EXPLORING FOR DIAMONDS AND THE NORTH — Lac de Gras venture

The diamond exploration project of Dia Met Minerals (TSE) and BHP Minerals Canada has come a long way since the original option agreement was signed in August, 1990.

BHP holds the right to earn a 51% interest in the joint venture, which covers about 400,000 hectares near Lac de Gras, N.W.T. In return, it must fund all exploration up to delivery of a feasibility study, as well as finance up to $500 million on the first mining project. Minimum exploration costs are set at US$2 million per year.

On completion of the earn-in, Dia Met would hold a 29% interest while Dia Met Chairman Charles Fipke and partner Stewart Blusson would each retain 10%. (It has been suggested the two may transfer their direct interests to Dia Met in return for stock, though there are no immediate plans to do so.) BHP is a wholly owned subsidiary of mineral giant Broken Hill Proprietary. The Australian parent reported gross sales of A$15.9 billion for the year ended May 31. Profit for the year totaled A$1.19 billion from three key divisions including steel, minerals and petroleum.

Of the company’s $60-million world-wide exploration budget for 1993, at least $3 million has been committed to the BHP-Dia Met venture. BHP’s actual expenditures on the property to date have not been released, although Dia Met President James Eccott said the total is “many millions of dollars.” BHP’s original involvement can be traced to a previous association between Fipke and Hugo Dummett, North American exploration manager for BHP. In the early 1980s, the two worked together on a diamond exploration joint venture involving Superior Oil and Falconbridge.

The original Point Lake discovery pipe received international recognition last year when a 145-tonne sample returned a total diamond weight of 101 carats, with 25% of the diamonds deemed gem-quality.

The partners subsequently identified an additional nine kimberlite pipes on the property (with more to come at a later date) and completed core drilling on seven. The drilling yielded gem-quality diamonds from all the pipes, with a 122.4-kg core sample from one pipe returning 55 macro-diamonds and 132 micro-diamonds (less than 0.5 mm).

Bulk-sampling on four of the pipes, using large-diameter drilling, was completed over the winter and initial results were released in June. They are as follows:

* The Pipe 1 sample weighed 151.5 tonnes and contained 65.37 carats, an estimated 17% of which were gem-quality.

* The Pipe 2 sample weighed 21.2 tonnes and contained 17.99 carats, 6% of which were gem-quality.

* The Pipe 3 sample weighed 179.7 tonnes and contained 61.26 carats, 33% of which were gem-quality.

* The best results came from Pipe 4 which recovered 62.11 carats from a 49.8-tonne sample. Gem-quality diamonds made up about 31% of the total. There are plans to have some of the samples evaluated for commercial worth, which should provide analysts and investors with something substantial to chew on. Ultimately however, a minimum 5,000-tonne bulk sample is required to valuate a pipe accurately.

The joint venture expects to extract a 5,000-tonne bulk sample this winter from at least one, or perhaps two, of the five pipes drilled to date. A pilot recovery plant is being erected on site to process the sample. Investors are also awaiting results of core drilling on at least six kimberlite pipes discovered this year, as well as results of a program designed to identify additional pipes.

In the near term, investors are awaiting results of the diamond valuations of the samples, Eccott said. Those numbers will allow analysts to project a potential value per tonne for each of the pipes.

Meanwhile, in Alberta, Dia Met hopes to repeat the exploration success it enjoyed in the Territories. The company has a joint venture with Cameco (TSE) covering more than 1.2 million hectares in the province. Cameco can earn a 51% interest in the ground through an unspecified amount of exploration expenditures. Details of a final agreement have not yet been released, nor have exploration results.

Although all its exploration costs are covered by joint-venture partners, Dia Met took advantage of its strong share performance to raise more than $13 million earlier this year through an issue of 350,000 shares at $39 each. There are no specific plans for the funds, which are in short-term deposits, Eccott explained.

The potential rewards of bringing the first diamond mine in Canada into production are large indeed if the market capitalization of Dia Met is representative.

Taking into account about 11 million shares outstanding on a fully diluted basis and a trading level of about $47 (based on Dia Met’s 29% interest), the Northwest Territories find is valued at about $1.8 billion.

That’s big potatoes, even for the likes of BHP.