2007-04-24 07:19 ET - Street Wire

by Will Purcell

Eric Friedland's Peregrine Diamonds Ltd. is still drilling up kimberlite from the lake ice at its DO-27 project southeast of Lac de Gras and has surpassed its unstated target of 2,000 tonnes by a significant margin. The company has further good news, as BHP Billiton Diamonds Inc. will start processing the big sample at its Ekati mine on April 30. The sample should give Peregrine enough diamonds to provide a good estimate of the value within the old Tli Kwi Cho pipe.

The sample

Thanks to continued cool weather, Peregrine still has a drill running. The company has recovered about 2,420 tonnes of wet kimberlite since it started its third sampling program in December. In 2005, the first sample produced about 150 tonnes out of a planned 200-tonne test, while the company managed just 560 tonnes out of a planned 2,000 tonnes the following year.

Because of the 2006 disappointment, Mr. Friedland was reluctant to state a tonnage target, lest the company disappoint the market a second time. Nevertheless, Peregrine clearly hoped to acquire enough diamonds to support an accurate appraisal, leaving 2,000 tonnes as the obvious goal.

Peregrine had to wait a few months last year before BHP got around to running the DO-27 rock through its plant and a similar wait this year would have meant a the diamond results would not be available until fall. Ekati's small secondary plant will handle Peregrine's kimberlite on a continuous basis and results should be available in August.

The expectation

If Peregrine ends up with about 2,500 tonnes of kimberlite this year, it has a realistic shot at coming up with about 2,000 carats, especially if most of the rock comes from the higher-grade portions of the pipe, which yielded gems at a rate of nearly one carat per tonne in the earlier samples. Some parts of the current test likely tested material with somewhat lower grades, but there also is a realistic chance that Peregrine will tap into localized zones with higher grades.

Added to Peregrine's earlier parcels, the company should have at least 2,500 carats available for appraisal. It also has data for the 1,000 carats recovered during the 1994 bulk sample completed by Kennecott Canada Exploration Inc. That 3,000-tonne test was a bust, with a grade of about one-third of a carat per tonne and an average diamond value that barely topped $20 (U.S.) per carat.

The company's own appraisals reflect the expected increase in diamond prices since then, but the firs two parcels were too small to yield a representative result. As a result, Peregrine puts its hope in a modelled diamond value based on the expected size distribution and quality attributes of the DO-27 gems. The best of those numbers tops out at over $70 (U.S.) per carat, which Mr. Friedland thinks would be more than enough to generate a profit.

Some large, quality diamonds would give the value a boost. The largest stone recovered in the 1994 test weighed nearly 10 carats, but the heaviest gems in Peregrine's smaller parcels fall short of that mark. The company did recover a 7.11-carat diamond last year, along with a 3.91-carat gem that came from the same drill hole. In all, 13 stones weighed over one carat.

Unfortunately, the quality of the larger gems was lacking in the 2006 parcel, and that negated the improved size profile. In 2005, Peregrine recovered just four one-carat diamonds and none of them weighed over three carats, but some were quality gems that upped the average value.

Such variations are typical with diamond deposits and appraisals are subject to significant swings until the parcel size reaches into the thousands of carats. As a result, Peregrine will be hoping for more of the multi-carat diamonds that will also have desirable colour, shape and clarity.

Peregrine closed down a nickel to $1.80 Tuesday on 13,200 shares.