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Stockhouse Short Report: BHP puts Canadian junior in tough spot

Peter Kennedy Peter Kennedy, Stockhouse Featured Writer
0 Comments| November 30, 2011

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Already under pressure, shares of Peregrine Diamonds Ltd. (TSX: T.PGD, Stock Forum) took a big tumble this week after partner BHP Billiton Ltd. (NYSE: BHP, Stock Forum) announced that it was reviewing its Canadian diamond assets with a view to a possible sale.

On Tuesday, shares of Peregrine fell 15% on the news because aside from the flagship Ekati diamond mine in the Northwest Territories, BHP’s key Canadian asset is a joint venture with Peregrine on the Chidliak diamond project on Baffin Island, Nunavut.

BHP has a 51% stake in the property, which covers 860,000 hectares and is located 140 kilometres from Iqaluit. Peregrine has the other 49%.

John Kaiser, the California-based analyst, who has reported extensively on Peregrine in his Kaiser Bottom-Fish Report, said the stock fell sharply because investors see this as a signal that Chidliak is not going to be the next Ekati.

Canada’s first diamond mine, Ekati was discovered in 1991. It produced an average of over three million carats of rough diamonds annually during the past three years. Annual sales from Ekati amount to approximately 10% of the global diamond supply by value.

Kaiser said the BHP announcement comes at an extremely bad time for Peregrine, which was gearing up for a rights offering that was priced at 85 cents and designed to raise $11.6 million.

Most of the proceeds, plus $5.5 million in working capital, are earmarked to fund the junior’s share of exploration costs at Chidliak next year, including drilling and bulk sampling.

Over 50 kimberlites (the carrot-like structures that sometimes contain diamonds) have been found on the Chidliak property since 2008.

“This effectively torpedoes the rights offering,’’ Kaiser said during a telephone interview with Stockhouse.

After reaching a hitting a 52-week high of $3.18 in December 2010, the stock has continued to slide with the BHP news, making a new low of 65 cents this week, and leaving Peregrine with a market cap of $63 million, based on 97 million shares outstanding.

Where things go from here is impossible to predict, Kaiser said. But chatter on Stockhouse Bullboards suggests that some observers aren’t very optimistic.

“[It] has to be a kick in the nuts that BHP wants to pull out of Canadian diamond operations entirely,’’ wrote rborhi in a Peregrine Diamonds post. “I am a bit surprised, diamond mines are supposed to be some of the most profitable mines in the world, and the future supply/demand equation is supposed to be good for diamond miners.

In another post, Kelvinklein described Peregrine as a “great stock to short.”

Kaiser said investors who own the stock now run the risk that Peregrine will have to fund not only its 49% share of exploration at Chidliak, but BHP’s 51% share as well.

“It could mean some monstrous financing,” said Kaiser, a move that has the potential to hugely dilute existing shareholders.

Those key shareholders include Peregrine Chairman and chief executive officer Eric Friedland (brother of Robert Friedland), who owns 13.6% of the company. Toronto-based Dundee Corp. (TSX: T.DC.A, Stock Forum) is the company’s biggest shareholder with 18.6%.

Company officials were not available for comment when Stockhouse placed a call to its Vancouver head office on Tuesday.



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