By agreeing to merge and consolidate their respective holdings in the Fort la Corne diamond district of Saskatchewan, management of both
Shore President Kenneth MacNeill described the combination of the two companies as “an unparalleled opportunity to realize the growth potential of one of the largest diamond fields in the world.”
“This is a great day for all Shore Gold shareholders,” said MacNeill on making the announcement. “We are very exited by the future of the combined company.
“The long-term synergies of this merger lie in what we can do in the Fort la Corne district working with our new partners De Beers and Cameco, and by using the benefits we have gained in combining the Shore and Kensington management teams,” said MacNeill. “We believe we can work together to maximize the long-term potential for the region and for our shareholders.”
Kensington holds a 42.25% interest in the Fort la Corne (FalC) joint-venture, whose land holdings total 225 sq. km and contain 63 known kimberlite bodies, some of them as large as 200 hectares, rivalling some of the biggest kimberlites in the world.
In February, the FalC partners announced the start of a 3-year exploration and evaluation program designed to advance the project to a decision regarding prefeasibility in 2008, with the stated objective of outlining a resource containing 70-100 million carats. This year’s $26-million budget is the most spent in one year on the project.
Under the terms of the proposed friendly takeover, Shore is offering 0.64 of a common share for each Kensington share. This will result in an ownership split of roughly 65% Shore and 35% Kensington in the new company. The board of the combined company will be comprised of five existing Shore directors and three Kensington nominees. The offer valued Kensington at $3.49 per share, which represented a 45% premium based on Shore’s closing price of $5.45 on Aug. 12, or a 35% premium based on both parties’ respective 30-day average closing prices.
Kensington has a 52-week trading range of $4.06-0.89, whereas Shore sits in a $7.50-1.61 range. Both bounced off 52-week highs in early March after Shore arranged a $117-million equity financing priced at $5.50 per share, of which
Kensington followed in May by raising $31 million through the brokered sale of 10 million non-flow units priced at $2.10 apiece, as well as 4.3 million flow-through units at $2.35 per unit.
Kensington’s board of directors unanimously approved the merger and is recommending shareholders vote in favour, which will require approval of at least two-thirds at a special meeting to be held by Oct. 27. The company’s financial advisor, BMO Nesbitt Burns, considers the merger proposal to be fair from a financial point of view.
“We believe this is a very positive step for the shareholders of both companies and the future development of the Saskatchewan diamond industry,” explained James Rothwell, chairman of Kensington. “The new company will be the major player in a consolidated Fort la Corne diamond district. It will be financially strong, enabling it to aggressively pursue its exploration and development plans.”
“We saw it as a very good deal for our shareholders to get a 45% premium to market,” Kensington President Robert McCallum told The Northern Miner. “It was an opportunity that presented itself and we felt it had merit. Kensington shareholders will benefit from revenues generated by the Star kimberlite that will likely be producing diamonds in the near future, while continuing to participate in the Fort la Corne joint venture.”
The new Shore will have $175 million in cash ($220 million fully diluted), with 145 million shares outstanding or 162 million on a fully diluted basis. Newmont is publicly supporting the deal and has confirmed a desire to maintain a 9.9% interest in the new company. “There is obviously a number of ways for them to do that,” said MacNeill, when asked if it would be in the form of a private placement or some type of open market transaction. “At this point, we are focused on getting the deal done. We will sit down with them, also speak to our other shareholders, and determine the appropriate course of action.”
The privately held Steinmetz Diamond Group, an integrated diamond marketing and trading company, also owns a 9.4% stake in Shore.
Shore Gold owns a 100% interest in the Star kimberlite, which lies at the southeastern end of the main Fort la Corne kimberlite field in north-central Saskatchewan, 60 km east of Prince Albert. The Star project ties on to the southern boundary of the FalC joint venture. Once perceived as nothing more than low-grade, geological oddities, Shore single-handedly changed the market’s perception of the economic potential of these bodies by going underground on the Star kimberlite.
The company consistently recovered large commercial-size diamonds of up to 19.7 carats during the batch-by-batch processing of some 27,837 tonnes of kimberlite. Diamond valuations on the first 3,050 carats recovered averaged an impressive US$110 per carat. In addition, an average modelled value of US$135 per carat (within a range of US$110 to a high of US$162 per carat) was derived based on the extrapolations that a number of larger-size gemstones will be recovered in a commercial-scale mining operation.
The Saskatchewan kimberlite bodies occur as laterally extensive, lensoidal or pancake-shaped horizons of well-preserved, multiple eruptive phases of mainly pyroclastic crater facies material. The multiple eruptions can come from a number of eruptive centres, which may coalesce or separate during the time the kimberlite is forming, so there can be many discrete intrusive phases and volcanic layers to the kimberlite complex. They were partially erupted and then capped by re-sedimented kimberlite, and range from single-eruptive bodies to large, multi-eruptive events consisting of a series of stacked, sub-horizontal kimberlite beds interstratified with Lower Cretaceous marine, marginal marine and continental sediments.
The end result is a high degree of variability in the grade and diamond content of the kimberlite bodies, making them a challenge to evaluate.
Shore’s underground bulk-sampling campaign involved sinking a 250-metre shaft into the throat of the Star eruptive centre. The vertical shaft was collared less than 100 metres east of the FalC property boundary. The shaft cut through two main eruptive phases of kimberlite that are equivalent with stratigraphically defined horizons in the Saskatchewan sedimentary basin, namely the Early and Late Joli Fou formations of the Lower Colorado Group. The shaft intersected approximately 70 metres of the Late Joli Fou stratigraphic-equivalent kimberlite and 75 metres of Early Joli Fou phase, with the transition at about 175 metres depth.
The Late Joli Fou kimberlite consists of very fine to medium-grained, layered matrix and clast supported, olivine dominated, pyroclastic macrocrystic material. The Early Joli Fou is comprised of medium-to-coarse-grained, largely clast-supported, olivine-dominated, pyroclastic macrocrystic kimberlites and volcaniclastic kimberlite breccias.
Based on the bulk-sample results, there is a distinct grade difference between the Early and Late Joli Fou kimberlite horizons, with better grades evident in the deeper Early Joli Fou phase. The results also indicate that the diamond grades in the Late Joli Fou kimberlite are much more erratic.
Diamond recoveries totalled 4,049 carats of rough diamonds exceeding a 0.85-mm cutoff from the processing of 27,837 tonnes of kimberlite, for an over
all run-of-mine grade of 14.5 carats per 100 tonnes (or 0.14 carat per tonne).
Batch samples from the deeper Early Joli Fou kimberlite alone delivered 3,853 carats of diamonds from the treatment of 23,282 tonnes, for an implied grade of 16.54 carats per 100 tonnes. By comparison, the shallower Late Joli Fou phase shows a diamond grade of just 4.27 carats per 100 tonnes based on the recovery of 194 carats from the processing of 4,554 tonnes of kimberlite extracted during shaft-sinking.
Shore completed 1,000 metres of underground development in an extensive network of 25 separate drifts on the 235-metre level. The company drifted laterally out into the kimberlite away from the FalC property boundary in northeasterly and southeasterly directions, guided by the results of surface and underground drilling. The drifting is confined to an area measuring 175 metres north-south and 150 metres east-west. The lateral development at this level is constrained by the kimberlite-country rock boundary, which is perhaps more than 100 metres radius out from the shaft.
At the 235-metre level there are distinct intervals of dominantly pyroclastic and volcaniclastic kimberlite breccias, and macrocrystic kimberlites forming discrete geological zones. Within these zones, all the different types of kimberlite units are found in varying abundances. At least five distinct macrocrystic kimberlite types have been visually observed.
The bulk-sample results from the 235-metre level indicate that there are variations of grade ranging from 10 to more than 30 carats per 100 tonnes within the Early Joli Fou phase that appear to be broadly associated with different kimberlite units. The highest grades are associated with volcaniclastic kimberlite breccias, with macrocrystic kimberlite typically delivering grades of better than 20 carats per 100 tonnes. Many of the lowest grades are explained by heavy internal dilution due to sedimentary xenoliths and reefs.
Just how representative is the bulk sample of the Star kimberlite? A March 2005 technical report by ACA Howe International states that based on drill-hole information and geological modelling carried out by Shore and Howe, the Early Joli Fou phase appears to make up about 80% by volume (or 240 million tonnes of kimberlite) of the total Joli Fou eruptive sequence on the Star kimberlite.
Management of both Shore and Kensington are using this number, 240 million tonnes at 15.7 carats per 100 tonnes, equivalent to 38 million carats, to justify their merger. John Kaiser, publisher of the Kaiser Bottom-Fishing Report, argues that the underground bulk sample tested a footprint representing less than 50 million tonnes.
“The extrapolation of the underground bulk-sample grade to 240 million tonnes of Early Joli Fou kimberlite is based largely on petrography done on kimberlite recovered through 30 core holes into the Star body,” wrote Kaiser in a recent report. “I am not sure microdiamonds and indicator mineral chemistry played much of a role in Shore Gold’s assembly of the Star kimberlite internal geology, which would be equivalent to a colour-blind person assembling a complex jigsaw puzzle.”
He added: “There remains a significant risk that grade peters out as one moves beyond the Star vent or the stone size distribution undergoes fining, a development which might not affect grade but would hurt average carat value. As far as I am concerned, that 240 million tonnes of 15.7 [carats per hundred tonnes] number coming from Shore Gold alone is little more than unsupported thinking, which Shore Gold’s $44-million prefeasibility study could destroy in 2007 when it is completed. But the willingness of Kensington to accept that number is very significant because without it the merger with Shore Gold would be a terrible blunder at the expense of Kensington shareholders.”
Kensington’s McCallum stresses that his company has in fact done its due diligence. “Our biggest concern was, is the tonnage there and is the grade representative,” he says. “Being able to carry out the due diligence gave us some comfort on the volume, and we did a lot of independent work through Roscoe Postle on the grades and that stood up extremely well.”
Shore is forging ahead with the prefeasibility study on Star, which will see $21 million spent this year to advance the project. Plans call for the extraction of a further 10,000 tonnes, expanding the underground workings on the 235-metre level, as well as a comprehensive core and large-diameter surface drilling program, and engineering studies.
“We remain committed to advancing the prefeasibility study program and are on target with our stated objectives,” says MacNeill.
The Star kimberlite extends onto the FalC joint venture, where De Beer put eight holes into the western portion body earlier this spring. The holes returned intersections of kimberlite ranging from 8.8 to 119 metres in thickness. With drier weather conditions, De Beers has resumed drilling some key holes closest to the deep-seated vent area of the body.
The FalC joint venture holdings cover some 20 larger kimberlite bodies in a 5-km radius in the southern portion of the claims. Four of these bodies (140/141, 122, 148 and 150) were extensively drilled from 2000 to 2004; three more (120, 147 and 121/122) were drilled in 2004.
The higher-grade sections of the 140/141, 148 and 122 FalC kimberlite bodies are modelled to contain anywhere from 29 to 156 million tonnes of kimberlite at predicted grades ranging from 7 to 16 carats per 100 tonnes. Together, these units of interest contain an estimated 369 million tonnes at an average modelled grade of 10 carats per 100 tonnes, equivalent to 35 million carats, using a bottom stone cutoff of 1.5 mm. The 2004 evaluation drilling on kimberlite 140/141 yielded the recovery of the largest diamond to date from the FalC joint venture; a large, clear 10.53-carat stone measuring 14 by 10 by 7.5 mm.
This year’s work will see geological drilling and microdiamond analysis of remaining 13 kimberlites to determine any units of higher-grade interest. The 2005 program assumes there will be additional follow-up core drilling and mini-bulk reverse-circulation sampling on some of these bodies. These will then be assessed as a single resource to facilitate economies of scale, which can be achieved from a large-scale mining operation.
So far, 74 HQ-size (6.35 cm diameter) core holes have been drilled as part of a planned 130-hole program in 2005.
“Accelerating the Fort la Corne project is in line with De Beers’ broader corporate strategy of fast-tracking exploration projects in order to meet the growing global demand for diamonds,” says Richard Molyneux, president of De Beers Canada.
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