Verkhotina diamond deposit poses challenges for Archangel

Shortly after winning a decade-long legal dispute over ownership of the Verkhotina diamond exploration project in northwestern Russia, Archangel Diamond (AAD-V, ADMOF-O) has filed a technical report demonstrating a significant resource increase there. But the project doesn’t come without sizable risks, the company concedes.

The recent National Instrument 43-101 report indicates that the “world-class” Grib pipe has an indicated resource of 50.2 million carats of recoverable diamonds (larger than 1 mm) at US$105 per carat and an inferred resource of 24.3 million carats of recoverable diamonds at US$119 per carat.

The Grib pipe contains an indicated resource of about 39.5 million tonnes of kimberlite down to 618 metres at an average grade of 127 carats per hundred tonnes. The inferred mineral resource of 62.7 million tonnes of kimberlite down to 774 metres has an average grade of 39 carats per hundred tonnes.

Those numbers represent a significant increase over the previous resource estimate completed in 1999, which showed 67.4 million carats of recoverable diamonds at an average grade of 69 carats per hundred tonnes and at an average diamond value of US$79 per carat.

By volume, the new estimate indicates that 63% of the resource is classified as inferred and is therefore subject to greater uncertainty, Archangel concedes. But in terms of estimated value, it says that 65% of the mineral resource is classified as indicated.

Beneath the estimated inferred and indicated resources, an additional potential mineral deposit has been estimated to contain 6.8 to 12.9 million carats at US$118 per carat to a depth of 1,050 metres. But these estimates, Archangel notes, are purely “conceptual” in nature and must be backed up by sufficient drilling.

The Grib pipe, discovered in February 1996 when hole 441 intersected 38 metres of kimberlite, sits on the 400-sq.-km Verkhotina licence northwest of the regional centre of Archangelsk, about 60 km south of the Arctic Circle.

Verkhotina is 30 km northeast of the Lomonosov diamond project, which is said to hold about US$12 billion worth of diamonds, half of which are gem-quality.

The technical report on the project doesn’t pull any punches about the challenges involved in mining the deposit, however. The report concluded that the best method to develop the Grib deposit, both technically and economically, would be an open pit but much uncertainty remains about the underlying deCAREER sign and cost estimates.

There are a number of challenges. For one thing, the Grib pipe is located within the Soyansky Natural Park, where mine development is currently not permitted. Access to the site would also be through the Primorsky Natural Reserve via a road from Lomonosov.

A number of forestry blocks would require rezoning and removal from the park at the very least and an equivalent area of so-called “ecological value” would have to be added to the park elsewhere.

What’s more, the final open pit limits and probably any underground mine workings as well could extend beyond the limits of the licence boundaries. Although the Grib pipe is 150 metres inside the southwestern boundary of the mining licence, an open-pit operation would likely extend past that boundary. As a result, the owners would have to secure an additional subsoil licence over the additional ground through a competitive tender or auction process.

There is also a dewatering issue and priority should be given to a preliminary environmental impact assessment looking at water quality of nearby rivers, streams and lakes preserved for salmon spawning. Potential water discharge from the Grib operation to the Soyana River would flow directly through the Soyansky Natural Park, which has been designated as a salmonspawning habitat.

Poor country rock strength — aggravated by high levels of groundwater — could become problematic, too.

Under an agreement reached in April with Russian oil giant LUKoil, which had tried to terminate Archangel’s 1993 joint-venture rights to Verkhotina, Archangel will increase its original stake in the project to 49.99% from 40% in return for a cash payment of US$100 million.

The Canadian junior has also agreed to spend an additional US$75 million upon a joint decision to build a mine and a further US$50 million once commercial production begins.

Archangel will have to raise US$200 million through a private placement in order to uphold its end of the bargain.

De Beers owns a 58% stake in Archangel and Firebird Global Master Fund holds 19%.

Currently, Archangel is trading at about $1.54 per share and has a 52-week trading range of 35-$2 with 85 million shares outstanding.