Peregrine ready to dance with a new partner at Chidliak

When Peregrine Diamonds (PGD-T) lost BHP Billiton (BHP-N, BLT-L) as a 51% partner at Chidliak late last year, it didn’t look good for the junior.

BHP’s withdrawal from the project was part of a larger corporate strategy away from the diamond space, and Chidliak remains a promising project, with 61 kimberlites discovered so far. But finding another partner to help advance the project, which is entering the crucial bulk-sampling stage, was far from a sure thing in a market that has all but abandoned diamond explorers.

Against the odds, perhaps, it looks like Peregrine could be about to land a new joint-venture partner at the project.

In September, Peregrine announced De Beers had signed an option agreement with the company for 50.1% of the advanced exploration project, on Baffin Island, in Nunavut.

Although De Beers hasn’t yet exercised the option for Chidliak, at presstime in late October, the two companies were working closely together on a potential work plan for next year, said the company’s management team in a telephone interview in late October.

“They completed their due diligence prior to us entering this option agreement, so it’s just really working towards a transition of operatorship and working towards future programs, preparing for those,” said Peregrine president Brooke Clements.

A series of meetings between the two are planned for November (a number of technical meetings have already taken place).

In return for the exclusive option on Chidliak, which does not expire until the end of 2013, De Beers agreed to invest $5 million in Peregrine. That includes a $2.5-million private placement financing in Peregrine that was completed in October, and the payment of $2.5 million Peregrine owes BHP Billiton that is due in January.

To earn its 50.1% interest in Chidliak, De Beers will have to spend a total of $58.5 million within five years of exercising its option and fund the project though a bankable feasibility study. The $5 million will count towards De Beers’ earn-in total if it does decide to pull the trigger.

At least $37 million of the total must be spent on a work program at Chidliak. If De Beers exercises the option, it will be required to invest the full amount in Chidliak.

The five-year deadline to earn in wasn’t in Peregrine’s initial press release, but CEO Eric Friedland concedes it has been an important detail for investors who may remember that De Beers put its Gahcho Kue joint venture with Mountain Province Diamonds on hold as it developed its Snap Lake and Victor mines first.

The management team believes that De Beers won’t dawdle — either on making a decision regarding the Chidliak option, or if it does exercise its option, on the parameters and economic viability of a mine there.

“The feedback we got from them right from the beginning is that they were very serious about getting the answer and moving this along as quickly as possible,” Friedland says. Because De Beers’ Victor mine in Ontario only has six years of reserves left, Friedland says the company may be thinking that Chidliak could “dovetail” with Victor.

“So there is a real corporate need and desire to get the answer on Chidliak in a timely fashion. I don’t have any indications whatsoever that they want to warehouse this and slow it down and just see how it plays out slowly.”

Friedland points out that after Anglo American (AAL-L) bought out the Oppenheimer family’s 40% stake in De Beers in a $5.1-billion deal that closed this summer, De Beers is now 85% owned by a public company. And Anglo has decided to go all in on diamonds while fellow diversified miners BHP and Rio Tinto (RIO-N, RIO-L) are both looking for buyers of their diamond businesses.

“They are very much committed to diamonds and they want to see continuity with their existing operations in Canada and got the very distinct impression that Chidliak is. . . certainly one of the best, if not the only exploration/development project that they’re looking at outside of Mountain Province.”

A spokesman for De Beers had not responded to emailed questions about the Chidliak option at presstime. But in a press release, De Beers Canada CEO Tony Guthrie said: “We see Chidliak as an exciting prospect and complementary to our existing pipeline of diamond operations and projects.”

For now, Peregrine is learning how De Beers explores and operates, which is unique from BHP or anyone else.

“We’ve learned a lot already,” Friedland says. “They’ve expressed some real interest and enthusiasm for one of the pipes that we had moved to the second or third category and they think that this pipe has a lot better potential than even we did. So at the end of the day, to be perfectly honest, they have a 124-year head start over us. They probably know more about Chidliak than we do.”

De Beers isn’t the only company that’s interested in the project.

In September, Peregrine revealed to The Northern Miner that while it chose to do a deal with De Beers, it had talks with other parties that were interested in partnering at Chidliak.

“Obviously, we are bound by confidentiality, but we can say that we did discuss specific terms with two other parties, and right up to our decision to move forward with De Beers, we had very good plans B and C,” said Tom Peregoodoff, the company’s executive vice-president, business development, in an emailed response to questions.

In another vote of confidence, at presstime in late October, Peregrine closed a $10-million financing with Robert Friedland-owned Newstar Securities and Ned Goodman’s Dundee Corp.

At a price of 50¢ per share, Newstar bought 16.4 million Peregrine shares from treasury and Dundee purchased 3.6 million shares. The financing gives Newstar a 13.2% interest in Peregrine, while Dundee now controls over 18.14% of the company, including shares held in managed accounts. (Notably, Dundee has also invested in Chuck Fipke’s Metalex Ventures [MTX-V] and its U2 kimberlite project in northern Ontario.)

In a release, Eric Friedland called his brother Robert and Goodman “two of the best mining financiers in the world” and noted the funds should cover the company’s administrative costs and currently planned exploration initiatives through mid-2014, including that year’s scheduled $2.5-million payment to BHP Billiton.

Bulk sample on hold

Peregrine ended work at Chidliak early this year as it focused on getting a deal hammered out with De Beers, which would see the diamond major pick up the whole tab for Chidliak the next year.

However, it did make progress on the ground with an $8-million 2012 program. The company completed 2,380 metres of core drilling it will use to refine its geological models of the CH-1, CH-7 and CH-44 kimberlites in advance of the bulk-sampling program; completed 720 line-km of ground magnetometer surveys; collected more than 400 samples; and generated 20 drill targets.

Friedland says he believes De Beers plans to focus on exploration next year, with a bulk-sample possible in 2014, but he said Peregrine would find out more about De Beers’ plans at meetings in November.

However, a bulk sample that Chidliak had planned for next year will not likely happen until 2014, because it’s now too late to get the large-diameter drill rig into the project by sealift for 2013.

If De Beers does exercise its option on Chidliak, that could pave the way for Peregrine to focus on exploration at a time when virtually nobody else is. Peregrine would be able to leverage not only the expertise of the world’s leading diamond company, but also BHP Billiton’s entire Canadian heavy mineral sample database, which it acquired when it bought BHP’s 51% stake in Chidliak last December. The database contains more than 38,000 samples covering 3.9 million sq. km or 38% of Canada’s total area, says Peregoodoff, a former vice-president of early exploration at BHP.

“I was with BHP Billiton for 18 years,” Peregoodoff says. “I know the value of that data set. . . (It) really does represent the future for the corporation.”

Friedland says that after having to watch the company’s spending and directing most of its resources to Chidliak, now is the time for wider exploration.

“As soon as they exercise the JV, all ongoing expenditures (at Chidliak) are going to be on the backs of De Beers going forward,” Friedland says. “That frees up not only our dollars going forward at these other projects, but also the time of our people. . . Our plan is to continue growing the exploration side of this company. There’s very few that are still doing it and I think we’re pretty good at it — our track record speaks volumes on that.”

The company has discovered multiple new diamond districts in the past four years with discoveries at its Nanuq, Chidliak and Qilaq projects in Nunavut, as well as finding three new diamondiferous kimberlites in the Lac de Gras area of the Northwest Territories this year.

The fine print

If it does exercise its option, De Beers will become operator with 50.1% of the voting rights in the joint venture.

But once De Beers completes its $58.5-million earn-in, both partners will then have an equal say on annual work programs and budgets.

“That gives us a tremendous amount of control on the pace of the program,” Peregoodoff noted. “I can say in my experience, the eighteen years I was with BHP Billiton, I’ve never seen a major give up control like that at the management committee level.”

“Which leads us to believe that these guys are very serious to get the answer,” Friedland adds.

If De Beers spends more than $58.5 million on Chidliak, Peregrine would have to pay De Beers back for its share of the excess amount. It would pay back up to $25 million in four stages, starting when the feasibility study is approved by the partners and ending when construction of a mine is completed. Any amount Peregrine owes above $25 million would be paid back from 66% of Peregrine’s share of after-tax cash flow from Chidliak.

Under the agreement, Peregrine will retain marketing rights over its share of production from a mine at Chidliak.

If De Beers decides to leave the joint venture before a feasibility study is completed, Peregrine can purchase its earned interest by repaying De Beers its expenses, less US$20 million on a similar payment schedule.

In the October private placement with De Beers, Peregrine issued 3.3 million units composed of one common share and half a warrant and priced at 75¢ a unit. Each whole warrant will allow De Beers to buy a common share of Peregrine at $2 for a period of two years.

At presstime, Peregrine shares traded at 55¢ in a 52-week window of 26¢-$1.06. The company has 128.9 million shares outstanding.