2008-11-11 12:15 ET - Street Wire See Street Wire (C-KRR) Kettle River Resources Ltd
by Will Purcell

Kettle River Resources Ltd., Dentonia Resources Ltd. and Horseshoe Gold Mining Inc. elected not to contribute to the DO-27 project in the Northwest Territories last month. The three companies are partners in DHK Diamonds Inc., which once owned the entire project. A series of option deals diluted DHK's interest over the years, and its share shrank further when its three owners missed a large cash call from the current operator, Peregrine Diamonds Ltd. The latest cash call was much smaller, just $212,112 and Kettle River's president, Ellen Clements, said accepting the minimal dilution made sense in today's tough market. Nevertheless, she remains optimistic the DO-27 pipe, once called Tli Kwi Cho, will become a profitable diamond mine.

The shrinking interest

DHK Diamonds holds a 10.77-per-cent interest in DO-27, and Ms. Clements said its share would shrink to about 10.5 per cent because of the missed cash call. That amounts to a 2.5-per-cent decrease in DHK's interest in the project. Kettle River and Dentonia each own 43.37 per cent of DHK, with Horseshoe holding a 13.26-per-cent interest. All three companies once held a one-third interest in DHK, but Horseshoe stopped paying its portion of the costs a few years ago.

Kettle River's woeful four-cent share price was the motivating factor in Ms. Clements's decision not to meet Peregrine's demand for cash. With Horseshoe still on the sidelines, Kettle's share of the tab would have been $106,056. That seems an insignificant sum, but it would balloon into 2.65 million Kettle River shares if the company sold more shares to cover the cost. Kettle River currently has 27.7 million shares outstanding, and it did not make sense for Ms. Clements to accept a 10-per-cent dilution of her company's shares to avoid a 2.5-per-cent reduction in its share of DO-27.

Adolf Petancic, Dentonia's president, has been doggedly touting the merits of DO-27 since a disastrous 1994 bulk test nearly killed the play for good. Meekly accepting another dilution of Dentonia's interest in the project seems an unlikely option for the securities lawyer turned stock promoter, but Mr. Petancic was likely making the same calculation as Ms. Clements. Dentonia's shares have been trading for about 1.5 cents for the past month, and the company would have to sell just over seven million new shares to pay its share of the cash call. That would represent a dilution of 8.6 per cent of its 82 million shares currently outstanding.

The encouragement

The good news for both Kettle River and Dentonia is that Peregrine's big spending ways are over for now at DO-27. The company has some other important projects to explore and it has its own stock woes to contend with. Meanwhile, work at DO-27 has now reached the point where the partners are willing to sit and wait for a series of events to occur that would make the project economic.

Peregrine recently completed a preliminary economic assessment that determined the DO-27 project would not currently be economic to develop, but it came sufficiently close to support hopes for better days. The project will need higher diamond prices -- something that most diamantaires predict for the next decade, once the global recession ends and some major mines reach the end of their lives.

The sharply weaker Canadian dollar is also helping, as diamonds are sold in U.S. dollars, and the loonie is off by about 15 per cent from when Peregrine's study was complete. Costs should be lower as well. The price of oil is now less than one-half the levels of late spring and early summer, and collapsing commodity prices are putting many a miner onto the unemployment lines.

Kettle River closed up one cent to five cents Tuesday on 3,000 shares. Dentonia closed unchanged at two cents on 12,000 shares.