Diagem thwarted in Brazilian Amazon (June 09, 2008)

Diagem (DGE-V, DGEMF-O) has stopped activities at its Chapadao diamond project in Brazil.

The company announced that it is complying with an order from the Brazilian Federal Environmental Agency (IBAMA) issued in April and has frozen its exploration program at the project, which lies in the Juina diamond province of Mato Grosso.

The order stems from illegal deforestation in the area that Diagem says occurred before it arrived and had been reported to IBAMA.

While the company is pursuing legal avenues to fight both the order and a $1.1-million fine slapped on it by IBAMA, it has had to scale back its workforce at the site. It says it will keep its mineral rights and do minimum maintenance on project equipment and infrastructure.

In Toronto on the news, the company’s shares were up a penny to 41 on just 8,000 shares traded. The company’s shares have traded between 39 and $1.10 over the last 52 weeks and it has roughly 27 million shares outstanding.

IBAMA issued an order against Diagem’s activities on another property in the region — known as 213 — back in 2003.

While in May 2005, Diagem announced the order had been lifted after the company agreed to rehabilitate mined-out land within three years, the order is still in place.

Diagem says the order against its activities at 213 was originally put in place after IBAMA questioned the validity of a mining licence granted by the National Department of Mineral Exploration.

Commenting on the latest order at Chapadao, company chief executive Denis Francoeur said in a press release: “the goal of the company is to rapidly resume evaluation work on the project, which is undoubtedly in the best interest of the shareholders and the community of Juina. Diagem plans to rehire the laid off employees once the embargo is lifted.”

IBAMA’s strong-arm tactics are part of its campaign to clamp down on the deforestation of Amazonian forest, particularly illegal logging, which is rampant.

Brazilian President Luiz Inacio Lula da Silva is trying to balance his stated desire to bring economic growth to 5% per year in the country — a means to deal with massive poverty — against protecting the Amazon basin and Brazil’s international reputation.

IBAMA itself is going through turbulent times at the top. Criticized for being overly bureaucratic, Lula chose former Greenpeace member Carlos Minc to head the ministry. Minc, in turn, recently announced he was selecting Roberto Messias to lead IBAMA, and gave a clear mandate to streamline the institution.

IBAMA launched its campaign to stem illegal deforestation in the state of Mato Grosso under the previous leadership of Marina Silva.

With a workforce of 200 people operating from five land bases and support from two air bases, the campaign does have some teeth.

Diagem has one development-stage project and two recently discovered kimberlite pipe clusters in the region.

The company received results from its most recent bulk sample at Chapadao after the embargo was put in place. A total of 556 were recovered, 13 of which were larger than 1 carat. Of the 13 larger diamonds, three were white, gem-quality stones weighing 1.76, 1.38, and 1.2 carats, respectively. Analysis of the smaller diamonds is pending, and the company says some of those may be gem-quality or near gem-quality. The sample showed an in-situ grade of 0.68 carat per cubic metre from the processing of 94 cubic metres of the ash-fall layer. The weight of the sample was 111 carats for an average diamond weight of 0.2 carat.

In April, the company released results from another bulk sample that returned an in-situ grade of 0.36 carat per cubic metre from 80 cubic metres of the ash-fall layer. This sample yielded 102 stones, including a gem-quality 6.23-carat diamond.

A total of 2,215 metres of diamond drilling in 28 holes had also been completed in crater facies kimberlitic rocks representing roughly 30% of the first-stage drill program.

Diagem says exploration work done thus far, including ground magnetic anomalies and field observations, indicates the presence of pipe-like kimberlitic bodies that form a tight cluster.