ELLENDALE () -- The global diamond industry is currently experiencing increasing demand against a backdrop of a forecast decline in production. Consolidation by a major of the various participants in the Ellendale Diamondiferous Lamproite Field in Western Australia must remain a strong possibility under this scenario.
More specifically, Kimberley Diamonds appears vulnerable to a take over, because of its expansion plans and weak handed share structure, (over 70% retail investors). Blina Diamonds has significant potential in both alluvials and lamproite pipes on its large land holdings.
However the smaller exploration companies such as Blina and Canadian-listed Caldera Resources may represent greater share price growth potential (albeit at higher risk levels), compared to Kimberley Diamonds, which is already in production and trading closer to its fair value.
A significant corporate portfolio investment in the above targeted companies could possibly even trigger the expected consolidation at substantially higher share prices by drawing investors attention to the potential of the Ellendale Field situation. However, the latter currently has a relatively low profile for European and North American investors due to the lack of a quotation for KIM outside of the ASX.
One scenario for consideration would be a straight share swap between the company investing and KIM, on a pro market capitalisation basis, perhaps with significant warrants attached. This would be a pure investment diversification policy, with no operational involvement, at least in the early stages. Taking a share in BDI and CDR would also provide a back door, low cost investment opportunity in the Ellendale Field.
History of the Ellendale Field
CRA led the early exploration at Ellendale back in the 1970's, but later Rio Tinto [LSE:RIO] (who merged with CRA in 1995) gave priority to developing the Argyle mine, virtually leaving Ellendale on hold.
RIO have just taken the long awaited decision extending the future of Argyle.
Mining giant Rio Tinto will develop a $760 million underground project at its wholly owned Argyle diamond mine in the Kimberley region of Western Australia, the company said in a press release on December 8, 2005.
An additional $150 million will be spent on a related open pitcutback, which will enable production to continue from the end of open pit mining in 2008 to the ramp up of the underground mine. Development work will continue and construction of the underground mine will begin once government approvals have been finalized.
The average annual production of the life of the underground mine from 2007 to 2018 is expected to reach approximately 60% of Argyle's historical annual average of 34 million carats and of similar quality.
It remains to be seen whether this new financial comitment in Australia to Argyle will once more forestall any interest they might have for alternative diamond operations such as at Ellendale.
Statistics as of December 2005.
Kimberly Diamonds
Kimberley Diamonds [ASX:KIM] has been mining diamonds at Ellendale since 2002.
Expansion of production at KIM is planned from 120,000 carats current to 700,000 carats by 2006-2007, and is currently being financed by a rights issue (A$46 million). See extracts from a Nov. 2005 presentation.
The history of Kimberley Diamonds describes how Kimberley reached agreement to purchase the Ellendale Project during 2001 for a total of A$23.25 million in a series of staged payments and subsequently completed a feasibility study on the Stage 1 development of the Field.
Over 100,000 carats of gem quality diamonds were produced at Ellendale from start-up in mid-2002 through until 30 June 2004 from Ellendale Pipe 9.
Curiously it is the tuffs of these lamproite pipes that are diamondiferous and are commercially mined. The lamproite magmatic phase does not contain diamonds in commercial grades, presumably because the higher temperatures at formation of the magma destroyed most of the diamonds present.
Blina Diamonds
Kimberley Diamonds spun off its exploration work, and claims outside of the central area (see above map-brown) to its 54% owned subsidiary, Blina Diamonds [ASX:BDI], in order to focus on mining the lamproite pipes (E9 in production and E4 currently on startup). Blina also has the right to explore for and mine alluvial diamonds within the Ellendale mining lease.
BDI's role is to explore for and evaluate alluvial and lamproite diamond deposits in an area covering about 1,700 kilometres of the Ellendale Diamond Field (where Kimberley has established substantial resources at Ellendale Pipes 4 and 9 and is mining Pipe 9). The project areas include about 50 already identified lamproite pipes and a number of diamondiferous alluvial channels and it is anticipated that a re-evaluation of the entire Ellendale Field (using new and existing techniques), made possible by the consolidation of all tenements, will generate many more targets.
BDI and KIM have 5 different sized diamond processing plants between them, from 5,50,100,300 and 450 tonnes/hour ore capacity. This is ideal from both a mining and exploration point of view, providing flexibility in production and enabling processing of the enormous amount of bulk sampling that is necessary to establish grades and value, (particularly with alluvial deposists) in order to complete feasability studies.
Many of Blina's proposed alluvial and lamproite targets are considered to be near mine status and include the Terrace 5 project (with a target size of around 10 million tonnes with 400,000 carats worth A$80 million) and the J-Channel project (with a target size of 8 million tonnes with 420,000 carats worth A$56 million).
Blina estimates that diamonds worth in excess of A$500 million have been eroded from the E9 pipe alone.
For example bulk sampling of E9 north has produced 7287 carats with an average size of 0.37 carat and a grade of 20 cpht.
Caldera Resources
Recent encouraging exploration results included both indicator minerals and micro diamonds from Caldera Resources' [TSX:CDR] Ellendale East project, located 25 kms south east of KIM's Ellendale 4 mine. CDR's tenements are located immediately adjacent to the Oscar Range Fault system, which is considered favourable for continuation of the Ellendale Diamond Field.
The volcanoclastic quartz tuff material recovered from seven targets during the June 2005 drill program at Ellendale East appear to be olivine lamproite in origin. Processing is nearing completion. Caldera has 510 square kilmoeters of prospective ground at Ellendale.
A logical development for Caldera would be a cooperation in some form with Blina, who are only 25 kms away and have the plant and infrastructure to do the necessary bulk processing.
However a complication exists in the JV agreement between Caldera and Ron Winston, Chairman of Harry Winston Inc. The latter will have 30 days to decide whether to buy in his share of the JV after being presented with the latest exploration results, expected in the next few weeks.
If Ron Winston for any reason backed out, it would be logical for Blina and Caldera to at least discuss joint venture possibilities.
United Kimberley Diamonds
One new pipe that United Kimberley Diamonds [ASX:UKD] during 2005 from 53 (airborne magnetic ) targets under investigation is a leucite lamproite, which tend to be less or non diamondiferous than olivine lamproites and so the exploration continues to try and identify diamondiferous olivine lamproite pipes (similar to KIM's E9 and E4).
Leucite and olivine lamproites do occur in proximity, so it remains to be seen if they can find the latter.
Astro Diamonds
According to the Astro [ASX:ARO], "The Ellendale Project consists of one (1) exploration licence covering an area of 59 square kilometres located approximately eight (8) kilometres south east of the diamondiferous Ellendale lamproite pipe cluster currently being mined by Kimberley Diamond Company N.L. ("KDC"). KDC is producing from Pipe 9 and has approval to mine Pipe 4 and Pipe 4 Satellite which between them have a resource of 90.4 million tonnes at 6.2 carats per hundred tonnes for 5.61 million carats.
The main controlling structural features of the Ellendale Field are parallel to the northwest trending Oscar Range Fault and the project area covers a significant strike of this tectonically prospective area. Examination of open file reports in the area shows that previous base metal explorers completed a ground gravity survey over the present tenement area. Several discreet gravity lows resulting from this work are located within the tenement. These are considered to be prime drill targets. Another discreet low to the northwest coincides with a mapped pipe within the KDC tenements.
Heritage impact assessments are currently being carried out prior to on-ground exploration activities taking place."
Their E. claim, although small is well positioned. It remains to be seen what priority they give to developing it compared to their many projects elsewhere.
Financials and Analysts Recommendations
Brian Warner and Jonathan Battershill of Citigroup recommended KIM as a buy and high risk on 11/7/05 and 11/22/05 with a target price of A$1.79.
Chris Lancaster of RBC Capital Markets recommended KIM with a rating - outperform, speculative risk, on 9/12/05, and a 1 year price target of A$1.50 in line with their base case NAV of A$ 1.50 per share.
Rex Adams of Southern Cross Equities recommended KIM as a buy rating with a target (12 months) of A$1.70 on 10/31/05.
Paul Carter of Argonaut Securities recommended BDI as a speculative buy on 9/9/05.
Conclusion
The Ellendale Diamond Field is poised to experience explosive growth in diamond production, reserves and resources, over the next two to three years, as a result of stepped up mining and exploration projects by the some of the companies involved.
Many new target lamproite pipes, anomalies and alluvial gravel targets are being discovered on an ongoing basis, and full evaluation of the Field's potential will take many years.
But the Ellendale Field contains the highest density of diamondiferous intrusions in Australia and consistently produces high value, fancy yellow diamonds.
(c) Copyright 2006 Alan Leishman
Alan Leishman is not a registered Investment Advisor or a Broker/Dealer. Readers are advised that the information contained herein is issued solely for information purposes and is not constructed as an offer to sell or the solicitation of an offer to buy. The opinions and analysis included herein are based from sources believed to be reliable and in good faith but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. The author is a shareholder of Caldera Resources and Blina Diamonds as of 12/19/05. The author has not been remunerated in any form by any of the companies mentioned above for writing this report.
