Kennady Diamonds loses altitude on Kelvin results

Kennady Diamonds’ (TSXV: KDI; US-OTC: KDIAF) high-flying stock lost almost a third of its value in a single day on disappointing grades from a mini-bulk sample at its Kennady North diamond project in the Northwest Territories.

At 1.79 carats per tonne, the grade from the 25-tonne sample from the Kelvin kimberlite — which returned 751 commercial-sized (larger than 0.85 mm) diamonds weighing a total of 44.64 carats — is actually quite good. However, previous samples had hinted at even higher grades: a 4.3-tonne sample last year returned 18.57 carats of diamonds for a grade of 4.32 carats per tonne.

Taking into account last year’s higher-grade sample, Kelvin’s overall grade rises to 2.16 carat per tonne, Kennady noted.

On the news, Kennady stock fell by $2.50 to $5.49.

Kennady president and CEO Patrick Evans commented that the grade is within the company’s previous guidance of greater than 2 carats per tonne.

“We were happy with the results — 2.16 carats per tonne — the market was obviously expecting something quite a bit higher than that,” he said.

Evans noted that the sample came from one small area of Kelvin, where the pipe outcrops below Kelvin Lake, and is small compared to the overall tonnage Kennady expects to delineate.

“I think the market got a little bit exuberant,” he said. “A 25-tonne sample out of something that is 7 million to 10 million tonnes is tiny … whenever a pipe outcrops at surface, you always find more dilution.”

In a press release, Evans said there were fewer large diamonds in the mini-bulk sample compared with previous samples from Kelvin.

“A higher frequency of larger diamonds in previous samples resulted in sample grades well above 2 carats per tonne,” he said. “The sampling and treatment methods used for the mini-bulk sample will be reviewed to understand the reasons for this.”

The three largest diamonds recovered from the mini-bulk sample include a 1.27-carat off-white, transparent, broken irregular with inclusions; a 1-carat white/colourless, transparent dodecahedron with minor inclusions; and a 0.7-carat white/colourless, transparent dodecahedron with minor inclusions.

The Kelvin kimberlite is not a homogenous body. Four different lobes sampled in the mini-bulk sample all returned different grades varying from 0.84 carat per tonne to 2.96 carats per tonne.

In a note to clients, Matthew O’Keefe, a senior mining analyst at Dundee Capital Markets, said the variability in the kimberlite phases could help explain the lower-than-expected grade.

“Relative proportions of these phases have not yet been determined [as part of a geological model], and reported drill results haven’t included any detailed geological information, but this will be key in determining the resource grade,” O’Keefe wrote.

While O’Keefe rejected the 2.16 carat grade, explaining that it is “generally inappropriate to mix [dense media-separation] results with results from caustic dissolution” — last year’s smaller but higher-grade sample was processed by caustic fusion — he noted that 1.79 carats per tonne is a healthy grade.

“We note that the reported average grade is still impressive and in line with neighbouring Gahcho Kué.”

Kennady North is next to the Gahcho Kué diamond mine being built by operator and 51% partner De Beers and Mountain Province Diamonds (TSX: MPV; NYSE-MKT: MDM) (49%). Gahcho Kué’s reserve grade averages 1.57 carats per tonne.

While the latest sample grade was lower than expected, drilling at Kelvin is expanding the unusual Kelvin-Faraday kimberlite complex, and the company is accelerating its work program — including a 500- to 700-tonne bulk sample — based on the encouraging results.

Details of the bulk sample haven’t been finalized, but the company plans to collect samples early next year, possibly by reverse-circulation drilling. In the meantime, Kennady is stepping up its current drill campaign: the junior plans to drill 18,000 metres, which is enough for a 30-tonne mini-bulk sample from Kelvin. It has so far finished 15,300 metres. The company is also building an advanced exploration camp at Kelvin to support year-round drilling.

Kennady has raised its tonnage target for the upcoming maiden resource at Kennady North to 9 million to 12 million tonnes, from 7 million to 10 million tonnes. The resource is expected in the first quarter of 2015, instead of late this year.

The company’s grade expectations are the same, at a minimum of 2 carats per tonne.

Unusual geology

Since the company started work at Kennady North two years ago, tonnage estimates for the Kelvin-Faraday kimberlite complex have grown from the 5 million tonnes the junior expected to find.

But it hasn’t been until this year that Kennady has refined its understanding of the geology at Kennady North — a project that was first explored in the 1990s (Kelvin was discovered in 2000). Whereas the junior previously described the Kelvin and Faraday kimberlites as northeast-trending dyke structures, with a small pipe at the north end of Kelvin, Kennady’s drill programs have shown that the kimberlites don’t conform to typical kimberlite models.

Instead of a classic carrot-shaped vertical kimberlite pipe, drilling has shown that Kelvin is a horizontal-lying, north-plunging, banana-shaped kimberlite tube. A kimberlite sheet lies southwest of Kelvin, and the Faraday kimberlite lies northeast.

Evans says that since June this year, the theory has been that a feeder pipe — which has not yet been found — could lie somewhere between Kelvin and Faraday, and hit the same northeast–southwest structural fault as the Gahcho Kué kimberlites to the southwest.

“The theory is that encountering the structural fault, the pipe didn’t erupt at surface, instead — for lack of a more technical phrase — it squirted kimberlite to the southwest into this fault structure, forming the Kelvin pipe,” Evans says. “Then, as the fault structure thinned towards the southwest, it formed the Kelvin sheet. So the pipe structure is a fairly uniform, almost banana-shaped structure, which is 610 metres along strike, 100 to 200 metres vertically and 30 to 50 metres wide.”

The pipe trends northeast, where it is open for expansion in the direction of the anticipated feeder pipe. Recent drilling has also confirmed that the pipe widens northwards.

On Oct. 1 Kennady finished its most recent financing: a $5-million private placement of common shares at $6.50 per share.

Kennady’s shares have traded between $3.75 and $8.74 in the past 52 weeks. The junior has 23.6 million shares outstanding. O’Keefe rates the stock as a “speculative buy.”