Market applauds Shore Gold and Kensington Resources merger

Shore Gold (SGF-T) and Kensington Resources’ (KRT-V) symmetrical move up the market on Tuesday should come as no surprise. Not with the planned merger between the two diamond exploration companies so imminent.

The good news on Kensington’s side is shareholder voting on the planned merger – announced in mid August — will be completed on Wednesday at 9 a.m. Kensington’s President and Chief Executive Robert McCallum says of balloting thus far: “the vote is going exceptionally well.”

The good news on the Shore Gold side – beyond the likely approval from Kensington shareholders – is the announcement of an intercept of a second kimberlite feeder pipe on its Star Diamond project in Saskatchewan.

In a press release Senior Vice President of Exploration George Read says: “The location of this Cantuar feeder vent has significant upside for the economics of the Star Diamond Project.”

The release went on to say that while the Cantuar Kimberlite exhibits characteristics associated with diamondiferous kimberlites, the diamond grade won’t be known until mini-bulk samples are recovered from a planned 1.2 metre diameter drilling program.

In Toronto on Tuesday, Kensington shares were up 4.75% to $4.19 on 444,000 shares. Shore gold was up 3.3% to $6.53 on 456,000 shares.

While Canaccord Capital’s analyst, Graeme Currie, says Shore Gold’s drill results are positive, he says more results are needed before a definitive statement can be made about the deposit.

“At the end of the day, you need to get to the diamonds,” Currie says.

Shore Gold is currently pushing ahead on its $44 million prefeasibility study on Star. Star borders on Kensington’s 43% held, Fort a la Corne diamond project (FALC). The proximity of the two properties means a merged company would be able to develop an underground extension into FALC from the Shore Gold side, McCallum says.

De Beers Canada holds approximately 43% of FALC and Cameco Corp. (COO-T) and UEM Inc. hold the remaining interest.

“There’s all sorts of things we can do co-operatively,” McCallum says, “joint applications for environmental permits, building a single plant instead of two. There are enormous savings to be made from shared land use.”

McCallum expects such synergies to not only make the new company more efficient, but also more attractive to prospective buyers, should the company decide to sell. McCallum says majors such as De Beers and Newmont Mining (NMC-T, NEM-N) could move to consolidate the promising diamond region in central Saskatchewan.

“If you can (acquire the property from the merged company) it’s a great thing to do,” McCallum says. “But you’ll have to make an offer that’s attractive to shareholders.”

The boom in interest from traditionally non-diamond mining companies bodes well for Shore Gold and Kensington. While both De Beers and Newmont already have a stake in the region – Newmont holds roughly 10% of Shore Gold shares — they aren’t the only players with the resources necessary to acquire the new company.

Catherine Gignac, an analyst with Wellington West Capital counts BHP Billiton (BHP-N) and Rio Tinto (RTP-N, RIO-L) — who both have diamond mining interest in Northern Canada — as possible suitors.

Another positive for the proposed new company, says Gignac, is the size of its combined market capitalization. Gignac says there is a psychological threshold passed when a company’s market cap exceeds $1 billion, as the merged Shore Gold’s and Kensington’s would. That should attract larger institutional investors, and generate even more cash for the proposed company, Gignac says.

Gignac has a 12 month target of $7.50 for Shore Gold and $4.80 for Kensington.

Gignac doesn’t hold shares in either Shore Gold or Kensington, but Wellington West has had an investment banking relationship with Shore Gold in the last 12 months. Currie doesn’t hold shares in either company but Canaccord has had an investment banking relationship with Shore Gold in the last 12 months.