Peregrine pushes ahead on DO-27

SITE VISIT

Lac De Gras, N.W.T. — Halfway through this winter’s bulk-sampling campaign on the DO-27 kimberlite pipe, Peregrine Diamonds (PGD-T) is well on its way to recovering at least 3,000 carats of rough diamonds, which will be crucial in determining the economic viability of the WO project.

This year’s program at the project in the Northwest Territories will go a long way toward proving up the grade, value and tonnage of DO-27. Previous bulk-sampling programs carried out in 2005 and 2006 indicate the main pyroclastic zone or vent of the DO-27 pipe carries a grade just shy of 0.9 carat per tonne.

The DO-27 pipe covers a surface area of roughly 9 hectares under a small lake and is comprised of a main vent and a smaller contiguous northeast lobe that extends partially under land. The lake covering DO-27 is about 1 sq. km in size and averages 4 metres deep.

The main vent is composed of primarily higher-grade pyroclastic kimberlite material, while the northeast lobe is much more geologically complex. Part of the northeastern lobe is filled in with pyroclastic kimberlite similar to the main vent, but it’s underlain by some complicated and highly variable volcaniclastic kimberlite units, with hypabyssal kimberlite at depth. Recent drilling suggests there may be more kimberlite of interest at depth than first thought.

So far, a 508.9-carat parcel of rough diamonds recovered in 2005 and 2006 from pyroclastic kimberlite in the main and northeast lobes show a modelled value in the range of US$41 to US$62 per carat based on the September 2006 price book, or US$45 to US$73 per carat using September 2005 diamond prices.

Based on drilling results to the end of the 2006 bulk-sample program, the main pyroclastic unit of DO-27 is modelled to contain a mass of 18.9 million tonnes to a depth of 450 metres assuming a rock density of 1.92 tonnes per cubic metre, or 20.6 million tonnes using a higher density of 2.1 tonnes per cubic metre.

For the 2007 field season, which got under way in the first week of December some 60 days earlier than last year, Peregrine has proposed a $27-million budget for a third bulk-sample drilling campaign in order to recover a much larger parcel of diamonds. At least 3,000 carats are needed to tighten confidence levels of the valuation modelling.

Three large-diameter reverse-circulation (RC) bulk-sample rigs are currently drilling atop the ice-covered lake, in addition to the two core rigs that are being used for delineation and metallurgical pilot test holes. As of early March, roughly 1,000 tonnes of kimberlite had been extracted from 12 large-diameter holes drilled to depths of up to 275 metres. This compares with 151 tonnes collected in 2005 and 549 tonnes extracted from 11 large-diameter RC holes in 2006.

2007 progress

Peregrine got such a big jump over last year because two of the large-diameter bulk-sampling rigs had been left at the project site. The company was also able to start drilling on the land-based portion of the northeast lobe while it waited for the lake ice to thicken enough to support the rigs — at least 84 inches of ice is required. A total of five large-diameter holes, representing 580 metres of drilling, were completed on the northeast lobe before the rigs moved out onto the ice and over the heart of the system at the beginning of February.

By early March, Peregrine had completed seven lake-based, large-diameter holes representing 1,600 metres of drilling. In total, 380 samples representing 620 cubic metres have been collected so far during this third phase of bulk-sample drilling, which will continue until the end of April. The samples are being trucked to BHP Billiton’s (BHP-N) Ekati diamond mine for processing in the coming months. The holes vary from 21 to 24 inches in diameter, depending on the size of the casing.

Wendy Mathison, vice-president of operations, says that this year’s bulk-sampling campaign is overcoming the drilling problems that hampered last year’s program. The kimberlite is extremely weathered and clay-rich near the surface, so when water is added to the mix, the clays are liberated and end up clogging the drill bits, as well as creating caving issues in the holes.

“Obviously, our objective is to get as many tonnes as possible this season; the third kick at the cat, the third time lucky,” Mathison says.

Typically, the most productive months are March and April.

“We’re doing a combination of grade holes in areas we haven’t drilled previously, but also volume holes to get tonnage in areas that we know carry grade so we can get a larger diamond population and do meaningful evaluations,” Mathison says.

Peregrine is testing a northeast-southwest-trending, higher-grade corridor in the centre of the DO-27 body.

The WO project is 300 km northeast of Yellowknife, N.W.T., and 23 km southeast of the Diavik diamond mine, owned by Rio Tinto (rtp-n) and Aber Diamond (ABZ-T, ABER-Q). An 11-km-long spur road connects the project to the Tibbitt-to-Contwoyto winter road used to supply many of the mines and exploration projects in Canada’s Arctic. The 75-man camp is also supported by a winter airstrip designed to handle aircraft as large as Hercules freighters, with five to eight flights a week.

DO-27 is one of two diamond-bearing pipes that comprise the infamous Tli Kwi Cho kimberlite complex, which occupies the WO claims at the southern end of the Lac de Gras camp in the Slave province; DO-18 is the other.

Peregrine Diamonds is the operator of the project, with a 71.74% stake. Of the remaining interest, 17.48% is held by Archon Minerals (ACS-V, AHNMF-O) and 10.78% by DHK Diamonds, a consortium owned equally by Dentonia Resources (DTA-V, DRSEF-O), Horseshoe Gold Mining (HSX-V, HSSHF-O) and Kettle River Resources (KRR-V, KRRSF-O). Peregrine boosted its interest when cash calls to its partners, with the exception of Archon Minerals, went unanswered in December 2006.

Kennecott Canada, a division of Rio Tinto, retains a 1% gross overriding royalty on any future diamond production, while Aber Diamond and SouthernEra Diamonds (SDM-T, SDMFF-O) own gross overriding royalties of 0.55% and 0.25%, respectively.

Tli Kwi Cho history

Kennecott discovered the Tli Kwi Cho kimberlite complex in the early days of the Lac de Gras diamond rush while drilling a twin magnetic high geophysical anomaly on ground optioned from DHK Diamonds. The WO claims were originally staked by DHK in 1992 on the heels of the Point Lake diamond discovery by BHP Billiton and Dia Met Minerals. Today, the WO project covers 151 sq. km and hosts nine known kimberlite bodies.

The WO ground was quickly optioned by Kennecott, Aber and SouthernEra, which flew airborne geophysics. In March 1993, discovery holes were put into DO-27 and DO-18. Additional drilling and ground geophysics were completed that spring and summer.

Kennecott intersected up to 12 metres of diamond-bearing pyroclastic kimberlite in the first two holes on DO-27 before hitting the main body of the pipe in the third hole. That hole cut 52 metres of pyroclastic kimberlite, which delivered 64 microdiamonds from a 60-kg sample, including 16 larger stones exceeding 0.5 mm in at least one dimension. A 91-kg sample from the fourth hole, which intersected 105 metres of kimberlite, held 133 diamonds including 33 stones larger than half a millimetre. A diamond measuring about 3 mm was seen in one of the drill holes.

“They got some very interesting, very encouraging microdiamond results,” said Jennifer Pell, Peregrine’s chief geoscientist, during a presentation last year at the Prospectors and Developers Association of Canada conference in Toronto. “It was very early and exciting days in the Lac de Gras region. Rio Tinto/Kennecott decided to try and fast-track the project, possibly to jump ahead of BHP, and by October of 1993, essentially seven months after the discovery of the pipe, they began work on a decline to go underground and take a 5,000-tonne bulk test.”

Rio Tinto chose to byp
ass a crucial mini-bulk sampling stage — which would normally provide a glimpse of grade and diamond quality and guide future exploration — proceeding directly to a major underground bulk-sampling program on DO-27. At the time, only 38 holes had been completed, with microdiamond counts released to the public from only nine. Kennecott would eventually drill 44 core holes in and around DO-27 to an average depth of 150 metres, with the deepest intercept being 236 metres.

Historically, Kennecott estimated that DO-27 contained a 22.7-million-tonne mass of pyroclastic kimberlite to a 300-metre depth, supplemented by 8.8 million tonnes of diatreme of hypabyssal material.

By April 1994, Kennecott had extracted some 5,000 tonnes of kimberlite material, which was trucked out to Yellowknife and processed at a newly constructed test plant at the Con gold mine site. The $10-million underground gamble proved costly for the Tli Kwi Cho partners. The market was left reeling when disappointing bulk-sample results were announced in August 1994; hundreds of millions of dollars were wiped off the stocks of the Lac de Gras diamond players. Kennecott would later relinquish its interest in the WO claim block after concluding that Tli Kwi Cho did not have the grade or value to make it in the Far North.

Technical challenges

The DHK partners have long argued that Kennecott’s underground bulk sample was limited in scope and failed to sample the higher-grade main vent as originally planned. The bulk sample was restricted almost entirely to the periphery of the smaller northeastern lobe. Peregrine contends Kennecott was racing the clock. The company faced technical challenges while driving the decline, including bad ground conditions and water leakage issues, which slowed its progress. DO-27 is covered by as much as 25-50 metres of overburden and is mostly covered by Tli Kwi Cho Lake.

The bulk sample was collected from a Y-shaped drift starting from the eastern outer edge of the lower-grade lobe at about 95 metres below the surface of the lake.

“When they got under the lake and out of the permafrost area, there were some really horrible ground conditions and they were literally not able to advance into the zone they wanted to test,” Pell said. “They had to cut back the decline.”

A 3,003-tonne sample of pyroclastic and volcaniclastic kimberlite material extracted from the northeast lobe held 1,079 carats of rough diamonds grading just 0.36 carat per tonne. Worse than the lower-than-expected grade, the diamonds were valued at only US$22 per carat and described as one-third gem, one-third “cheap gem” and one-third industrial. The size distribution was described as very fine, meaning fewer large diamonds than might be expected. The largest gem-quality stone recovered weighed 3.6 carats, while the biggest industrial-grade diamond came in at 9.8 carats.

The remaining portion of the bulk sample comprised diatreme or hypabyssal kimberlite facies, represented by some 1,258 tonnes of material that contained a dismal 16.4 carats, for an implied grade of 0.01 carat per tonne.

“A study of Kennecott’s work shows that the majority of their bulk sample was in the hypabyssal and from pyroclastic kimberlite in the peripheral northeastern lobe, and only peripherally into pyroclastic rock that might be part of the main southern crater,” said an independently prepared technical report commissioned by Peregrine. “Indeed, Kennecott bulk samples became significantly higher grade at the ends of their sample drifts.”

Discouraged by the results, Kennecott conducted no further work on DO-27. Plans to extract a 10-tonne mini-bulk sample from the neighbouring, land-based DO-18 pipe, 700 metres north, were aborted in 1996, when an RC rig failed to cut through the overlying till and boulders, which varies from 5 to 20 metres thick.

DO-18 lies in a topographic bowl covered with typical tundra vegetation. The discovery hole into DO-18 yielded 78 microdiamonds from 265 kg of kimberlite core, with 16 of the diamonds exceeding 0.5 mm in at least one direction. Kennecott completed 11 holes into DO-18 by year-end 2003. While the microdiamond counts for DO-18 were not as strong as DO-27, it’s worth noting that at Kettle River’s 1993 annual shareholder meeting, former president George Stewart described the largest diamond recovered as a clear 0.35-carat, indicating the pipe’s promising potential for commercial-sized stones.

Peregrine has poked some holes in the area between DO-27 and DO-18, where historic drilling intersected narrow dyke or sill-like features at depth. A Falcon survey flown over the area detected a number of gravity lows between the two pipes.

“There are kimberlite dykes in the area between the two bodies, but our drilling has clearly shown that they are two distinct bodies,” says Jim Crawford, a former supervisor of the DO-27 project and now manager of investor relations for Peregrine. “The character of the kimberlite is different.”

Peregrine completed eight core holes totalling 1,353 metres on DO-18 in 2005. An additional six holes totalling 1,772 metres were drilled in 2006 as a pilot program, for eventual testing by large-diameter RC drilling. The DO-18 pipe contains re-sedimented volcaniclastic kimberlite, kimberlite breccia and possible pyroclastic kimberlite, with locally complex mixing of mud and kimberlite. DO-18 has been subdivided into four distinct kimberlite assemblages based on lithology.

In terms of volume, the volcaniclastic KIMB-1 is the most significant unit, comprising 65% of the pipe infill and located primarily in the northern and central part of the pipe. An aggregate 695-kg sample of KIMB-1 recovered from the 2005 drilling held 1,154 microdiamonds exceeding 0.106 mm in size. The largest stone was caught in the upper 0.85-1.18-mm size fraction.

The KIMB-2 unit is observed primarily in the southern part of the pipe and accounts for roughly 15% of the overall volume. This unit is similar in appearance to KIMB-1 but contains significantly more mud in the matrix, giving the kimberlite a brown colour. In total, 409 microdiamonds were recovered from 241 kg of samples collected from the 2005 drilling. The three largest stones were caught in the 0.85-1.18-mm sieve-size fraction.

Kimberlite indicator minerals are present in both units, but not abundant. Two samples of the DO-18 kimberlite were sent to Mineral Services Canada for indicator mineral analysis.

“The mineral composition data from the two samples of DO-18 processed and evaluated for this study suggest that during emplacement, this body sampled lithospheric mantle material well within the diamond stability field,” Mineral Services Canada concluded in a 2006 report. “The two samples from DO-18 are interpreted to indicate a moderate diamond potential for the phase(s) represented by these samples.”

Overall, the stone-size distribution of the microdiamonds suggests a lower grade when compared to DO-27.

Led by Eric Friedland, Peregrine Diamonds was formed in early 2003 as an exploration vehicle with exclusive use of one of BHP Billiton’s proprietary Falcon airborne gravity geophysical systems for all of North, Central and South America.

Peregrine had been a private company until it merged with Dunsmuir Ventures at the beginning of 2006, when it obtained a listing and completed a $50-million special warrant financing priced at $5.00. Today, Peregrine sits with 49.2 million shares outstanding, or 64.7 million on a fully diluted basis. Its stock is trading at around $2.00 in a 52-week range of $1.13-$4.25.

In 2004, Peregrine acquired BHP Billiton’s 38.5% interest in the WO claims, with the objective of further assessing the potential of the DO-27 pipe, and in particular, the higher-grade main vent. Peregrine increased its interest to just shy of 54.5% by spending $4 million to take a mini-bulk drill sample from the interpreted main core of DO-27 in the early part of 2005.

A 151-tonne sample was extracted from six large-diameter holes drilled into the main lobe of the DO-27 pipe to varyi
ng depths of up to 209 metres. A total of 136 carats of diamonds were recovered, for an overall grade of 0.9 carat per tonne based on a cutoff of 1 mm. The results contrast sharply with Kennecott’s implied grade of 0.36 carat per tonne.

Separate valuations were carried out on this small parcel of diamonds in summer 2005 by three major diamond producers: BHP Billiton Diamonds, Rio Tinto Diamonds and Aber Diamond. The average value of the 136-carat parcel, based on what the stones would command on the open market without any adjustment or modelling, ranged between US$53 and US$67 per carat. The largest gem-quality diamond recovered was a 1.85-carat octahedron.

Revaluations

As part of the valuation exercise, Peregrine had Kennecott’s original 1994 parcel of diamonds revalued. The Kennecott goods were slit into two parcels. One lot represented 724 carats of diamonds recovered from higher-grade pyroclastic kimberlite grading better than 0.3 carat per tonne, while the other consisted of 249 carats recovered from lower-grade pyroclastics grading less than 0.3 carat.

The higher-grade parcel was valued by two of the parties at between US$38 and US$43 per carat, while the lower-grade parcel averaged between US$33 and US$42 per carat. The diamonds were then sent to Antwerp, Belgium, and revalued after undergoing deep acid boiling. It was originally noted in 1994 that a few of the diamonds had skins or were coated, making them difficult to grade.

The two parcels of cleaned diamonds were valued at about US$54 per carat, significantly higher than the original US$22-per-carat valuation and more in line with Peregrine’s 2005 sample.

In early 2006, Peregrine returned to collect a much larger, second bulk sample from the sweet spot of DO-27. Using two large-diameter rigs, the company originally planned to extract some 3,000 tonnes, but managed to recover just 548 tonnes of kimberlite from 11 holes before drilling was halted by the spring thaw. The 2006 program sampled the pipe to a depth ranging from 53 to 404 metres, twice as deep as the 2005 program.

Eight of the holes tested the main vent, with the grade of each hole ranging from 0.81 to 1.08 carats per tonne. In total, 300.8 carats of diamonds were recovered from 340 tonnes of pyroclastic kimberlite, for an implied grade of 0.88 carat per tonne, which compares favourably to the 2005 bulk-sampled grade of 0.9 carat.

The higher-grade pyroclastic unit was also encountered in the three large-diameter RC holes that tested the northeast lobe. These holes intersected anywhere from 48- to 108-metre-long sections of pyroclastic kimberlite that averaged from 0.64 to 0.92 carat per tonne in each of the holes. In total, 104.4 tonnes of pyroclastic kimberlite was recovered from the three holes, yielding 89.07 carats for an implied grade of 0.85 carat per tonne. Volumetrically minor lithologies in the northeast lobe averaged 0.36 carat per tonne.

A combined 508.9 carats of diamonds recovered in 2005 and 2006 from pyroclastic kimberlite in the main and northeast lobes of DO-27 was examined by WWW International Diamond Consultants for valuation and size-distribution modelling. The modelling work assumes a value range of US$41 to US$62 per carat based on September 2006 prices or US$45 to US$73 per carat using September 2005 prices. No actual values of the parcel were released by Peregrine.

During a presentation at this year’s PDAC conference, Peregrine’s Jim Crawford was quick to point out that the 509-carat diamond parcel recovered to date is quite small and therefore not an accurate measurement of the true value.

“We feel once we reach the threshold of at least 3,000 carats, we’ll begin to have some confidence in our numbers and that diamond valuation number should begin to firm up.”

“The 2006 mini-bulk sample of approximately 600 tonnes cannot be considered representative from the data at hand,” said an updated 2006 year-end technical report. “No mineral resource estimate is possible with this limited data. Larger bulk samples from a more representative area and from depth, and the inherent larger parcel of recovered diamonds, will provide estimates of higher confidence level.”

WWW concluded that at least 3,000 carats would be required from DO-27 to obtain a geologically meaningful average diamond valuation. A 3,000-carat parcel would give an average price within 15% of the true value.

AMEC has been contracted to complete a comprehensive, internal preliminary technical assessment of the project. This study will include a conceptual model of a potential diamond mine, focusing on a variety of issues including kimberlite processing, waste rock disposal, water management and overall project footprint. The study is expected to be complete this summer.

Exploration

Peregrine has a land package of more than 3,400 sq. km in and around Lac de Gras, divided into four projects: Pellatt Lake, Lac de Gras East, Lac de Gras West and Mackay Lake West. Last year, Peregrine intersected multiple kimberlite horizons, the largest being 10 metres thick, while drilling a 150-metre stepout from the known diamond-bearing PL-1 kimberlite, 42 km northeast of the Ekati mine. The Pellatt Lake project covers claims under option from DHK Diamonds and Dentonia Resources.

The Lac de Gras area properties have been subjected to several seasons of heavy mineral sampling, along with airborne and ground-based geophysical surveys that have helped narrow down the source of a number of unresolved kimberlite indicator mineral trains. Geophysical crews are already on the ground to firm up drill targets.

“We’re hoping to put at least seven holes in Lac de Gras West and ten holes into Lac de Gras East,” Crawford says.

A Falcon survey over the Pellatt Lake claims has identified 29 geophysical anomalies, 10 of which have been selected for detailed ground follow-up in preparation for drilling during the second quarter.

In February, Peregrine announced that it had acquired over 20,000 sq. km of prospecting permits covering three project areas — Chidliak, Mirage Bay and Foxe basin in the Baffin Island region of Nunavut. The permits were acquired under a strategic arrangement with BHP Billiton Diamonds, which will retain a back-in right for up to a 65% interest by reimbursing Peregrine 400% of its exploration spending.

Regional and reconnaissance till sampling by Peregrine and BHP have recovered anomalous kimberlite indicator minerals, including highly prospective eclogitic and pyrope garnets, some with compelling G10 chemistry and fresh surface textures. In addition, a fixed-wing aeromagnetic survey over the southern half of Prince Charles Island in the Foxe basin has produced 14 prospective geophysical anomalies.

“We want to follow those (up) on the ground, in addition to collecting about 350 heavy mineral samples,” Crawford says.