue of what to do with the waste material -- effectively kimberlite mud -- and that would add something to the operating costs.

The big saving would come on the personnel and processing side. If Mr. Friedland's optimistic waste reduction estimate holds up, Peregrine would send just one-fifth the amount of kimberlite off for processing, allowing it to run with a much smaller plant. A smaller plant would have higher costs per tonne than a larger one, but Peregrine's plant costs could easily drop to about one-third of what they would otherwise be.

The implications

Operating costs at Diavik are running at under $100 per tonne, and Jericho still hopes to hit a target of about $85 per tonne. Earlier, Mr. Friedland said he believed DO-27 needed rock worth at least $70 per tonne to break even, before Peregrine set out to lower its anticipated costs. That figure may be on the optimistic side, but if Peregrine is able to achieve operating costs of no more than $45 per tonne, it would take an unpleasant surprise for the result of the company's current bulk test to kill the project.

Based on earlier mini-bulk tests, Peregrine expects a grade of about 0.9 carat per tonne from the core of its kimberlite pipe, with grades of perhaps one-half carat per tonne in other fringe phases of rock. Mr. Friedland believes those earlier results are representative, and Peregrine is expecting few grade surprises from the 2,650-tonne test it is currently processing.

The original 1994 test produced a diamond value that would likely be no more than $40 (U.S.) per carat in today's dollars, and Peregrine needed an optimistic modelled value to push its projected value to $70 (U.S.) per carat. Although diamond values remain critical to the project, a somewhat higher value is possible and the scrubbing success could offer valuable breathing room.

Peregrine closed down three cents to $1.55 Thursday on 33,000 shares.