October 26, 2018
It’s 1:15 p.m. on a sunny Friday afternoon in Vancouver and I arrive a little early for a downtown meeting with Westhaven Ventures (WHN-V) chairman Gren Thomas. A short elevator ride at Granville and West Hastings takes me to Westhaven’s modest offices on the 10th floor, where I let myself in and drop by CFO Shaun Pollard’s office.
Inside, Pollard and veteran geologist Ed Balon — Westhaven’s technical director — are talking rocks and stocks. Westhaven shares rose 36% on the day to an all-time high close of 94 cents. Teamwork: Balon was key to identifying the Spences Bridge epithermal gold belt, which hosts Shovelnose, outside of Merritt, and Westhaven’s other projects: Prospect Valley, Skoonka and Skoonka North. Pollard runs a tight treasury ship in a sector with its share of (adrift) lifestyle companies.
And it’s at Shovelnose where a high-grade intercept of 17.77 metres of 24.50 g/t gold in hole 14 sent Westhaven shares — which traded between one and three nickels for years until this spring — rocketing from 37 cents to 81 cents on Oct. 16. This is a junior mining market where momentum flows to companies that can hit rich intercepts of high-grade gold. Westhaven has become one of them.
Gren arrives at the office. The soft-spoken mine finder made his reputation and fortune when his Aber Resources discovered Diavik, Canada’s second diamond mine. But these days, it’s mostly gold on his mind.
He comments with a chuckle that he’d had a nap earlier in the day and been surprised when he awoke to see the large stock increase. Making a few million dollars while he slumbers … that’s the new normal for Thomas, who owns (directly and indirectly) almost 30% of Westhaven’s shares. But it’s not like he’s sitting around counting his winnings — the veteran prospector was uncertain and low-balled his stake in the company when asked about it.
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The Westhaven surge is a reversal of fortune for Thomas, who got his share position by bankrolling the company, keeping it afloat through years of struggle and shoestring budgets. Thomas is Westhaven’s chairman and his son Gareth runs the company as president and CEO. Gareth, who was out of the office for interviews, owns 3.3 million shares, a 4.2% stake.
“What are we going to do with all this paper, paper the walls?” Gren says, recalling earlier days of backstopping the operation.
He fills me in on the small, persistent band of believers who were convinced there was high-grade gold at Shovelnose. Central to early-stage exploration was Balon, who discovered Skoonka and found a boulder at Shovelnose in the mid-2000s that ran 100 g/t gold. That was while both projects were still in Strongbow Exploration (SBW-V), where Thomas is also chairman. A 50-metre intercept of 0.5 g/t gold provided further encouragement.
“There were a lot of small programs, but frustrating. We would go back every year thinking we would find more the next year. But we were basically prospecting with a drill. There is lots of cover there, right.”
“We were talking to major companies and they were not remotely interested.”
The majors are interested now, and so are plenty of others. Gren’s cellphone rings in the pocket of his jacket, which is draped over a chair. He apologizes for pausing the interview and walks over to take the call. It’s Peter Brown, the Canaccord cofounder and Howe Street legend — and Westhaven shareholder. Brown, too, is eager to know when assays for hole 15 will arrive (anytime) and when the next drilling starts (early November).
Hole 14 was the intercept that lit a fire under Westhaven shares. Hole 15, 100 metres southeast of 14, hit a 20-metre quartz vein and contains visible gold. Assays are pending and could land at any time. The core for hole 14 contains ginguro bands, a distinctive black sulphide that is sprinkled with visible gold. The latest core looks very similar to the mineralization at Hishikari (Sumitomo), a Japanese gold mine with some of the world’s highest grades, at 40 g/t gold. Exploration manager Peter Fischl also sees parallels to Kupol (Kinross), a large high-grade mine in Russia’s Far East. Both Hishikari and Kupol are world-class epithermal gold deposits. Shovelnose is a speculative, earlier-stage project, but the potential is tantalizing.
A turning point, Gren relates, was when exploration manager Peter Fischl — attempting to zero in on the “heat zone” — targeted a valley with a creek that hosted heavy clay alteration. Hole SN17-06 intersected 85 metres of 0.52 g/t Au. Higher-grade intercepts followed earlier this year, including 17.7 metres of 3.9 g/t Au.
“We still couldn’t get any interest. We’ve got the boulders, we’ve got the showings, we’ve got these intersections — there’s a lot of gold here.”
“One company even went so far as to say, ‘There are no mines here. Why are there no mines?’ ”
“Well, because nobody has found one yet,” Gren says with a laugh.
Westhaven Ventures (WHN-V) Price: 0.94 Shares outstanding: 85 million (92 fully diluted) Market cap: $80 million
There are also new developments in the other two companies where Gren is chairman: Strongbow Exploration (SBW-V) and North Arrow Minerals (NAR-V). He is preparing to fly to the U.K. with Strongbow CEO Richard Williams to work on fundraising and an AIM listing for Strongbow, which is developing the high-grade South Crofty tin project in Cornwall. An Oct. 17 deal with Orion Mine Finance should help on that front — the well-known mining group agreed to finance Strongbow to the tune of US$3 million in conjunction with the AIM listing, which is expected before the end of the year. Thomas owns 5.133 million Strongbow shares, a nearly 6% stake.
There are large pools of capital in London for U.K. mining projects, which Williams and Thomas plan to tap into. There is also renewed interest in Cornwall and tin mining thanks to a popular British television series called Poldark. One participant in a recent tourist walking tour of Cornwall turned out to be a fund manager who was interested in Strongbow and South Crofty.
Strongbow is the “mother ship” of Gren’s three companies: diamond play North Arrow Minerals was spun out of Strongbow in 2007 and Westhaven optioned its Spences Bridge gold belt properties from the company. The deals for Shovelnose and Skoonka have left Strongbow with a 2% royalty on Shovelnose as well as 3.1 million Westhaven shares. Those shares are now worth almost $3 million — a not-insignificant total for a company with a market capitalization of about $14 million. “It’s funny how things morph,” Thomas remarks of Strongbow’s pivot from gold to tin.
Strongbow has a mining permit that is valid until 2017 and the company is currently building a dewatering plant to treat water from the old mine workings. The project was financed by the $7.17-million sale of a 1.5% NSR to major shareholder Osisko Gold Royalties, which owns a 27.5% stake.
Strongbow Exploration (SBW-V) Price: 0.16 Shares outstanding: 86.6 million (127.4M fully diluted) Market cap: $13.9 million
As for North Arrow Minerals, the diamond play is awaiting microdiamond and till sample results from Mel in Nunavut, where it discovered the diamondiferous ML-8 kimberlite last year. This season North Arrow drilled a new kimberlite (ML345), expanded on ML-8 and collected 224 kg of kimberlite for microdiamond analysis.
One of the main focuses of North Arrow CEO Ken Armstrong is getting a road permitted from the town of Naujaat to the Q1-4 kimberlite, which hosts a population of valuable yellow-orangey diamonds.
Completion of a road would dramatically cut the costs of collecting a large bulk sample to get a better sense of diamond values at the 12.5-hectare kimberlite, which is near tidewater. A road to the community, which is very supportive of the idea, would also potentially allow the construction of a small test mill in Naujaat.
“A major should take this on, because they take a longer-term view of it,” Gren says of Naujaat. “It’s the perfect place for a mine, near the coast.” He owns more than 10.5 million North Arrow shares, an 11.5% stake.
North Arrow Minerals (NAR-V) Price: 0.14 Shares outstanding: 92.8 million (128.9M fully diluted) Market cap: $13 million
“We’re quite confident that we’re doing the right things,” Thomas says of progress at Strongbow and North Arrow. “We just wish the markets would show more interest.”
That’s no longer a problem at Westhaven, with shares sitting just shy of a dollar as investors anticipate assays for hole 15. Warrant exercises have topped up the treasury, which sits north of $1.5 million. That’s enough for the next drill program, which is imminent, and it removes the need to finance under a dollar — something Gren is loathe to do.
While Westhaven’s fortunes have changed, its corporate culture will not, Gren pledges. “Gareth and I were talking about it, and I told him – ‘We under-promise and over-deliver.’ So no bullshit. It’s funner and you get a lot fewer phone calls from angry shareholders.”
There aren’t many of those these days, and Westhaven’s share structure all but ensures higher prices IF the company can keep hitting high-grade gold. Management own about 40% of shares, the Plethora Precious Metals Fund owns 16% and friends and family (including Gren’s daughter Eira Thomas) own another 10-15%. Those high ownership levels keep the supply of shares low during a period of rising demand for the stock.
Disclosure: James Kwantes owns shares of Westhaven Ventures, Strongbow Exploration and North Arrow Minerals and covers each company in his newsletter, Resource Opportunities. North Arrow is a sponsor of the newsletter. This article is for informational purposes only and should not be considered financial advice. All investors need to do their own due diligence.
North Arrow Minerals is 1 of 3 Resource Opportunities sponsor companies.
Vancouver-based North Arrow Minerals is one of the more active diamond exploration companies globally, with a portfolio of projects focused on Canada. Its most advanced-stage project is the large Naujaat deposit in Nunavut, which has a resource and hosts a population of valuable fancy orange yellow diamonds.
But this season’s focus is on exploration drilling at the Mel and Loki projects in Nunavut and the Northwest Territories, respectively. Mel was a grassroots diamond discovery that North Arrow announced late last year. The company traced kimberlite indicator mineral (KIM) trains up-ice and made a prospecting discovery of kimberlite, from which 23 microdiamonds were recovered from a 62.1-kg sample. The first drilling program on the property is planned for this summer.
The Loki project is in the Lac de Gras diamond field that hosts the Diavik and Ekati mines. The focus there is EG05, a kimberlite that Rio Tinto discovered, and 465, a kimberlite discovered by North Arrow in the spring. The latter was the first kimberlite discovery in Lac de Gras in the past 5 years. It’s familiar terrain for the North Arrow team, including chairman Gren Thomas whose Aber Resources discovered the Diavik diamond mine.
Rough diamond prices are now at a 52-week high and demand for polished diamonds is strong in China, India and the U.S., according to New York-based diamond analyst Paul Zimnisky. On the production side, pending mine closures including Argyle and Victor will put pressure on supply, with few new operations coming online.
The improving picture follows a choppy 2017 that saw high inventory levels at De Beers and Alrosa and flat rough diamond prices. North Arrow shares have been under pressure along with shares of new Canadian producers Stornoway Diamonds and Mountain Province Diamonds, which declined 41% and 18% respectively over the past year as startup problems weighed.
On Monday North Arrow announced a $3-million private placement consisting of flow-through shares at 20 cents and non-flow-through units (one share, one 2-year 30-cent warrant) at 17 cents. We caught up with CEO Ken Armstrong, who was in Calgary for the TakeStock! investor forum, to find out more about plans and how the money will be used.
Q: What is the breakdown on how the $3-million financing will be spent?
A: We’ve allocated $2 million for Mel drilling – testing the 2017 kimberlite discovery and new targets. That number includes microdiamond processing costs. We will also complete microdiamond processing of the EG05 and 465 kimberlites at the Loki project that were drilled in March, as well as some final microdiamond processing from the 2017 drilling of Naujaat. That’ll be a couple hundred grand. We are also looking at getting a remaining top target drilled at Loki, target 853. Ideally we’d tie that onto ongoing drilling at our LDG JV property, which is operated and funded by partner Dominion Diamond. We’d retain a half million or so for G&A.
Q: Any big names buying into the financing? How much will insiders and management participate for?
A: Insiders are committed to taking at least $1.5 million, so half, with most of that being directors/management. Gren Thomas, our chairman, and Eira Thomas, a North Arrow advisor, will both participate. I will also participate.
Q: How did you determine the pricing of the financing?
A: We tried to price it to make the non flow-through unit and flow-through share components equally attractive. On the Unit we put a fairly quick threshold on the accelerator, at 40 cents, however we felt it was justified by pricing it a discount to market with a full warrant, rather than a half-warrant. The flow through is essentially priced at market with the intent to fill the orderbook efficiently. We are looking at immediate use of funds with Mel drilling in July, Loki drilling in July or August and with more diamond results from Loki, Naujaat, and in September or October, from Mel. This is all news flow that will occur before the four-month hold comes off the financing shares which is, we think, a positive feature of the placement. We have been the most active Canadian junior in terms of new kimberlite discoveries in Canada and are poised for more discovery, potentially on up to three projects, over the four months.
Q: Which of the three active projects that you’re raising money for is the most likely catalyst — Loki, Mel or Naujaat?
A: All three have potential catalysts. Folks seem to be most interested in new discoveries and Mel certainly fits that bill — it’s a brand new kimberlite discovery made by prospecting last fall. The kimberlite contains some very coarse mantle minerals and we see hints of that coarseness in the initial diamond results, which is positive. Having already found kimberlite and diamonds actually de-risks the initial drilling significantly. We know we will hit kimberlite with diamonds, it’s more a question of how many and how big they are.
Based on the spread of indicator minerals there are certainly multiple sources with some nice, sizable magnetic targets. This is a brand new kimberlite field and the first kimberlite discovered is significantly diamondiferous. It doesn’t happen too often, so we are keen to get drilling. We’re currently mobilizing a camp and drill to the property now with drilling planned for July.
At Loki we also have a new discovery and are waiting on microdiamond results. In early April we announced the discovery of the 465 kimberlite – the first kimberlite discovery made in the Lac de Gras area in over 5 years. There are also pending microdiamond results from the EG05 kimberlite which was also drilled during the spring 2018 program. We also have a number of targets that we’d like to drill test, including target 853, which we’d like to see drilled this summer.
Q: It’s been almost three years since the disappointing Naujaat diamond valuation. Does Naujaat remain North Arrow’s flagship project and what is happening with the project?
A: Naujaat remains North Arrow’s most advanced project. We’re still interested because it’s a significant diamond inventory in a large tonnage deposit (as far as Canadian diamond deposits go) sitting on tidewater near a community. Our work on the Q1-4 diamonds has clearly shown the deposit contains high-value fancy orange yellow diamonds and, overall, is under evaluated. Last summer we completed more drilling to confirm the size potential of the kimberlite down to 300 metres below surface and we had three different holes extend over 100 metres beyond the geological model, with two of those holes ending in kimberlite. It’s a big body. We also collected a 210-tonne sample that confirmed the presence of the coloured diamond population in the A88 phase of the kimberlite. This is a totally different unit than was sampled in 2014 – the 2017 sample pit was over 400 metres away for the 2014 pits – and the proportion of coloured stones is very similar to the 2014 result. The work we’ve done with the diamonds themselves has shown that the coloured stones are a distinct population from the non-coloured stones. The two populations are completely different ages and the yellow population has a markedly coarser distribution than the non coloured stones.
The photos of the diamonds we had polished and certified at the GIA show how beautiful this colour is and highlight the potential value upside in these diamonds. But it is actually the potential for a coarse size distribution that may be even more important in terms of potential upside to the value contribution of the coloured diamonds. And the only way to confirm or disprove the potential value upside is a larger bulk sample.
To that end we have hired consultants and been working closely with the community of Naujaat to look at developing a road to the deposit. We’ve also started looking at processing options for a larger sample and how that might look, all with an eye to better pinning down the budget options for collecting a sample of sufficient size to get that answer. Being so close to the community really presents opportunities for reduced costs – we’ve seen that with our exploration programs and we need to make sure we take full advantage of all potential cost savings.
Of course all this takes time, but that is why we have North Arrow evaluating a number of quality projects, not just one. It allows the team to focus on well-informed, cost-effective exploration even if that might mean slower news flow from a particular project. There will be steady news flow from other projects as each cycles through the process.
Q: Along the lines of quiet projects, what is the status of the Lac de Gras joint venture with operator Dominion Diamond Corp.?
A: The LDG JV is having an active year. It has definitely been one of our quieter projects as our partner Dominion spent a lot of effort defining targets through a series of overburden drilling and geophysics programs. Late last year, Dominion also went through a well-documented takeover by the Washington Group of Companies, with the resulting transitions that often accompany such changes. However, a very positive outcome for the LDG joint venture has been Dominion’s renewed commitment to exploration, and, as I understand it, the 2018 LDG JV budget was one of the first budgets approved by the new ownership. The focus of the 2018 program is exploration and discovery-type drilling and we expect that work to pick up again during the summer. North Arrow elected not to finance its share of the current program so we could focus our resources drilling our 100% owned projects at Mel and Loki. However, although we are taking dilution of our joint venture interest, if a Lac de Gras-type discovery is made North Arrow will still maintain a significant interest, north of 25%, in the joint venture.
Q: With Eira recently taking over as CEO of Lucara Diamond Corp., how involved does she remain with North Arrow?
A: Eira’s involvement with North Arrow has been key since we began our focus on the Canadian diamond space. She remains an important advisor and sounding board for management – and the board – as we strategize on how best to move the project portfolio forward.
Disclosure: North Arrow Minerals is one of three Resource Opportunities sponsor companies and James Kwantes owns North Arrow shares. Readers are advised that this article is solely for information purposes. Readers are encouraged to conduct their own research and due diligence, and/or obtain professional advice. The information is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data.
Copyright: This publication may not be reproduced in whole or in part, in any form, without the express permission of the publisher. Permission is given to extract parts of the report for inclusion or review in other publications only if credit is given, including the name and address of the publisher.
North Arrow Minerals is one of three Resource Opportunities sponsors and Lucara Diamond and North Arrow are portfolio companies.
Canada punches above its weight in the world of diamonds – way above. Consider: the country is home to about 36 million people, or less than half of one percent of the world’s population. Yet in 2017, Canada produced 14% of the world’s diamonds by value, behind only Russia and Botswana.
The epicenter of Canadian diamond production lies in the frozen tundra of Canada’s North – the “Barren Lands,” in author Kevin Krajick’s words. Specifically, the Lac de Gras region, 300 kilometres northeast of Yellowknife, the Northwest Territories’ capital city. That’s where prospectors Chuck Fipke and Stu Blusson discovered the kimberlite indicator minerals that let to Dia Met’s 1991 diamond discovery. When Ekati went into production in 1998, it marked the birth of what has become an important northern industry.
The discovery of the Diavik diamond mine by Gren Thomas’s Aber Resources in 1994 established that the Ekati find was no fluke. Diavik went into production in 2003 and quickly became one of the world’s richest diamond mines. The discovery of diamonds in this inhospitable corner of the world, surrounded by only frozen lakes and tundra, is a testament to the ingenuity and perseverance of Canada’s diamond pioneers.
Two decades later, the Ekati and Diavik diamond mines are still churning out carats – and cash. More than $20 billion worth of diamonds has been mined at the two operations. The prized profit centers didn’t escape the notice of the Washington Group, a private conglomerate founded by US billionaire Dennis Washington. Last year the Washington Group paid about US$1.2 billion to snap up Dominion Diamond Corp., owner of a controlling 90% interest in Ekati and a 40% stake in Diavik (operator Rio Tinto owns 60%).
CANADA’S GROUND ZERO FOR DIAMONDS
And the Lac de Gras region remains a hub of activity for diamond production and exploration, well beyond Ekati and Diavik. The newest mine is Gahcho Kue, which began commercial production in March 2017 and is 51% owned by De Beers and 49% by Mountain Province Diamonds (MPV-T).
North Arrow Minerals (NAR-V), Canada’s most active diamond exploreco, is also zeroing in on Lac de Gras. The company has two projects in the region and both of them will see drilling this spring. The Loki project covers 8,600 hectares and is close to both Ekati (33 km away) and Diavik (24 km). North Arrow will drill about 1,000 metres on up to six targets in March.
Loki is a good example of a junior company benefiting from millions of dollars spent by a major while big money flowed into exploration. One of the six Loki targets is EG05, a diamondiferous kimberlite that Rio Tinto (Kennecott) discovered but never followed up on. The other targets were identified through airborne geophysics and electromagnetic surveys. At each target, pyrope garnets and other kimberlite indicator minerals have been recovered, but no source has been found.
At Dominion’s Lac de Gras (LDG) joint venture with North Arrow, operator Dominion is ramping up for 2018 exploration, including spring drilling. Dominion has an approximate 67% interest in LDG, with North Arrow retaining 33%. The LDG JV covers a vast 125,000-hectare property to the south of the Ekati and Diavik mines and immediately east of Loki.
The “privatization” of Dominion Diamond Corp. translates into fewer eyes on the company, particularly its exploration initiatives. But Patrick Evans, Dominion’s CEO – appointed after the takeover – is well-known in the diamond world. Evans is the former president and CEO of both producer Mountain Province Diamonds (MPV-T) and explorer Kennady Diamonds (which was recently taken over by Mountain Province for $176 million).
DRIVE FOR DISCOVERY
Evans’ exploration background – and his assertion that new diamond discoveries are critical to the viability of the Canadian diamond industry – will likely ensure that exploration remains a key focus for Dominion. In a 2016 talk at the annual Roundup Mineral Exploration conference in Vancouver, Evans lamented the “paltry” amount being spent on diamond exploration in Canada. The dearth of exploration threatens Canada’s No. 3 position as a world diamond player, Evans said at the time.
Loki and the LDG joint venture represent North Arrow’s most imminent potential catalysts. But North Arrow continues to advance its flagship Naujaat coloured diamond project in Nunavut, which has a population of rare, valuable fancy yellow diamonds.
On Wednesday the company announced it had recovered 64.25 carats from a 209.8-tonne mini bulk sample collected last year from three phases of the large Q1-4 kimberlite. The proportion of the more valuable yellow diamonds was consistent with an earlier bulk sample – 10.7% of the total by stone count and 21.2% by carat weight.
“It’s encouraging, because it confirms the yellow diamond population exists in different phases of the kimberlite,” said North Arrow CEO Ken Armstrong, noting that the results merit further work. “The size of the prize is large.”
The next step, Armstrong says, is a large bulk sample at Naujaat – perhaps as large as 5,000 to 10,000 tonnes. A sample of that size would answer remaining questions about the value of the diamonds and size-frequency distribution of the yellow stones, he said. It would also carry a large price tag: perhaps between $20 million and $30 million. Securing a joint venture partner would allow North Arrow to undertake the bulk sample without blowing out the share structure, Armstrong pointed out.
The diamond sector has faced some ups and downs in recent years, but mostly downs. One of the main issues has been large inventories held by industry heavyweights Alrosa and De Beers, which has suppressed rough diamond prices. There have been some high-profile scandals in the sector, too – Indian diamond magnate Nirav Modi fled India earlier this year and is currently being investigated for alleged bank fraud and money laundering.
However, the macro picture is improving, according to New York diamond analyst Paul Zimnisky. Inventory levels for both De Beers and Alrosa are at estimated three-year lows and demand remains healthy, according to Zimnisky’s latest State of the Diamond Market report. On the supply side, no new mines are coming onstream in 2018 and Alrosa’s production is forecast to decrease this year.
For a sector that has struggled – and been bypassed by many retail investors – there’s a lot going on. The takeover of Dominion Diamond by a private group was a surprise to many; less so the purchase of Kennady Diamonds by Mountain Province, which had earlier spun out the exploreco. There are new and rejuvenated exploration plays, including Bruce Counts’s newly listed Lithoquest Diamonds (LDI-V) with its North Kimberley project in Australia. In the Northwest Territories, GGL Resources (GGL-V) has revamped with the appointment of 25-year diamond veteran David Kelsch as CEO and an injection of capital from project generator Strategic Metals.
But for diamond sector investors, perhaps the most interesting moves were made by Lucara Diamond Corp. (LUC-T) on February 25. Diamond veteran Eira Thomas was named Lucara’s CEO and the Vancouver-based company announced a blockchain initiative that could improve transparency and efficiencies in the sale of diamonds in the one to 15-carat range, and eventually for smaller stones as well. Blockchain will not be used to sell the larger diamonds that have established Lucara’s reputation and bolstered its treasury – stones such as the 1,109-carat Lesedi La Rona and 813-carat Constellation.
Eira’s most recent CEO gig was with Kaminak Gold, which was sold for $520 million to Goldcorp in 2016. Before that, Eira – the daughter of North Arrow chairman Gren Thomas – cofounded Stornoway Diamond Corp. (SWY-T) and Lucara. Her partner on both initiatives was Catherine McLeod-Seltzer, who is joining Lucara’s board of directors. The appointments mark a kind of reunion for Lucara’s three co-founders – Thomas, McLeod-Seltzer and Lukas Lundin.
But before Stornoway, Lucara or Kaminak was Aber Resources. Hired as an Aber field geologist straight out of university, Eira was thrust into a lead role when a senior geologist left for another company. In the spring of 1994, the geologist and her exploration team raced the spring melt and drilled one final hole from a floating ice platform. The core had a 2-carat diamond embedded in it, and the rest is history. She later became VP Exploration for Aber, Dominion Diamond’s predecessor company.
Eira’s appointment as Lucara CEO strengthens already solid connections between Lucara and North Arrow. She remains a North Arrow advisor and large shareholder, and was critical in landing $2-million investments from both Ross Beaty and the Electrum Strategic Opportunities Fund L.P., which is funding North Arrow’s current programs. There’s a brother connection between the two companies, too – North Arrow CEO Ken Armstrong’s brother John is Lucara’s vice-president, mineral resources. His specialty is the assessment and analysis of diamond size and value distribution as well as deposit modelling. John Armstrong’s partner Allison Rippin Armstrong, a corporate social responsibility specialist, is an advisor to North Arrow.
As for Eira, her association to North Arrow’s flagship Naujaat project runs deep. It was Thomas who secured the Naujaat project (formerly called Qilalugaq) from Stornoway Diamonds and brought it to North Arrow, after stepping down as Stornoway’s executive chairman. The Naujaat, Pikoo and Timiskaming projects were optioned from Stornoway on a JV basis, with North Arrow subsequently buying out Stornoway’s stakes to secure 100% interests in Naujaat and Pikoo.
Assays are pending for 2,440 metres of kimberlite core drilled at Naujaat last fall. Further drilling later this spring will conclude the program at the 12.5-hectare kimberlite, the largest in the Eastern Arctic. Naujaat has an Inferred mineral resource of 26.1 million carats from 48.8 million tonnes grading 53.6 carats per hundred tonnes, from surface to 205 metres depth. Fall drilling established that Q1-4 remains open at depth and has a surface area of at least five hectares 305 metres below surface.
Further north, there are also drill plans at Mel, North Arrow’s second grassroots discovery of a diamondiferous kimberlite field in Canada (Pikoo was the first). In October, North Arrow announced the recovery of 23 diamonds larger than the .106-mm sieve size from a 62.1-kilogram sample at the ML-8 kimberlite. The diamond body was discovered through the systematic tracking of a kimberlite indicator mineral (KIM) train to its up-ice termination. North Arrow has subsequently increased its Mel land position to 56,000 hectares through staking. Driling will focus on ML-8 as well as other targets at the heads of three well-defined KIM trains.
Disclosure: North Arrow Minerals is one of three company sponsors of Resource Opportunities and James Kwantes owns North Arrow and Lucara shares, which makes him biased. Readers are advised that this article is solely for information purposes. Readers are encouraged to always conduct their own research and due diligence, and/or obtain professional investment advice. Dollar and $ refer to Canadian dollars, unless otherwise stated.
North Arrow Minerals is one of three Resource Opportunities sponsors.
The November 1991 discovery of diamonds in the Northwest Territories by Chuck Fipke and Stu Blusson put Canada on the global diamond map. It also triggered one of the largest staking rushes in the world, as hundreds of companies hurried north to find treasure.
A few years later, many had retreated to warmer climes. One company that remained in the hunt was Gren Thomas’s Aber Resources, with a large land package staked by Thomas and partners at Lac de Gras near the Fipke find. In the spring of 1994, an Aber exploration crew led by Thomas’s geologist daughter, Eira Thomas, raced the spring melt to drill through the ice in search of kimberlite — the rock that sometimes hosts valuable diamonds.
It was a longshot. Since the Fipke find, the great Canadian diamond hunt had virtually ground to a halt — despite the millions of dollars spent in search of the glittery stones. But the drill core from that final spring hole had a two-carat diamond embedded in it. The Diavik discovery meant it was game on for Aber — and Canada’s nascent diamond industry.
DIAMOND POWER PLAYER
A quarter century after that fateful hole was punched through melting ice, Canada punches above its weight in the world of diamonds. Measured by value, the country is the third largest producer of diamonds by value globally. And the valuable diamonds that continue to be unearthed at the Diavik mine discovered by Aber are a big reason why.
The discovery unleashed a wave of shareholder value. The shares of Aber and its successor companies went from pennies to more than $50 as the quality of the diamonds and the asset became known. Dominion Diamond Corp., as Aber is now known and which owns the Ekati mine and 40% of Diavik, is Canada’s premiere diamond company. Diavik is expected to produce about 7.4 million carats this year, making it among the world’s largest diamond operations.
The team behind the Diavik discovery has also created a fair amount of shareholder value in the years since, led by Eira Thomas. She has co-founded two diamond players, Stornoway Diamond Corp. and Lucara Diamond Corp., and remains a director of the latter Lundin Group company. Her most recent gig, as CEO of Kaminak Gold, ended rather well — Goldcorp bought the company for $520 million last year.
Thomas is also an advisor to North Arrow Minerals (NAR-V), a cashed-up junior company at the forefront of Canadian diamond exploration. Aber’s Gren Thomas is North Arrow’s chairman and the CEO is Ken Armstrong, a former Aber and Rio Tinto geologist. North Arrow recently raised $5 million to explore its portfolio of projects and a drill program is underway at its advanced-stage Naujaat project, which hosts a population of valuable fancy orangey yellow diamonds.
In a space with few new discoveries or development projects, Canada is home to two of the world’s new diamond mines. Stornoway’s Renard mine in Quebec and Gahcho Kue, a De Beers-Mountain Province joint venture in the Northwest Territories, have both recently begun commercial production.
Globally, the diamond industry has faced headwinds, including India’s demonetization and choppy rough stone prices. But diamonds remain a money maker for some of the world’s largest mining companies, including Rio Tinto (60% owner of Diavik) and Anglo American. Incoming Rio boss Jean-Sebastien Jacques identified diamonds as a “priority area” last year in a Bloomberg interview: “I would love to have more diamonds, to be very explicit.” The company recently backed up those words by signing a three-year, $18.5-million option on Shore Gold’s Star-Orion South diamond project in northern Saskatchewan.
And Anglo’s De Beers division remains a reliable profit generator. In 2016, rough diamond sales surged for both Anglo American (up 36%) and Russian producer Alrosa (up 26%), according to The Diamond Loupe. A recent hostile takeover bid for Dominion Diamond reflects the demand for well-run diamond mines, which are powerful profit machines.
The picture is less promising on the exploration front. Budgets dried up during the mining slump that began in 2011, and little grassroots exploration work is being done. It’s particularly problematic for supply because diamond mines take longer to discover, evaluate and build pharm. The new Canadian mines will help fill the gap, but it won’t be enough. Economic diamond discoveries have simply not kept pace with mine depletion, globally.
“There are definitely a lack of new projects, at least new projects that are close to infrastructure,” said Paul Zimnisky, a New York-based independent diamond analyst. “There really is not much at all in the global diamond production pipeline.”
Economic, world-class diamond projects are few and far between, and most exploration companies looking for them have failed, Zimnisky explained. That has resulted in wariness and declining interest among investors: “In general, shareholders have not done well in diamonds.”
The looming supply deficit is particularly acute for rare coloured diamonds, which fetch higher prices. Australia’s Ellendale mine produced an estimated 50% of the world’s fancy yellow diamonds before closing in 2015. The Argyle mine, also in Australia, is one of the world’s biggest mines and a source of valuable coloured diamonds, including extremely rare pinks. It, too, is slated to close in the coming years, after decades of production.
North Arrow’s Naujaat could help fill the void. The project hosts a population of fancy orangey yellow diamonds that are more valuable because of their rarity. Naujaat is on tidewater, which dramatically reduces costs, and hosts a very large diamondiferous kimberlite, Q1-4, that outcrops on surface.
It’s the focus of this year’s $3.2-million program, which will see North Arrow drill 4,500 metres and collect a 200-tonne mini bulk sample. The goal is to extend the Inferred resource to a depth of at least 300 kilometres below surface and better define the diamond population. The sample will be shipped south in late August and processed in the fall.
“There is excellent potential to extend the Q1-4 kimberlite at depth, beyond the reach of past drilling efforts,” said North Arrow CEO Ken Armstrong. “It’s the first drilling in more than 12 years. The work will help us confirm and update the size of Q1-4 and improve our understanding of the deposit’s internal geology and diamond distribution.”
In 2014 and 2015, North Arrow collected a small bulk sample at Naujaat (formerly known as Qilalugaq) with the goal of gauging diamond values. But the carat values on the small 384-carat package came in significantly below expectations. North Arrow shares were relegated to the market penalty box and the company has been largely under the radar since, despite important background work that set the stage for this year’s program.
RISK AND OPPORTUNITY
Contrarian investing and the ability to time cycles can lead to fortunes in the junior mining sector. Vancouver investor Ross Beaty has proven it, time and again. In the early 2000s, with copper trading for under US$1 a pound, his team assembled a portfolio of unwanted copper assets in a bear market. He developed and sold those projects during bull markets, turning $170 million in invested capital into shareholder returns of $1.87 billion. His latest win was a large bear-market investment in Kaminak Gold, later bought out by Goldcorp.
Beaty’s latest contrarian bet is on North Arrow, through a $2-million investment that was part of the recent $5-million private placement financing. Other investors included the New York-based Electrum Strategic Opportunities Fund ($2 million) and company management and directors. The money will fund an aggressive program at Naujaat including drilling and a bulk sample, as well as exploration at North Arrow’s Mel, Loki and Pikoo projects.
North Arrow also has exposure to drilling through the LDG (Lac de Gras) joint venture with Dominion Diamond Corp. That project borders on the mineral leases where Diavik is located. Ekati is 40 kilometres to the northwest. Dominion plans to drill several targets later this summer as part of a $2.8-million exploration program. North Arrow will have a 30% interest in the JV.
With a target on its back, Dominion is highly motivated to enhance shareholder value. And that extends beyond mine operations to exploration and new discoveries. In May, Dominion announced a “renewed strategic focus on exploration” and a $50-million, five-year exploration budget.
A FANCY EDGE
As for Naujaat, North Arrow is revisiting the project after a polishing exercise yielded fancy yellow diamonds that turned some heads in the industry. Several were certified “fancy vivid” diamonds, a coveted designation in the coloured diamond world. The quality of the polished stones suggests the fancy orangey yellow diamonds at Naujaat are considerably more valuable than the June 2015 valuation of the roughs indicated.
The primary conclusion of the diamond evaluators was that the 384-carat parcel of Naujaat diamonds was too small to properly evaluate. North Arrow plans to remedy that, in part, by collecting a 200-tonne bulk sample that should yield another 80 to 100 carats. The sample will be taken from the kimberlite’s highest-grade zone, A61. Lab results are expected in early 2018.
Another complicating factor at Naujaat is the presence of two distinct diamond populations of different ages, including a population of rare fancy yellow diamonds. It’s a consideration that was not factored into the prior carat valuation. It will be next time. Diamonds are a rarity play, and diamonds that occur less frequently — such as coloured diamonds and large diamonds — are more valuable. Yellow diamonds made up only 9% of the 2015 Naujaat sample by stone count, but more than 21% by carat weight.
The drilling at Naujaat is targeting kimberlite between 200 and 300 metres in order to bring material designated target for future exploration (TFFE) into the Inferred category. That drilling, plus the mini bulk sample, should help North Arrow better evaluate the diamond deposit on the path to a future Preliminary Economic Assessment. The Q1-4 kimberlite has a horseshoe shape that makes it amenable to open-pit mining and a low strip ratio. A larger bulk sample is planned for 2018.
Fancy yellow diamonds were thrust into the spotlight earlier this month when Dominion unveiled the striking 30.54-carat Arctic Sun, a fancy vivid yellow diamond cut from a 65.93-carat stone unearthed at Ekati. Dominion also played up coloured diamonds in their latest corporate presentation — specifically, the sweetener effect of high-value fancy yellow and orange diamonds at Misery.
The potential emergence of Canadian coloured diamonds could help solidify Canada’s position on the world diamond stage, according to analyst Zimnisky. On the branding and marketing side, Canadian diamonds continue to have strong appeal because of their high quality and ethical sourcing.
And the two recent Canadian mine openings are a bright spot for the global industry, despite early growing pains at both Gahcho Kue (lower-than-expected values) and Renard (breakage), he pointed out.
“There is absolutely an opportunity to sell Canadian diamonds at a premium, especially in North America,” Zimnisky said. The United States remains the world’s largest diamond market, despite the growth in demand from China and India.
Important hurdles remain before any mine is built at Naujaat, but the strength of North Arrow’s management team bodes well for success, according to Zimnisky.
“North Arrow is looking for something world-class and it’s high-risk, high-reward,” said Zimnisky, who has seen the company’s cut and polished fancy yellow diamonds: “They’re beautiful.”
The appetite for fancy yellow and other coloured diamonds remains strong, despite the closure or pending closure of two of the mines that produce many of them. Last year a De Beers store opened on Madison Avenue in New York, Zimnisky said, and the feature diamond on opening day was a very large fancy yellow of more than 100 carats.
Further north of Naujaat on Nunavut’s Melville Peninsula is another North Arrow project with a good shot at a kimberlite discovery. At the Mel property, 210 kilometres north of Naujaat, North Arrow geologists have narrowed down and defined three kimberlite indicator mineral (KIM) trains through systematic soil sampling over several seasons. Last year’s till sampling defined where the KIM train is cut off, suggesting the bedrock kimberlite source is nearby.
The discovery of a new kimberlite field this season is possible, since kimberlites in the region outcrop at surface. “It’s a first look, but there’s potential for discovery without drilling,” says CEO Ken Armstrong.
As for the Lac de Gras joint venture, the US$1.1-billion hostile takeover bid for Dominion unveiled by the private Washington Corp. earlier this year may work in North Arrow’s favour. In addition to spurring a stock surge, the bid forced the diamond miner to crystallize its focus on creating shareholder value. And a key strategy for Dominion, with its two aging mines, is a renewed exploration push.
Finding new diamondiferous kimberlites in proximity to its existing operations would be a big boost for Dominion. One of its best shots is through the joint venture with North Arrow, which covers 147,200 hectares south of Ekati and Diavik. Dominion is spending $2.8 million on the project this season, including a planned drill program in the fall. North Arrow is well-positioned to capture the value of any Dominion kimberlite discoveries made.
North Arrow also plans to drill two or three promising kimberlite targets at its nearby 100% owned Loki project, dovetailing with the completion of the LDG drilling. The company has received a $170,000 grant from the Northwest Territories government to drill Loki. North Arrow will also conduct till sampling in the fall at Pikoo, its Saskatchewan diamond discovery, in advance of a potential early 2018 drill program.
Disclosure: Author owns shares of North Arrow Minerals. North Arrow is one of three company sponsors of Resource Opportunities, helping keep subscription prices low for the subscriber-supported newsletter. North Arrow Minerals is a high-risk junior exploration company. This article is for informational purposes only and all investors need to do their own research and due diligence.
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Their unique combination of portability and value make diamonds a favoured target of thieves, both on the big screen and in real life.
In The Pink Panther, a distinctive pink diamond was fodder for several movies worth of escapades between bumbling Inspector Clouseau and the elusive jewel thief.
Away from the screen, one of the biggest thefts was the Antwerp diamond heist of 2003. Thieves planned it for years, including posing as diamond merchants and renting office space in the Antwerp Diamond Center. They then made off with more than US$100 million in diamonds and jewelry from a heavily fortified safe. The bad guys were arrested; the gems were never found.
However, the greatest diamond heist of all time didn’t involve masked men, gunpoint or intricate plans concocted over several years. In fact, it didn’t involve coercion at all.
It went down rather quietly in the fall of 2009 when upstart Lucara Diamond Corp. bought a controlling interest in AK06, a De Beers diamond project in Botswana, for US$49 million. De Beers’ discovery of the nearby AK1 kimberlite — now Orapa, the world’s largest diamond mine — had launched a diamond district in Botswana’s Kalahari desert. But the diamond giant was now shedding assets and William Lamb, then Lucara’s only employee and now its CEO, was looking.
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Lamb had been hired the previous year by Lukas Lundin, the Swedish tycoon whose international mining empire is based in Vancouver. The idea of a diamond company called Lucara was hatched earlier during a Lundin lunch with Catherine McLeod-Seltzer and Eira Thomas (who contributed the “ca” and “ra,” respectively, for the company name). Lamb spent more than a year scouring the globe for prospective diamond projects and plotted them on a spreadsheet, he told me during an interview in Botswana. AK06 made his short list.
He ironed out the purchase price for a 70% stake in AK06 during a 5-minute phone conversation with an executive at De Beers, where Lamb had worked for several years. Lucara later bought out JV partner African Diamonds — who couldn’t afford to fund their share of mine construction costs — to take control of 100% of the project. AK06, of course, became the Karowe mine, the source of many of the world’s largest and most valuable rough diamonds. Lucara has now sold 145 diamonds for more than US$1 million each, generating US$528 million.
Lucara sells its largest stones through Exceptional Stone Tenders, where buyers submit sealed bids over a number of days. On May 11 Lucara announced sales proceeds of US$54.8 million from its latest tender, the largest yet. The sale featured 15 diamonds for a total of 1,765 carats, including a 374-carat Type IIA diamond, below, that fetched US$17.54 million. The 374-carat stone broke off the 1,109-carat Lesedi La Rona, the world’s most famous diamond. It was purchased by Graff Diamonds, whose owner Laurence Graff is arguably the most powerful player in the global diamond trade. I suspect he desires the larger companion piece.
The “Lesedi La Rona” — “Our Light” in the local Tswana tongue — was unearthed in November 2015. It is the largest gem-quality diamond recovered in a century and the second largest ever. The stone was named last year in a contest open only to Botswana residents. Last year Lucara put the Lesedi up for live auction at Sotheby’s in London. But the diamond failed to sell because bids didn’t hit the reserve price. More on that later.
Lucara sold the 813-carat Constellation diamond, recovered at about the same time, for US$63 million — a record for a rough diamond — as well as a share of the profit generated from the cut stone. Notably, the price tag for the Constellation exceeded what Lucara had paid just seven years earlier for a controlling interest in the mine that produced it.
I travelled to Botswana recently to visit Lucara’s operations and learn more about both where the company has been and where it’s going. Also on the tour was the Africa correspondent for a Swedish daily newspaper and an analyst for Nordea, a large Swedish bank. There are plenty of reasons to be bullish Lucara and I have purchased more shares in the company since I returned.
“Big” and “beautiful” were recurring themes of the trip. After the site visit, I went on a two-day safari at a lodge on the Boteti — the only river that runs through the Kalahari Desert. Watching elephants, hippos, lions, giraffes and zebras in their natural habitat was an amazing experience. Fun fact: a group of zebras is called a “dazzle.”
BOTSWANA, DIAMOND POWERHOUSE
I flew into Gaborone, Botswana’s capital, through Frankfurt and Johannesburg. “Gabs,” as the city is known colloquially, has become a global diamond centre as Botswana has risen among the ranks of producers. The African nation is now the second largest producing nation by value, unearthing 22% of global supply, as outlined by New York-based diamond analyst Paul Zimnisky (Russia is first, Canada third). Most of the Botswana stones come from the Jwaneng and Orapa mines, located in the same neighbourhood as Karowe.
In 2013, De Beers moved its sorting and sales operations to Gaborone, an exclamation mark on Botswana’s emergence as a diamond power. Botswana owns the other 15% of De Beers not owned by Anglo American, as well as 50% of Debswana, a De Beers JV. Diamonds generate up to 50% of government revenues, funding universal health care and education (including post-secondary). Botswana is one of Africa’s fastest-growing economies and has a higher GDP per capita than South Africa.
One of the first stops for our small group was the gated Diamond Technology Park (DTP) on the outskirts of Gaborone. The compound is the headquarters for Lucara and other Botswana diamond miners. Down the street is the De Beers sorting centre. A helipad atop that building attests to former De Beers boss Nicky Oppenheimer’s fondness for helicopter transportation.
The DTP is ground zero for the billionaires, royalty and other high-net-worth investors who fly in from around the world to view Lucara’s finest merchandise: large rough stones that sell for millions — sometimes tens of millions — of dollars. The company picks up clients at the airport and whisks them in limousines to Lucara showrooms. Some spend hours with a single stone — investigating the clarity, evaluating the colour, envisioning the cut possibilities. The 1,109-carat Lesedi La Rona was not part of the latest Exceptional Stone Tender. But presumably some of the clients who flew in to view the diamonds on offer also viewed the Lesedi.
Security measures were extensive. My fingers were printed and retinas scanned. Later, on the way in to Lucara showrooms, I was searched in a secure room. On the way out, I was asked to remove a candy from my mouth to show that it wasn’t something much more valuable.
Steve Lincoln, Lucara’s sales manager, is a former De Beers man — like many in the sector. He led us into a room that shimmered with diamonds grouped by weight, colour and quality. Here, a group of 5- to 10-carat stones. There, a selection of the diamonds being sold in the Exceptional Stone Tender. Most were white and clear. Among them was the beautiful 374-carat Type IIA stone that went for almost US$18 million.
LESEDI LA RONA
Our final stop was at the icy elephant in the room. Sitting by itself on a white table under a row of lamps was the Lesedi. I picked up the rock, muscles adjusting to its heft as I cradled it in my fingers. Looking into the diamond through a loupe, what struck me was the stone’s architecture. Beyond the clear, smooth plane where the 374-carat diamond cleaved off were ridges, soft pools of light, jagged edges, rippled valleys. Close up, it’s easy to get lost in the stone’s landscape. The diamond occupies its own world.
And in the diamond world, news of its arrival landed like a lightning bolt. Once cut and polished, the Lesedi could be among the world’s largest clear diamonds. The largest, the 530-carat Great Star of Africa (or Cullinan), was cut from the 3,106-carat Cullinan diamond — the only larger diamond ever found. The Great Star is set into the British Crown Jewels. But not only did the Lesedi break, it broke the mould. The diamond’s size makes it difficult to determine how many stones could be cut from it, or how they might look. The rock doesn’t fit into the largest scanners made for diamonds.
The diamond’s incredible narrative was derailed by the unsuccessful auction. Following a global road show and marketing campaign, the Lesedi La Rona failed to hit the (undisclosed) reserve price at a glitzy live auction in London on the evening of June 29, 2016. The top bid was US$61 million, less than the Constellation had fetched and far below projections of a potential US$100-million sale price. The Constellation’s per-carat price, US$77,500, implied an US$86-million value for the Lesedi — plus a large premium given the stone’s provenance.
The fate of Lesedi La Rona remains the million-dollar question — perhaps, the $100-million question. Interest remains high — Lamb fields calls about the diamond most days (two on the day of the interview). Cash offers are rejected out of hand. A few members of the cast of characters drawn out by the giant diamond have been particularly interesting, Lamb said with a smile. He didn’t elaborate.
As author Matthew Hart documented in an Aug. 5, 2016 feature in Vanity Fair, it wasn’t for lack of interest that the auction fizzled. Moments after the hammer fell, Laurence Graff’s son rushed up to the CEO to express interest in the stone.
DIAMANTAIRES AND DISRUPTION
In the diamond business, diamantaires are the middlemen. They privately purchase rough stones from producers, cut them and take their cut of the value created. It’s a traditional, secretive system that goes back centuries. Lucara was the upstart that shook the foundations of that established order by auctioning the world’s most desirable stones.
“Diamantaires felt that we were trying to sell the stone to their end client,” CEO Lamb, right, states matter-of-factly. “The diamantaires hate the public process. … they will pay you more for that exclusivity.”
It goes some way to explaining why the second largest gem-quality diamond ever recovered, a stone with historical significance, failed to sell at the live auction.
Lamb reasons that Lucara is actually helping other producers — especially the handful of other producers that recover very large diamonds — by controlling the supply of such stones through orderly tenders. The company could easily swamp the market for large diamonds, he points out.
As for the auction, the company did not get to the pinnacle of the large-diamond world by shying away from calculated risks, the CEO noted. The live Sotheby’s auction, he acknowledges, was an experiment. The exercise, driven by the significance of Lucara’s find as Lamb tells it, didn’t ultimately pay off — at least monetarily.
“We wanted to maximize shareholder value and let the world know that we had recovered the only 1,000-carat stone that anybody on the planet had ever seen.” (The Cullinan was unearthed in 1905.)
Lamb continues: “It’s not because we just love the risk and we sort of don’t pack our parachute and jump out of the plane. We’re packing the parachute very meticulously. We’re going to the edge of the cliff and we’re jumping, knowing that we’ve actually done our homework.”
As “failures” go, the Lesedi La Rona marketing blitz and auction was rather successful. The company estimates about 1.8 billion people — a quarter of the world’s population — have either seen, read about or heard about the diamond. But only about 100 people have held the stone, and the list of potential buyers is shorter yet. The diamond’s fate has weighed on company shares, which have drifted down from the $4 level pre-sale to below $3.00.
Eighteen months after its discovery, Lamb still becomes animated when talking about the Lesedi. The diamond, forged deep within the Earth over billions of years, is likely as old as the Earth itself, the CEO enthuses. “That stone was growing as the Earth cooled down … the Earth was just gas clouds collecting. While that gas cloud is collecting, those carbon atoms were already trying to find each other. The stone was starting to grow that far back.”
Tall and trim, Lamb is a former elite athlete who has represented South Africa at the world track and field championships (he once placed fifth in the duathlon). Running remains a passion — a recent excursion with a friend and his son saw Lamb start at one edge of the Grand Canyon, run down and through it, and up the other side (it took him 4.5 hours). I got the sense that blazing a trail through the traditional diamond industry — not to mention proving naysayers and skeptics wrong — brings out his competitive juices.
That said, other extraordinarily large diamonds the company finds will likely not be sold at live auction. “We learn from our mistakes. We wouldn’t go back to auction.” Lucara is investigating various options for selling the Lesedi, Lamb said, including partnership and/or retaining a financial interest in the polished product.
A humorous moment in the showroom, which had an empty diamond scale sitting on the table when we walked in. When the Lesedi La Rona was placed on the platform, the reading that came up was 1,106 carats — prompting a few laughs as well as nervous glances between company officials. As it turned out, the scale had not been calibrated after it had been moved into the room. The stone does, in fact, weigh 1,109 carats.
TWO SUITCASES, $1 BILLION IN STONES
After viewing some of the most valuable stones pulled out of Karowe, we flew to the mine for a tour of the operation. It started in the open pit, which measures 820 metres across at its widest point and is about 80 or 90 metres deep. Weekly dynamite blasts loosen up the ore, which is transported out by 100-tonne dump trucks. The strip ratio is in the range of 5 or 6:1 for the next couple of years, then drops to below 2 due to the shape of the kimberlite. Lucara will then shift focus from accessing the treasure to mining it. The bottom of the pit will get about three times as deep by the end of the current mine life, in 2026.
Lucara recently brought in a new mining contractor at Karowe, a move prompted by consistent over-billing by the previous contractor for volume of ore processed, Lamb said. Open-pit mining was shut down for two months during the transition but operations were not affected — Lucara mined from stockpiles. It has worked out alright, Lamb says — the new contractor is cheaper and has more capacity.
About 40 million cubic metres of rock have been processed since Karowe opened. The diamonds recovered could fit in two suitcases. They have generated a billion dollars in revenue, and counting.
Lucara is working on economic studies — due out later this year — on an underground expansion that would extend the Karowe mine life well beyond 2026. And it’s the expansion that could really drive profitability if Lucara can continue to pull large stones out of the south lobe. That’s the largest kimberlite, from which the Lesedi and Constellation were unearthed. Lucara completed a deep drilling program at Karowe in February that included a 758-metre drill hole. An updated resource estimate is expected in Q4.
Lucara is also building a Mega Diamond Recovery unit (MDR) at Karowe. A particular challenge of diamond mining, especially for Lucara, is avoiding breakage during a process that consists of crushing and grinding rock into progressively smaller pieces. The MDR, at a cost of between $15 million and $18 million, will divert the largest stones at the front end of the mining process. The unit will be able to recover stones as large as 45-50mm. Lamb refers to the recovery of large stones as “mining money” and the MDR will help Lucara recover the largest, most valuable stones intact. The company is also installing four new XRT (X-ray transmission) diamond recovery units.
Viewed from the primary crusher — the first point of entry for the ore and one of the highest points of the mine — the operation resembles a kind of amusement park. The ball mill is the Ferris wheel, the conveyors the roller-coasters that deposit sometimes precious cargo at the next stop. In this Darwinian adventure park, only the most valuable cargo survives a series of crushing and shaking exercises.
Karowe has a been a phenomenal success, by many metrics. The mine was built in just 18 months and had a 9-month payback. In December 2016, just four years and eight months after the very first diamonds were produced, Lucara passed $1 billion in sales. The company implemented a dividend in 2014 and has now paid out more dividend dollars than it has raised in equity. The dividend policy also broke new ground as the first company in the Lundin empire to pay one. It took six months to convince Lundin, Lucara’s chairman, to go with a dividend, Lamb recalls with a smile.
Karowe mine staff also reaped the benefits of the recovery of the 813-carat and 1,109-carat stones. Each employee received a 20-30% large stone bonus. Jobs in the Botswana diamond industry — which is large enough to ensure salaries remain competitive — are typically coveted positions.
At a $2.95 share price, Lucara’s market capitalization is about $1.13 billion. Last year the company paid out dividends totalling 51 cents a share — 6 cents in quarterly payments plus a special dividend of 45 cents in the months following the failed Lesedi sale. This year Lucara hiked the full-year dividend to 10 cents — a 60% increase — for a current yield of about 3.4%. The list of mining companies paying that generous a dividend is very short.
Lamb is open to adding assets through acquisition, but only if they are accretive — a tall order given Karowe’s profitability. Late last year Lucara purchased a 9.9% stake in Tsodilo Resources (TSD-V), an illiquid diamond exploreco that is currently drilling its BK16 diamondiferous kimberlite. BK16 is six hectares at surface, located in the same Orapa kimberlite field as Karowe, and hosts a population of rare Type IIa diamonds. The project is another De Beers discard and the company is run by Mike de Wit, De Beers’ former VP of exploration for Africa.
ROUGH START, EXCEPTIONAL OPERATION
The company’s value can be expressed in a single sentence: Karowe produces less than .5% of global diamonds by weight, but more than 50% of the world’s “specials” (10.8 carats plus). And those large stones command exponentially higher prices. A 100-carat diamond is much more valuable than ten 10-carat diamonds. A 1,109-carat diamond? Its price has yet to be determined. But the stone remains in Lucara’s inventory, as under the radar as a world-famous diamond can be. I will be surprised if it doesn’t sell this year.
Karowe was no overnight success, Lamb recalled during an interview after the mine tour, in nearby Letlhakane. Lucara’s first sale was underwhelming, with average carat prices coming in at US$215 (2016 revenue was US$824 per carat). It was a “disappointing” outcome, below projections, and the stock plunged from the $1.25 level to below 50 cents, Lamb recalled.
“We’re now panicking. We’re thinking, ‘We bought this dud from De Beers.’ What’s happening?”
Then in April 2013, Lucara recovered a 239-carat stone. It turned out to be a sign of things to come, and the company took immediate steps to modify the plant, decreasing the risks of breaking large stones. Ever since, a steady stream of beautiful, unusually large stones — and the high prices fetched for them — have made Karowe one of the world’s most profitable diamond mines on a per-carat basis. Debswana’s nearby Orapa mine, the world’s largest diamond operation, mines more carats in two weeks than Lucara does at Karowe in a year. But size matters — Lucara has now sold 145 diamonds for more than $1 million each, generating revenues of more than US$528 million.
The company’s greatest success came in November 2015, when Lucara unearthed the three largest diamonds it has ever recovered in the space of a week. In addition to Lesedi La Rona and Constellation — the sixth largest gem-quality diamond ever recovered — there was the 374-carat stone that sold in the latest tender.
Lucara’s large-stone focus also insulates the company from two of the primary threats facing the global diamond industry: synthetic stones and changing relationship patterns among millenials. With its iconic “Diamonds are forever” narrative, De Beers inextricably linked love, commitment and diamonds for generations of couples.
However, lower marriage rates among millenials means fewer diamond engagement rings. The diamond industry is countering the trend through its “Real is Rare” campaign, which emphasizes authenticity and is aimed at people who didn’t grow up with “Diamonds are forever.”
Prospective husbands are not really the target audience for the large stones that generate most of Lucara’s revenues, anyway. The buyers for these diamonds travel by private jet and sometimes rule countries. Similarly, synthetic stones are much more of a threat to companies producing smaller stones. And synthetics take an enormous amount of heat and electricity to create, tarnishing their green credibility.
The “blood diamonds” legacy is another headwind in Africa. Blood Diamond, the 2006 thriller starring Leonardo DiCaprio as a diamond smuggler, helped stamp the narrative on the public imagination. To an extent, Lamb is resigned to it: “Diamonds will always have a tarnished image, no matter how much marketing you do.”
But when talk turns to DiCaprio, who is also backing a California-based synthetic diamond producer, frustration crosses Lamb’s face and his voice develops a bit of an exasperated edge. He links the 50% of government revenues that come from the diamond industry with Botswana’s emergence as a stable nation with a high GDP and low corruption. Botswana provides universal health care and free education, including post-secondary. Taxes are based on profitability and Lucara paid US$103 million in taxes in 2016 (full-year revenue was US$295.5 million).
Oscar-winning actress Charlize Theron, right, also provided a sort of counterpoint to the blood diamond narrative at the 2017 Academy Awards in February. The actress created a buzz with a pair of stunning diamond earrings cut from the Queen of Kalahari, a clear 342-carat diamond recovered at Karowe in 2015. The diamond sold for US$20.55 million and was cut by jeweller Chopard into a diamond collection dubbed the Gardens of Kalahari. Theron, who is South African, wore a 26-carat heart-shaped stone and a 25-carat pear-shaped diamond.
For me, a very brief foray into South Africa during a transfer — and in-flight conversations with a few South Africans — highlighted the geopolitical contrasts between the neighbouring countries. At the Johannesburg airport, the TV headlines were “No-confidence vote against Zuma considered.” In conversation, a few of the prevailing themes were presidential corruption on a massive scale, ANC infighting, racial tensions and the country’s downward slide.
In Botswana, by contrast, the current (elected) president — Ian Khama — is the son of a black father and a white mother. His father is Botswana’s founding president, Seretse Khama, a tribal leader who studied in England and fell in love with and married a white English woman. The union rocked South Africa — where apartheid was just getting started — as well as the rest of southern Africa. Fifty-some years later, the young country ranks high on living standards and low on corruption compared to African peers. Especially given what’s happening to the south, Botswana is a veritable oasis of stability.
There was, however, a bit of excitement during the Botswana visit. I was sitting across from Lucara CEO Lamb during dinner at a Brazilian restaurant in Gaborone when the table began to shake. “This is an earthquake,” he declared. The epicenter of the 6.5-magnitude quake was not very far away and the shaking lasted longer than any quake I’ve experienced in the seismically active Vancouver area. The quake did not cause any damage or deaths — only jokes that it was triggered by the falling rand.
In the diamond world, Lucara is the upstart that has quickly climbed to the top thanks to its high-quality, exceptionally large stones. Just four years into the mine life, Karowe is a dividend-paying profit machine. The company actually lost money in Q1 because revenues came in below projections, but that had more to do with timing of tenders than company performance. Globally, there is a looming supply shortfall for smaller diamonds. Few new mines are coming online; two Canadian mines, Stornoway’s Renard and De Beers/ Mountain Province’s Gahcho Kue, are among the exceptions. Demand for Lucara’s large stones remains strong.
And as countries go, Botswana is a young one at just 50. The Kalahari Desert covers most of the nation, and it was greener than usual this year because of above-average rainfall. Botswana’s Tswana language reflects the country’s desert reality — the currency is called the “pula.” The word has many meanings: it’s also the Tswana term for rain, as well as the declaration when you raise a toast.
It’s an apt metaphor for Lucara, because the consistent haul of large, high-quality diamonds from Karowe ensures the company will likely continue to “rain money.” The likelihood of underground expansion would extend the mine life beyond 2026 as Lucara focuses on the south lobe — the kimberlite pipe that produces the most valuable stones. The strong dividend, including further potential hikes, and share price growth makes Lucara a compelling investment under $3.00.
Disclosure: The author owns shares of Lucara Diamond Corp. and Tsodilo Resources but has no business relationship with either company. Lucara paid for flights to the Karowe mine site and associated costs, but not safari costs. Readers should always conduct their own research, do thorough due diligence and/or obtain professional advice. This article is solely for information purposes. Nothing contained herein constitutes a representation by the publisher, nor a solicitation for the purchase or sale of securities. The information contained herein is based on sources which the publisher believes to be reliable, but is not guaranteed to be accurate, and does not purport to be a complete statement or summary of the available data. Any opinions expressed are subject to change without notice. The author and their associates are not responsible for errors or omissions.
James Kwantes is the editor of Resource Opportunities, a subscriber supported junior mining investment publication. Mr. Kwantes has two decades of journalism experience and is currently the mining reporter at Vancouver Sun, the city's paper of record. He is also the founder of the World of Mining blog. Twitter: @JamesKwantes
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Resource Opportunities (R.O.) is an investment newsletter founded by geologist Lawrence Roulston in 1998. The publication focuses on identifying early stage mining and energy companies with the potential for outsized returns, and the R.O. team has identified over 30 companies that went on to increase in value by at least 500%. Professional investors, corporate managers, brokers and retail investors subscribe to R.O. and receive a minimum of 20 issues per year. Twitter: @ResourceOpp