Siberian Diamonds Chases Next Big Russian Find

Paul Sobie has spent a good amount of time looking at diamond projects.

Now, the former senior partner with geological consulting company MPH Consulting, is in a position to run one.

Sobie is on the front lines of the diamond exploration world as managing director of Siberian Diamonds, a private company with some of the most prospective diamond properties in Russia.

Siberia is already the second most important resource for diamonds after the combined southern African countries. Since 1957, the frigid region has turned out roughly 530 million carats at a value of US$50 billion.

But that production has come mainly from Yakutia, a province north of Siberian Diamonds’ concessions in Irkutsk.

The company has four wholly owned licences in Irkutsk, a southerly Siberian province near the northern border of Mongolia, with another three newly granted applications working their way through the system.

Until now, the province has been largely unexplored, but Sobie insists it has all the markings of hosting the next world-class deposit.

The lack of exploration is connected to the discoveries of Mir and Udachnaya — two famously rich diamond mines in Siberia.

“The Soviet Union had enough diamonds, and the budget went to expanding production and exploring around known deposits as opposed to going back to areas that were prospective,” Sobie says. “They just didn’t need anymore, and herein lies our opportunity. It’s that simple.”

Although government purse strings loosened a bit in the late 1990s, exploration in the region was in the form of limited government-funded ventures. The work confirmed anomalous areas and found smaller diamonds, but it didn’t go far enough.

Siberian Diamonds, however, has recruited the key scientists and geologists used for those early technical reports.

“All the guys that know the most about the diamond potential there are on our team and that’s why our licences are well chosen,” Sobie says. “We believe we have the best ground or at least the best ground for the most immediate discoveries.”

In choosing its four main licences, the company looked for properties that hosted alluvial diamonds, were in settings where kimberlites would most likely be discovered upstream, had good mineral chemistry, and importantly, had shallow overburden.

Kimberlites discovered by Russian diamond mining giant Alrosa are Devonian-aged (roughly 320 to 330 million years ago) and Siberian Diamonds doesn’t want to be in areas where younger rocks are thick.

“Ideally, you want country rocks to be older than (Devonian age) and very little overburden or younger sediment,” he says. “Our model is there can never be more than one hundred metres of this stuff because we want exploration to be relatively cheap and an open pit to be viable.”

Another consideration in the selection process was ensuring the projects were near infrastructure.

While the image of railroads, highways, and power lines don’t leap to most investors’ minds when they think of Siberia, the area that Siberian Diamonds is in has benefited from the buildup of the oil and gas industry. Three of the four projects are accessible by paved road, and near the fourth, a paved road is currently being put in for a recently discovered oil and gas deposit.

Still, the greater buildup of infrastructure at the three concessions known as M, VB and TU means exploration dollars go further, and as such, they will see the bulk of early exploration.

“Each of the three has something going for it,” Sobie says. “Each is slightly different, each will generate different news.”

The VB concession currently has the strongest potential for alluvial production and the company is looking to trace alluvials back to a kimberlitic source. TU also has alluvials and the mineral chemistry indicates the chance of a large kimberlite. The M concession, while lacking alluvials, is a discrete area with hundreds of indicators.

“If we’re going to get lucky and get a kimberlite early in the process,” Sobie says of M, “it will be there.”

As for the political risk some investors attach to Russia after much-publicized clashes between Putin and some oil-sector giants, Sobie says the situation was specific to the oil industry and that Putin needed to correct ill-guided decisions made by the previous Yeltsin regime.

“They sold massive oil projects at a fraction of their real value. Yeltsin did a bunch of deals with the original oligarchs that were cronyism at its worst,” he says. “They, in turn, did deals with Western oil and gas companies and Putin has said these are state assets of enormous consequence, and we want one of our state companies to own a piece.”

In contrast, Sobie says foreign mining companies are doing well and points to the recent success of the former Bema Gold — now owned by Kinross Gold (K-T, KGC-N) in developing the Julietta and Kupol gold projects. He also remarks on the activity of De Beers, BHP Billiton (BHP-N, BLT-L), and Rio Tinto (RTP-N, RIO-L) in Russia; all three companies have joint ventures there.

“Is there a possibility that things could go awry?” Sobie asks rhetorically. “There is everywhere. (Ontario Premier) Dalton McGuinty raised the royalty regime on De Beers for its Victor mine, so it can change anywhere.”

Still, it doesn’t hurt to have a strong and experienced Russian presence on staff in order to keep things moving along in what can be a more bureaucratic system than Westerners are used to.

“Certainly, partners are key and that’s where we’re very well covered,” Sobie says.

How Sobie became a part of the strong Russian contingency that forms the core of Siberian Diamonds goes back to a Russian by the name of Boris Zubarev.

Zubarev, the former first deputy minister of geology of the USSR, along with his team of local geologists, staked out what they considered to be the choice diamond concessions not yet held by Alrosa.

Knowing that he would need Western capital to take on the large exploration project — the company currently has 28,000 sq. km of concessions — Zubarev turned to a group of Geneva-based investors. Sobie came onto the scene as a consultant and, after visiting the projects in 2004, was enthralled. He soon signed on to be the operational head of the first private diamond exploration company to hold exploration licences in Siberia.

Beyond Zubarev, the Russian part of the team is made up of two ex-Alrosa managers in Vladimir Schukin and Alexander Kurakulov, Vladimir Sklyarov — ex-head of the regional resources department — and Vladimir Galenko, who was once the principal diamond prospecting specialist for the government of Irkutsk.

With the geological and political experience in place, the company’s next challenge is to secure the level of funding it needs to keep the drills turning. It currently boasts an exploration arsenal consisting of four field teams, a drill rig and a laboratory.

At the present burn-rate, however, the roughly $2 million currently in the treasury won’t last through the winter. Sobie says a private placement is the likeliest source of funds for the immediate future.

“We don’t want to go public until we’ve advanced everything to a state where it’s not just another grassroots exploration story,” he says. “We’re not one in that we have diamonds that most juniors would kill for, but I want all historical data to be verified and validated. . . we want a good exploration database and hopefully we’ll make a discovery or two and we’ll have proven that in the area, kimberlites do exist and are the source of the diamonds. Then I think it would have a huge amount of momentum going public.”

He anticipates that time could be as soon as spring 2008, when the company will target TSX and AIM listings.

Siberian Diamonds has roughly 70 million shares outstanding and a market capitalization of roughly $34.7 million.