Long/short equity, value, debt, base metals
Summary
Kennady's newest exploration results are confirming the expected average grade of the deposit, increasing the confidence in the model.
The next few months will be important as the value of the diamonds will be appraised and a maiden resource estimate will be completed.
The exploration target 12-15 million tonnes and could contain anywhere between 24 and 37.5 million carats, so 30 million carats is a good target.
Introduction
I like diamonds but right now I only have Lucara Diamond (OTCPK:LUCRF) in my portfolio as a diamond play. I have been on the lookout for a new diamond company and have kept an eye on Kennady Diamonds (OTC:KDIAF), which is exploring for diamonds around the Gahcho Kue development project. The Kennady project is less than 200 miles away from Yellowknife, the capital of the Northwest Territories.
Kennady has its main listing in Canada and the company is listed in Canada with KDI as its ticker symbol on the TSX Venture Exchange. The average daily dollar volume is almost $100,000.
Kennady has released new exploration results, what does this mean?
Kennady Diamonds has released the results if a bulk sample from the Kelvin zone. Kennady has excavated 443 tonnes and wanted to find out how many diamonds of what quality it would be able to recover from the project. It recovered the sample from the southeast lobe and as usual, DMS (Dense Media Separation) techniques were used to do the test work.
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Source: company presentation
The average grade of Zone Bx was below my expectations, but zones A,B and C were pretty good with an average grade if 2.85, 2.46 and 1.98 carats per tonne. The five largest diamonds were between 2.59 and 4.22 carats, and this could indicate the Kelvin zone could host a high-grade diamond zone especially as the north lobe also returned an interesting result of 2.59 carats per tonne.
These are very interesting observations, and the average grade of in excess of 2 carats per tonne of rock at the southeast lobe is beating my expectations as this lobe apparently is a more diluted portion of the ore body. So this grade bodes very well for the future. Additionally, the company has also completed a drill program to further define the Kimberly pipes and by the end of this month all infill holes and geotechnical holes will have been completed as a larger drill rig had to be mobilized to the north lobe.
(click to enlarge)
Source: company presentation
This infill drill campaign has confirmed the kimberlite zones as the drill bit has intersected another 152 meters of kimberlite and this bodes well for the future (see later). Kennady has also completed some holes at the MZ zone which is approximately 15 miles from the Kelvin camp. It did intercept some kimberlite but the intercepts are a bit narrower at 3-4 meters but that doesn't necessarily have to be a deal-breaker.
What are the next steps to create some tangible value in the Northwest Territories?
Kennady is now in the final straight line to define a maiden resource estimate at the Kelvin zone and this will be an incredibly important step forward. Infill drilling will be completed in the next few weeks, and the next step thereafter will be to find out exactly how much the diamonds found by Kennady are worth. An appraisal of the stones is expected by the end of October/November, right before the maiden resource estimate will be released by year's end.
(click to enlarge)
Source: company presentation
I don't think this will be the end and I would expect Kennady to complete another bulk sample at Kelvin to increase its confidence in the resources there. The company has an exploration target of 12-15 million tonnes of rock at an average grade of 2-2.5 carats per tonne, resulting in a total resource estimate of 24-37.5 million carats.
This resource estimate will then probably be the basis for a Preliminary Economic Assessment to find out if Kennady's Kelvin project could be built and operated at a profit. Any decent resource estimate would also make Kennady Diamonds an attractive acquisition target considering its Kelvin project is located just 6 miles away from the Gahcho Kue mine which is currently being constructed by a joint venture of Mountain Province Diamonds and DeBeers.
Investment thesis
Kennady Diamonds seems to be sitting on something interesting in the Northwest Territories and the most recent results of the bulk sample at Kelvin and the infill drilling have convinced me the company might have a valuable diamond play in hand. On top of that, there's a real buyout potential as Mountain Province Diamonds (where Kennady was spun out from) is developing another diamond mine just six miles away.
The next important catalyst will be to determine the value of the diamonds at Kelvin as well as completing a maiden resource estimate to use as a first step for further growth.