stockhouse editorialwww.stockhouse.ca/shfn/editorial.asp?edtID=38697
Demand from Asia expected to soar
True North Gems (TSX: V.TGX, Bullboards; 56 cents)
www.truenorthgems.com
Shares outstanding: Approx. 65 million with $6 million cash
We've watched this stock for a couple years now and while they've continued to prove up a significant ruby and sapphire discovery in Greenland, the stock has really done nothing - so we've ignored it. However, on October 18th they released new drill results that attracted substantial blocks of buying for two days near 70 cents.
The stock has since pulled back and based on industry research we've done, the next few weeks may be a good time to take a look while it trades in the 50-cent range, as the demand and supply side fundamentals are changing dramatically. They just closed a $3-million financing at 55 cents and one investor took five of the 5.4 million shares.
Demand & supply side fundamentals
Demand side
From a demand perspective, we have to look at China (as usual). That economy has been driving commodity prices as everyone is aware, but another side to that equation is the significant increase in the demand for luxury goods - in particular precious gems. The Gem and Jewellery Trade Association of China recently predicted the overall trading value of jewellery in China could hit 200 billion yuan by 2010, which would make it the biggest jewellery market in the world. China expects to import US$900 million worth of diamonds this year - and double that within three to five years - as it starts cutting and polishing more rough stones to dazzle Chinese customers, a Chinese official said recently.
Yu Huimin, secretary general of China's Diamond Administration, told a diamond conference in Antwerp that the country was already on track for diamond imports to jump 60% from last year. Imports of polished stones have already surged 180% to US$200 million in the first half of 2007 compared to the previous year as demand from Chinese luxury customers surge. Yu said there were no authoritative figures for future demand in China but gem industry estimates forecast that the entire Chinese jewellery market would be worth US$2.5 billion by 2010.
In addition to diamonds, the growth potential of rubies and sapphires is significant. Rubies, in particular, can carry high values per carat and are typically used in conjunction with diamonds. On November 6, 2007, TGX announced the opening of an office in Bangkok to start serving the Asian market with stones coming out of its properties in Greenland. Obviously, they recognize the same market potential.
Supply side
While the demand side looks strong, the supply side may be on the verge of an important shift that would benefit stones coming from peaceful regions and that can be certified. Due to recent civil rights abuses by one of the world's leading suppliers of gems, Burma stones are becoming less and less desirable.
Rubies, sapphires, and emeralds are Burma's third-largest export behind natural gas and timber. Rubies are the top selling stone: highly prized for its deep "pigeon blood" colour, Burmese rubies account for 90% of the world's supply. There is a large sale upcoming with the majority of buyers expected from Asia. A similar gem emporium held last March drew more than 3,000 merchants and generated $185 million in sales. A third, special sale in July attracted about 4,000 buyers.
Critics call these "blood rubies." They say the color is symbolic of the blood shed by laborers who work in unsafe mines to recover them, and of the people killed over the last several decades by the military government's harsh policies (that hit the mainstream media just recently). Burma gems are supporting the military regime and causing widespread human rights abuses.
Jewelers of America, and industry giant Tiffany and Company, have taken the lead in pushing for a more responsible gem trade. They are lobbying the U.S. Congress to close a legal loophole that allows Burmese gems to be imported to the United States from a third country. There are two pieces of legislation pending in Congress that have a strong likelihood of closing that loophole. Europeans are also becoming much more reluctant to buy gems from Burma or violent regions of Africa.
About True North
There are few public companies in North America that are involved in this segment of the resource industry. For this reason, it is a sector that has few analysts and a small following overall. However, as demand continues to build within Asia, more people will begin looking for ways to capitalize on that growth. With a limited number of public companies, TGX has a good chance of attracting a much higher valuation in 2008.
The company's Ruby Project is located on the southwest coast of Greenland, about 160 kilometres south of the capital Nuuk. The property consists of three claim blocks covering 110 square kilometres (they have an option to earn 100%). Both ruby and pink sapphire are found on the property. Individual stones weighing more than 80 grams (400 carats) have been found. High-quality rubies can be worth more than diamonds.
True North began summer exploration programs in 2004 and has returned every year since. More than 30 ruby occurrences have been found so far with a total of 120 tonnes of material removed for processing over three years. From the material processed to date, more than 65,000 grams of gem and over 129,700 grams of near-gem ruby and pink sapphire have been recovered.
Although the prices of gemstones can vary greatly depending on quality, independent valuations have valued a 0.69 carat ruby from Aappaluttoq at $3,220/carat and a 0.96 carat pink sapphire at $460 per carat (prices are $US wholesale).
In mid October, True North reported that drilling had intersected visible ruby and pink sapphire mineralization in 12 of 25 holes drilled and logged to date. Drilling tested an area of the host zone over a 60-metre strike length and to a vertical depth of 144 metres below surface. The host zone remains open to the north and south along strike and is open to depth.
Greg Davison, True North Gems vice-president of exploration said ... "The lateral continuity and depth of ruby and pink sapphire mineralization within a structurally complex geological terrane is very encouraging, particularly with one of the thicker intervals, containing the highest content of ruby and pink sapphire, observed in the deepest drill intersection."
We spoke briefly with the CEO to ask what its plan was for the winter until they can get back in and drill more next season (so we could avoid the potential for a news vacuum). He pointed out the following:
- They hope to start the drill season earlier than previous years
- They are now entering their "results" season as they deliver and process the bulk sample from this year. The material passes through a number of stages from concentrates to rough grades and valuations.
- This winter they will complete and release a Preliminary Assessment study (scoping study) which, if positive, will lead to a feasibility program for 2008.
- They will also be ramping up investor relations efforts to create more awareness of the property potential and the strong market for rubies and gems.
Disclosure: Danny Deadlock owns 15,000 shares of True North Gems (TSX: V.TGX)