True North writes book on ruby valuation

Vancouver — For True North Gems (TGX-V, TNGMF-O), finding gemstones is the easy part. The real challenge is convincing investors in a hot commodity market that rubies and sapphires are a sound commercial asset.

The company has an emerald project in the Yukon and a sapphire project on Baffin Island, in Nunavut, but True North’s focus is the Fiskenaesset ruby project on the southwest coast of Greenland. The 110-sq.-km project hosts both rubies and pink sapphires, which are simply red and pink varieties of the mineral corundum.

The gemstones occur along a regional geological contact between anorthosite and amphibolites that extends for more than 200 km through the Fiskenaesset district. The company has picked up some 400 rubies and sapphires off the ground and recovered individual stones weighing more than 80 grams, or 400 carats. In situ stones have been identified in 29 occurrences, nine of which lie along the Ruby Island Line. One of those nine occurrences is Aappaluttoq, the most promising target in True North’s sights.

Ruby was discovered in outcrop in the Fiskenaesset area in 1966 by the Geological Survey of Greenland and Denmark. From 1969 to 1982, a succession of private companies explored Fiskenaesset’s ruby occurrences. In 1979, for example, one company collected a 1.4-tonne mini-bulk sample that rendered 340 grams of rough ruby, including 21 grams of facet-grade polishing stock.

True North started work at Fiskenaesset in 2004, extracting a 3-tonne bulk sample from an occurrence known as Siggartartulik that produced 144 grams gem per tonne and 3.3 kg near-gem per tonne. The next year, mini-bulk samples from five different occurrences all produced similar gem and near-gem grades.

Then, near the end of the 2005 field season, True North discovered Aappaluttoq, the most significant ruby occurrence to date. It was the first occurrence that showed hydrothermally formed rubies, characterized by a higher percentage of transparent material than rubies that form via metasomatic or metamorphic processes. A 100-kg talus sample from Aappaluttoq produced 533 grams of gem material, including 253 grams of gems greater than 8 mm, and 550 grams of near-gem material. The largest ruby weighed in at 88 grams, or 440 carats.

Focus immediately shifted to Aappaluttoq. The first 30-tonne bulk sample returned 1,937 grams gem per tonne and 2,563 grams near-gem per tonne. Geological mapping situated Aappaluttoq as the southernmost occurrence along the Ruby Island Line, which has a strike length of 2.6 km.

This year saw two more 30-tonne bulk samples, one cut using chisels and a diamond saw and the other blasted out of bedrock using focused, low-intensity blasting to control grade and width. The second sample was blasted to provide ore of the type that would be recovered under typical mining conditions. The summer exploration season also included 50 holes for 5,000 metres of diamond drilling.

“What we’re finding is that the rocks aren’t pinching out at depth — we’re finding similar thicknesses at depths below one hundred metres,” says vice-president of exploration, Greg Davison. “That’s a pretty good feeling, to see that. And so is seeing ruby in the drill core — we’ve hit ruby in over half our holes.”

Exploration, then, is progressing nicely. Wardrop Engineering is preparing a preliminary economic assessment of Aappaluttoq, expected out in early 2008. The other side of the business, however, was not moving along as well. Building investor confidence and raising capital is arguably the hardest part of developing any resource company, but for True North, the task is proving particularly arduous.

“The challenge is convincing people that we’ve got a commercial asset,” says chairman Andrew Smith. “With rubies, there’s no historical data to fall back on, and that makes it very difficult to valuate the deposit.”

Smith explains that the value of the project depends on the “stone curve,” a series of variables such as stone size, yield on cutting, and aspects of statistical distribution and quality that can only be defined through manufacturing experiments. But there is no protocol for assessing the curve — True North is the only public company in North America working on coloured gemstones. So the company started writing the book on ruby valuation in Canada.

First, management decided to determine a market value for the gemstones recovered from the first 30-tonne bulk sample. One-eighth of the recovered stones were sent for valuation as rough gemstones. A second eighth was sent to be cut and polished, in order to get a valuation for the deposit as finished product. Both of those valuations should be available before year-end. The remaining gems were retained for cutting and heat treatment tests, but will eventually be polished as well.

By way of background, rubies are rarer than diamonds and thus, are more valuable. While prices vary greatly depending on colour and quality, independent valuations have put a wholesale value of US$3,220 per carat on a 0.69-carat ruby from Aappaluttoq. Pink sapphires are rubies with less colour; they are more common and therefore, less valuable. A 0.96-carat pink sapphire from the project was independently valued at US$460 per carat.

Second, True North commissioned MVI Marketing to conduct a global ruby market survey to help establish an economic context against which to evaluate Aappaluttoq. The report found that the wholesale US$2.1-billion global ruby market is based on production that is at best stable and more likely on a decline. It also determined that ruby demand is growing as industrialization nurtures markets for fine jewelry and precious stones in Eastern Europe and Central and South Asia.

Ethical rubies

Most of the world’s ruby supply comes from Myanmar. The military junta there controls a majority share of every gem mine, but the gem mines in the country formerly known as Burma are getting deeper and production of so-called “blood rubies” is declining.

“The market is crying out for rubies — more and more countries are putting up embargoes against Burmese rubies, and if the junta didn’t utilize low-cost labour, those mines would shut down,” says company director Nicholas Houghton. “What we could offer is an alternate, ethical supply of rubies.”

True North’s third tactic in developing the company as a sound investment was to open an office in Bangkok. Bangkok is the centre of the global coloured gem market, thus a presence in the city was deemed essential.

And fourth, the company decided to capitalize on the eye-catching essence of its product and commissioned a jeweller in Bangkok to craft eight sets of jewelry using only Aappaluttoq gems. Moreover, the jewelry is set entirely with small goods — stones less than 2.5 mm diameter — because 60% to 70% of Aappaluttoq production would consist of small goods. The ornate necklace-and-earring sets carry an average value of $45,000 and have already attracted the attention of renowned international jewellers.

In addition, Greenland has proven a good place to work. Denmark is currently devolving power to the island, and mineral rights were one of the first powers handed over to the autonomous government. The Greenland government, for its part, sees resource development as a key component of an independent country.

For example, True North does not yet hold a mining permit and so is not allowed to sell any assets it gains through exploration. But the company needs to sell some of its gemstones as part of the valuation process. The Greenland government recognized True North’s predicament and worked with the company to get around the problem. The solution: True North will be allowed to sell rubies, but the proceeds from any sale will be held in escrow, not available to the company until a mining permit is in hand.

True North has $4.5 million in the bank; provided the preliminary assessment is positive, the company will need $10-15 million to complete a feasibility study next year. In short, it needs its ruby valuation pla
n to work.