I hope John does not mind me posting his report but its on his web site free:
Spec Value Hunter Comment - July 16, 2014: Recommendation Strategy for Peregrine Diamonds Ltd
Peregrine Diamonds Ltd is a Good Relative Spec Value buy at $0.40 based on its goal to advance its cluster of high grade diamond pipes on its 100% owned Chidliak project on south Baffin Island. Since the discovery of kimberlite in 2009 over $40 million has been spent at Chidliak to discover 70 kimberlites, of which 49 have been tested for diamonds, resulting in 44 diamondiferous kimberlites. Of these Peregrine believes that CH6, CH7 and CH44 have the greatest economic potential. The most advanced pipe is CH6 for which an initial inferred resource estimate of 2,894,000 tonnes at 258 cpht (1.18 mm cutoff to a depth of 250 m) was published in May 2014. CH6 hosts another 1.47-1.53 million tonnes to a depth of 250 m, and a further 1.13-1.94 million tonnes from 250-380 m for which there is insufficient caustic fusion derived micro diamond data to assign a grade. Petrographic studies indicate that all but 10% of the volume clearly belongs to the same magmatic phase. Delineation drilling is underway to convert the conceptual tonnage into inferred status. If Peregrine is successful, the low end of the conceptual tonnage would boost the resource by 2.6 million tonnes, and the high end by 3.47 million tonnes. Assuming the 258 cpht grade holds up, CH6 has a resource potential of 5,490,000 to 6,360,000 tonnes representing 14.2-16.4 million carats. A surface bulk sample of 404 dry tonnes believed to be representative of CH6 yielded a diamond parcel averaging US $213 per carat with a modeled range of $163-$236. The 1,042 ct parcel, valued at $215,605 by WWW, revealed an excellent distribution of high quality stones up to 8.87 carats. The absence of very high value outlier stones enabled WWW to model a base case price of $188 per carat, vastly superior to what it has modeled for the Gahcho Kue pipes.
If delineation drilling converts the conceptual tonnage into a resource at 258 cpht, CH6 will have an in situ diamond resource worth US $2.7-$3.1 billion at $188 per carat with a rock value of $485 per tonne of which 70% is accessible to open pit mining to a depth of 250 m. That is equivalent to a gold grade of 11.6 g/t at $1,300 gold. At $0.40 and 166.1 million shares fully diluted the market is assigning a value of only $66 million to CH6 compared to the $200-$300 million valuation a comparable gold deposit would command. The valuation gap is due to 1) skepticism about Peregrine's ability to convert the conceptual tonnage into a resource at the surface bulk sample indicated grade and carat value, 2) the perception that Canada's permitting system treats diamond deposits as a special opportunity to ratchet up the permitting cost and timeline, 3) the perception that developing a diamond mine in Canada's Arctic will have an exorbitant capital cost, 4) the concern that Chidliak does not have the critical mass to support a standalone diamond mining operation, and 5) skepticism that the Friedlands have the clout to finance a feasibility study without horrific dilution.
The resource conversion skepticism has its roots in market ignorance about the evaluation of diamond deposits. Based on the detailed work Peregrine's highly experienced team has done on CH6, I see the conversion of the conceptual tonnage into a resource as largely a mechanical data collection process. Unfortunately it is true that the Canada sees diamonds as something it can milk, and milk and milk to keep its civil servants busy. Capital costs in the Arctic are very high, but Chidliak's 150 km proximity to Iqaluit and the fact that none of the kimberlites are under lakes suggest Peregrine may get a break in this area.
The market treated Peregrine's failure to convert the entire conceptual CH6 tonnage into an inferred resource as a setback, creating unfavorable optics in the form of an in situ resource of only 7,470,000 carats. With the benefit of this summer's delineation drilling I expect that resource to double, but at 14.2-16.4 million carats Chidliak still looks short of critical mass. Peregrine management has decided to boost the global carat resource by including the CH7 and CH44 kimberlites in its bulk sampling plan. CH7 already has the benefit of a 47 tonne surface bulk sample from the North Lobe which yielded a grade of 104 cpht. Peregrine has estimated a conceptual tonnage range of 2.75-3.97 million tonnes to a depth of 280 metres for CH7. This represents a potential resource of 3-4 million carats if the 104 cpht grade holds up; the micro diamond size distribution curves from delineation drilling support this grade. No mini bulk sample has yet been taken from CH44, but its micro diamond curve also projects a macro grade of about 100 cpht. Its conceptual tonnage is estimated at 1.16-2.05 million tonnes which would represent another potential 1-2 million carats. Another small pipe, CH46, has a similar curve, though because the sample was only 80 kg there are no diamonds in the 0.85+ mm size fractions. CH7 and CH44 are undergoing preparation this year for LDD bulk sampling in 2015. We do not yet know anything about the carat value potential of the CH7 and CH44 diamonds other than that large diamond are likely. The global resource potential targeted for advanced work is about 20 million carats.
None of the money spent during 2014 on CH6, CH7 and CH44 is likely to generate news that changes the market's perception about the Chidliak project's potential. But Peregrine is undertaking some exploration work that could deliver a surprise during Q4 of 2014, assuming Peregrine reports new kimberlite discoveries during Q3 of 2014. The Chidliak project is benefiting from a fresh set of highly experienced eyes in the form of Herman Grutter, whose technical work has already established that CH6 ranks among the coldest mantle geotherms in the world. The colder the mantle geotherm, the more fertile the mantle will be for diamond formation. The excellent grade and quality of the CH6 diamond population supports Grutter's analysis. It thus follows that other kimberlites with similar grade and quality potential should exist, especially in the vicinity of CH6.
During the summer of 2014 Peregrine will explore the "String of Pearls" within a linear structure projecting to the northwest from CH6. Past drilling has already intersected two blows, CH10 and CH20, of which CH20 exhibits a micro diamond curve similar to CH44. The String of Pearls could yield several million tonnes of dyke material, which could be significant if the diamond population shares the quality of the CH6 population. Peregrine will also follow up a number of gravity targets in the proximity of CH6 which lack the EM/Mag signatures the initial exploration wave would have tested. These were generated by De Beers while it held an option to option Chidliak in 2012-2013. Conversion of these targets into CH6 scale kimberlites would inject fresh discovery excitement into the Chidliak project, for a couple more pipes like CH6 would more than overcome the perceived critical mass shortfall. Exploration potential also resides in Area B 10 km north of the Sunrise Camp where "juicy" kimberlite float has been found that cannot be attributed to any linear magnetic features interpreted as kimberlite dykes.
In terms of finding large new pipes, the outlook is poor in the wake of age dating which places the Chidliak pipes in the 156-138 Ma range. Analysis of Paleozoic country rock inclusions in the kimberlites has led to the conclusion that these kimberlites intruded a sedimentary platform 270-305 m thick that has since been eroded away. In this regard the Chidliak kimberlites are similar to the much older Gahcho Kue kimberlites which have also lost their top third or more. The trick at Chidliak will be to find other 3-10 million tonne high grade pipes with high quality diamonds. This still open potential is reason alone to own Peregrine today rather than waiting until Q1 of 2015 to see how the Friedlands finance the next $20 million in exploration costs. After two years during which no drilling of new targets was done, the stealth surprise of the 2014 summer program could be new kimberlite discoveries made not for the sake of finding kimberlites, but for the sake of finding high value kimberlites.
The ability of the Friedlands to finance Chidliak without heavy dilution is not so easy to dismiss as a laughable concern. At the end of March 31 Peregrine had about $2.4 million working capital left after subtracting the final $3 million payment due to BHP Billiton in January 2015. Peregrine has budgeted $6 million for its 2014 summer work program, so it is clear that the junior will need to raise $6 million before the end of the year while maintaining a decent working capital cushion. The 2015 program to collect bulk samples from CH6, CH7 and CH44 through large diameter drilling is budgeted at $13.5 million. After De Beers pulled out at the end of 2013 there are no major diamond producers left as potential joint venture partners, so Robert and Eric Friedland will have to raise $20 million within the next 6-8 months through equity financings in order to advance Chidliak unless they can find a private equity group to put up the capital for a minority project interest. Assuming the resource sector remains stuck in a bear market, and none of the 2014 summer work delivers anything earth-shatteringly new before year end, it is conceivable that Peregrine will need to issue 15 million shares at $0.40 to raise $6 million. Peregrine has done rights offerings in the past, and may likely do so again. But this time around it will need a guarantee by somebody with deep pockets like Robert Friedland to coax capital out of a fatigued existing shareholder base. My recommendation to Spec Value Hunters is that they should take their cue from what the Friedlands do, because the current valuation qualifies as rock bottom.
Peregrine Diamonds Ltd offers the best speculative value among advanced diamond juniors, which is something of a puzzle because companies associated with Robert Friedland do not usually offer good speculative value. But that also was the case with Ivanhoe Mines during the midst of the 1998-2002 bear market. Ivanhoe subsequently transformed itself from a measly buck into a $20 bill. Robert owns 18.6% of Peregrine's 143.8 million issued shares, while brother Eric owns 13.6%. By the time a rights offering is done to fund this summer's $6 million program, their percentages will likely be higher. In terms of the four core narratives to which most resource juniors are subordinated, diamond juniors are either waiting for a new discovery to spark their markets alive, or are development plays only weakly linked to macroeconomic trends. Although demand for diamonds as a luxury good is a function of global macroeconomic trends, any economic trend slowdown is offset by the gradual depletion of existing diamond mines and the paucity of big mines in the development pipeline. Unlike the case of gold whose 5.5 billion ounce above ground gold stock sits in vaults theoretically for sale at a moment's notice, the trillion carats mined since the end of the 19th century have effectively vanished as if they were a disposable good unless they are very large, high quality diamonds. As the De Beers marketing slogan suggests, diamonds are for you and your heirs to keep forever except in an emergency. The price increase of diamonds, especially better quality diamonds, will likely outpace general inflation for a long time. In that sense advanced diamond plays have their own sector specific narrative which requires a catastrophic economic downturn to collapse. As for diamond discovery oriented plays, they do not need to worry about Goldman/Bloomberg propaganda seeking to engineer lower prices as is the case with gold discovery oriented plays, for the reality is that the bar for what counts as a potentially economic diamond deposit is on a long term declining trend. Furthermore, unlike the situation with uranium whose demand is subject to public policies increasingly guided by an intellectual race to the bottom, the psychological impulse that homes in on natural diamonds is in no danger of collectively dismissing diamonds as mere crystallized pieces of carbon. As far as synthetic diamonds are concerned, the uniqueness of natural diamonds establishes them as identifiable collectibles that will always stand apart in a way gold could never achieve if a philosopher's stone emerged to turn alchemy dreams into reality.
As far as the specifics of Peregrine's Chidliak play are concerned, it really has been only 5 months since we learned that the CH6 pipe has the sort of diamond population that will be in demand for a long time. In normal markets that would by now be extremely old news. But we are in an extremely abnormal market as far as the resource sector is concerned, so it is still staring us in the face as very good news that apparently nobody has noticed. It has been a difficult time for Peregrine shareholders since BHP Billiton pulled the plug in late 2011, but the timing for Peregrine Diamonds Ltd to resume a strong speculation cycle that includes discovery and development narratives is what it was during H1 of 2009, namely imminent. Spec Value Hunters should take advantage of the current lull to turn Peregrine Diamonds Ltd into a core position in their high risk resource sector portfolio.
*JK owns shares in Peregrine Diamonds Ltd