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TMR: Give us a story that brings the conflict and depletion cycle together and could get investors excited again. What's something that you would want to write home to mother about?
JK: Diamonds are a luxury good, which means that if all the gem diamonds for some mysterious reason flash evaporated, it would leave a lot of unhappy people behind, but the world would carry on as though nothing happened. Its demand is driven by fashion, and thus driven by a growing economy, especially where the growth is in the form of an expanding middle class, such as is the case in China and no longer in the United States. If we assume emerging markets will remain the main component of global economic growth, demand for natural gem diamonds will expand. That's a problem because although 5 trillion carats have been mined since the South African diamond fields were discovered, diamonds tend to just disappear.
Unlike gold, where the 5.4 billion ounces that have been mined in the last 10,000 years are all sitting there in vaults or hanging from people's necks ready to be melted down and resold when the price is right, diamonds seem to disappear into nooks and crannies from which they never emerge to flood the market. Although the stones are valuable, they do not get recycled. That's an issue for the jewelry industry because there have been no giant new discoveries made in the last 15 years, and the big mines like Jwaneng and Orapa in Botswana and others in Russia will be depleting in the next 20 years.
Unless diamonds fade as a coveted luxury good, a supply-demand imbalance will emerge that drives prices higher at a greater rate than inflation. This is important because if a junior owns a diamond deposit whose development costs have been established, the profitability of the mine will increase over time because the revenue side of the equation increases at a greater rate than the inflation-based increase of the operating costs. This is not done with a gold project because the main reason to expect a higher gold price is inflation. Adjusting revenues and operating costs by the same inflation rate is frowned upon because it mathematically boosts the present value of the cash flow. And there is no empirical basis to project a higher real price for gold. Diamond projects have been out of favor while gold was in an uptrend, but now that gold has stabilized at $1,200/oz in a low inflation environment, diamond projects are set to sparkle again.
Probably the best story out there right now is Peregrine Diamonds Ltd. (PGD:TSX), which has raised $28M since last October to collect a major bulk sample that will form the basis of a PEA in Q1/16. It has high-grade pipes on the Chidliak project with a high average carat value already established for the CH-6 kimberlite. If the bulk sample confirms preliminary grade, carat value and tonnage estimates, CH6 will be the equivalent of an open-pittable 4 Moz gold deposit with a grade just under 0.5 oz of gold at the current gold price.
The market has been so negative about anything resource sector-related that the Friedland brothers personally put up two-thirds of the $26M raised through a rights offering and attached warrant offering in the last six months. This stock has gone from a low of $0.14 to $0.34, with 300M shares out. It still has a valuation of only about $100M for a 100%-owned project that has potential to be worth 5 to 10 times that if the bulk sample confirms what we can already see from earlier results.
TMR: When might we see those bulk sample results?
JK: The bulk sample extraction will be done by the middle of May, and shipped from Iqaluit in July when the ocean is ice-free. We should start seeing grade results in Q4/15 with valuations in hand by the end of 2015 and new resource estimates and a PEA sometime in Q1/16. The bonus potential is that as Peregrine collects the largest ever bulk sample from Chidliak, we may start seeing those very big "specials" diamonds whose stone value can reach the hundreds of thousands of dollars. Although the Ekati and Diavik diamond mines in Canada produce high value diamonds, they have disappointed in the delivery of gem quality specials. The market is not assigning any premium to Peregrine for the potential of "specials," but if we do see these stones show up in the bulk sample, it should deliver an upside surprise for Peregrine shareholders.
TMR: What makes you think the specials are there?
JK: You do not know until you see them. That's the beauty of it. We could see a doubling or tripling of the stock from current levels by getting confirmation of what we've already seen from a surface bulk sample and what we see in the grade, but if we get the specials, that would be a bonus. Plus, the company is only testing three pipes out of 71 kimberlites that have been found on the property. If we get evidence that large gem-quality stones are present, then these other bodies that have lower-grade implications become potentially interesting.