Peregrine Launches Winter Program on Tli Kwi Cho

When cash calls to its joint-venture partners went unanswered in December, Peregrine Diamonds (PGD-T) increased its stake in the WO diamond project in the Northwest Territories and, in turn, the DO-27 pipe to 71.74% from 54.47%, at the expense of Aber Diamond (ABZ-T, ABER-Q), SouthernEra Diamonds (SDM-T, SDMFF-O) and DHK Diamonds.

The WO property centres on the DO-27 and DO-18 kimberlite pipes that comprise the infamous Tli Kwi Cho kimberlite complex. As the operator, Peregrine has been advancing the project through scoping level studies. From June 2005 to November 2006, the joint-venture partners spent almost $19 million in their assessment.

Discovered by Kennecott Canada, a division of Rio Tinto (RTP-N), during the early days of the Lac de Gras diamond rush, the 9-hectare DO-27 and 3-hectare DO-18 kimberlite pipes form one of the largest kimberlite complexes found in the Canadian Arctic, exceeded only by the Wombat and Jay pipes on the Ekati mine property.

In early November, Peregrine announced modelled values for a 508.9-carat parcel of rough diamonds recovered from the 2005 and 2006 bulk-sample drilling programs on the DO-27 kimberlite pipe. Modelling work by WWW International Diamond Consultants suggests diamonds from the pyroclastic phase of DO-27 would command a price of between US$41 and US$62 per carat based on the September 2006 price book, which is in line with expectations based on the work to date by Peregrine and earlier work by Kennecott.

For the 2007 field season, already under way, 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 the constraints or confidence levels of the valuation modelling.

In December, Peregrine reported that cash calls totalling $14.9 million were due and payable for all of the WO joint-venture partners. Archon Minerals (ACS-V, AHNMF-O) was the only one to contribute, increasing its participating interest to 17.48%. As a consequence, the interests of Aber and SouthernEra were diluted to below 4% each, resulting in an automatic conversion to a 0.25% gross overriding royalty.

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), was diluted to a 10.78% interest. The DHK partners now each hold a 3.59% indirect interest in the WO claim group, down from 6.7%.

As a result of DHK’s dilution, Peregrine and Kettle River have mutually agreed to terminate their plans to merge now that Kettle River’s holdings have “materially changed.”

Fallout

Dentonia Resources has publicly objected to the reduction of its ownership in the project, and has retained legal counsel. Jim Crawford, manager of Peregrine’s investor relations, says that there has been no reaction from the other WO partners.

In response to a query about DO-27 during a year-end earnings conference call last year, Aber chairman Bob Gannicott said he didn’t want to comment, other than saying that sampling had corroborated earlier results from exploration by Rio Tinto.

“However, of course, the diamond market has changed and so we think that this thing at least deserves this second look,” Gannicott said.

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 or hypabyssal material.

The WO claims were originally staked by DHK Diamonds in 1992 on the heels of the Point Lake diamond discovery by BHP Billiton (BHP-N) and Dia Met Minerals. Kennecott went underground in 1993 and extracted a 5,000-tonne sample from the periphery of DO-27’s northeast lobe. The pyroclastic portion delivered 1,079 carats of rough diamonds from 3,003 tonnes of sample, giving a preliminary grade of 0.36 carat per tonne. The diamonds were estimated in 1994 to be worth 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 diamonds of larger size 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 1,158 tonnes of material that held just 16.4 carats, for an implied grade of 0.01 carat per tonne.

Discouraged by the results, Kennecott abandoned the DO-27 pipe and later relinquished its interest in the WO claims in exchange for a 1% gross overriding royalty on any future diamond production.

In 2004, Peregrine acquired BHP Billiton’s 38.5% interest in the claims, with the objective of further assessing the DO-27 kimberlite pipe — in particular, the higher-grade south lobe. Adolph Petancic, president of Dentonia Resources, has long argued that Kennecott failed to properly test the potential of the large, multi-phase pipe. Petancic believed that the bulk sample was limited in scope and restricted almost entirely to the smaller northeastern lobe.

“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,” says an independently prepared technical report commissioned by Peregrine. “Indeed, Kennecott bulk samples became significantly higher grade at the ends of their sample drifts.”

Sharp contrast

Peregrine increased its interest to just shy of 54.5% after spending $4 million to take a mini-bulk drill sample from the heart of the main lobe of DO-27 during the first quarter of 2005. Peregrine extracted a 151-tonne sample by drilling six large-diameter reverse-circulation (RC) holes to varying depths of up to 209 metres. In total, 136 carats of rough 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.

As part of the valuation exercise, Peregrine had Kennecott’s original 1994 parcel of diamonds revalued. The Kennecott goods were split into two parcels: KCI-1 represented 723.7 carats of diamonds recovered from higher-grade pyroclastic kimberlite grading better than 0.3 carat per tonne; and KCI-2, consisting of 249.3 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 in the two parcels were then cleaned by deep acid boiling and revalued in Antwerp, Belgium. It was originally noted in 1994 that a few of the diamonds had skins or were coated, making them difficult to grade.

Peregrine’s 2005 year-end technical report noted that cleaning the diamonds greatly improved their appearance by “reducing the amount of brown goods.”

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.

Early this year, Peregrine returned for a much larger, second bulk sample from DO-27. Using two large-diameter RC rigs perched atop the ice-covered lake, the company originally planned to collect some 3,000 tonnes, but managed to extract only 548 tonnes of kimberlite from
11 holes before drilling was shut down due to unsafe ice conditions caused 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 lobe or vent, with the grade of each hole ranging from 0.81 to 1.08 carats per tonne. In total, 300.8 carats of rough 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 mini-bulk sample 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 material was recovered from the three holes, yielding 89.07 carats for an implied grade of 0.85 carat per tonne.

A combined 508.9 carats of stones recovered in 2005 and 2006 from pyroclastic kimberlite in the main and northeast lobes of DO-27 was sent to WWW International Diamond Consultants in Antwerp 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. Peregrine has not released the pre-modelling value of the parcel.

Peregrine has resumed large-diameter RC drilling on the land-based portion of DO-27’s northeast lobe with at least eight holes planned. Up to another 20 holes are budgeted for the central part of the pipe, once the ice is thick enough to support the drilling rigs. An update on the preliminary resource calculation and details of the technical scoping study are expected to be released this year.