2004-07-27 15:31 ET - Street Wire
by Will Purcell
Art Ettlinger's stint at running a junior diamond explorer could come to an end, as his Dunsmuir Ventures Ltd. plans to merge with Peregrine Diamonds Ltd., a private company run by Eric Friedland.(YES, that is Robert Friedland's little brother) Dunsmuir has a promising property on the northern part of the Churchill craton, but the company struck out with a spring drilling program. Peregrine has a few properties in the Lac de Gras region. The merger seems a good arrangement for both companies, as it will give Dunsmuir's Nanuq project a cash boost, and will allow Peregrine to become a public company.
Dr. Ettlinger said that the merger discussions had been in progress for the past few months, and the Vancouver-based geologist was content to trade control of the company for a stronger treasury. "We found a way to keep working on our projects without continuing to finance the company at 20 to 40 cents for the rest of our lives," he stated, adding that the merger would also make it easier to come up with exploration dollars in the future.
There has also been a connection between both companies and BHP Billiton Ltd. and the merger should accentuate those arrangements. Dunsmuir got its start as a gem hunter a few years ago, through a deal that gave the company access to some of BHP's data and Dunsmuir has selected a few projects from the company since then. That includes the Nanuq play that has been the company's top play for the past two years.
Peregrine has a deal with BHP that gives it the exclusive rights to use the mining giant's Falcon airborne gravity gradiometer system across the Americas. Falcon has proven effective at identifying kimberlites and other mineral deposits, and Dr. Ettlinger has high hopes the system will help find kimberlites on Dunsmuir's gem play. "I think Nanuq is a great property to test Falcon," Dr. Ettlinger said.
The prospect of a flush treasury, access to Falcon and the expanded relationship with BHP were the key factors that enticed the former Yorkton Securities Inc. gold analyst to give up control of his little diamond explorer and become the executive vice-president of a much larger Peregrine.
The merged Peregrine should be a much larger company than Dunsmuir, which had a market capitalization of less than $5-million at the time the arrangement was revealed. If all goes according to plan, the new company will have a market capitalization of more than $75-million, based upon the $2 price at which Peregrine will be completing a $4-million private placement.
Five of Dunsmuir's shares will become a single share of the new Peregrine, and that would imply that the Dunsmuir shares have been valued at 40 cents. The merged company is expected to have 38.4 million shares outstanding, and the existing Dunsmuir stock will account for 6.25 million of the total, or about one-sixth of the new company.
That proportion could grow if all of the existing warrants, options and debentures of both companies are exercised. On a fully diluted basis, the new Peregrine will have about 49.8 million shares outstanding, and about 2.7 million of the new shares will come from Dunsmuir's side of the ledger, increasing its share of the proposed new company to about 18 per cent.
Dr. Ettlinger said that although the immediate benefit of the deal to Dunsmuir's shareholders was the 40-cent valuation of their shares, he believes that the arrangement also gives the company's Nanuq play a financial boost. He added that the new cash would allow the project to reach a more advanced stage, and with crews currently out working on the property, a new drill program seems likely for next spring.
More till sampling is in progress on Nanuq, as Dunsmuir and its new partner plan to increase the sampling density in the regions with existing indicator mineral trains. As well, the Falcon survey is expected to start shortly, and the data from the programs are expected to be available later this fall, allowing Dr. Ettlinger and his new partner ample time to select some choice drill targets.
Dunsmuir's share price peaked at 49 cents in February, but the stock slid steadily through the spring, dipping to 14 sad cents in late June, after the company failed to hit kimberlite on Nanuq. "I don't think we understood the geophysics," Dr. Ettlinger said, adding that its magnetic survey had not been adequate to come up with kimberlites. The five magnetic targets that Dunsmuir drilled at the head of its main mineral train turned out to be the result of iron formations that coincidentally happened to occur in the prime area.
Despite the failure, the area still seems a favourable spot to explore for diamonds. The additional till sampling in the area will help zero in on the source areas, and the Falcon gravity survey should add a new dimension to the geophysical assessment of targets.
Peregrine will devote a significant effort to Nanuq, but Dr. Ettlinger thinks that one of the properties on the Slave craton will be the top project. Peregrine owns a 38.475-per-cent stake in the Tli Kwi Cho kimberlite pipe, which was a bulk sampling bust that sent Canada's developing diamond play into a slump nearly a decade ago.
Kennecott Canada Exploration Inc. processed over 1,200 tonnes of diatreme kimberlite, coming up with a meagre diamond grade of 0.01 carat per tonne, but things were markedly better with the pyroclastic phase that was encountered later in the program. A total of 3,003 tonnes of that material delivered a grade of 0.36 carat per tonne. That value was less than half of what speculators had been hoping for and with a diamond valuation of just a bit above $20 (U.S.) per carat, the project came to an abrupt end.
Although the result was well below expectations, the sample proved that the pipe was significantly diamondiferous, and there continues to be interest in taking a new look at the big pipe, which many believe was not adequately tested.
Dr. Ettlinger is among that group of diamond hunters who continue to believe that there is a central core of the pipe that has a much higher diamond grade. That core region had been poked with several delineation drill holes, but there was no sampling beyond that, as the underground bulk sample had to be aborted before it reached the prime region.
Nevertheless, there are signs in the initial diamond counts that the core zone of kimberlite had a significantly higher diamond content. About 1.3 tonnes of the best material had been processed, and the rock yielded more than twice the number of diamonds that had been found in the other zones.
As well, the size distribution of the diamonds from the core area was far superior to that in the other parts of Tli Kwi Cho, and the total diamond content of the sample was over two carats per tonne, compared with less than one-third of a carat per tonne in the remaining parts of the pipe.
That could bode well for a new test of the core of Tli Kwi Cho. Earlier this year, Peregrine acquired its stake in the play form BHP, and it can increase its share of the play to 54.475 per cent by completing a 200-tonne mini-bulk test. Dr. Ettlinger said that such a test was likely, and next spring seems a likely time for the sample, as the pipe lies under a shallow lake and the sample will be collected by drilling.
A drill program will allow Peregrine to zero in on the best parts of the pipe and that could provide a form of vindication for the early believers in Tli Kwi Cho. Still, even if a test does manage to deliver a grade comparable with what the diamond counts suggested, the DO-27 project would still have to leap a few more hurdles.
Diamond value is still a big concern, although Dr. Ettlinger thinks that the modest value produced in the 1994 test is unrepresentative of the core zone. Another concern is size, as there would have to be a significant amount of higher-grade kimberlite to make the project viable. "It is really a question of how big it is," Dr. Ettlinger said.
The merged company will have seven directors, and three of the proposed appointments have a Dunsmuir past. Joining Dr. Ettlinger on the board will be geologist Jennifer Pell, who has been kept busy with the Nanuq project, and Gordon Keep another geologist who has been busier on the business end of things. He was a broker with Yorkton Securities, but left to become the managing director of Endeavour Financial, where he helped hatch a cash shell into Dunsmuir.
Three of the Peregrine directors have been associated with Mr. Friedland, including Alan Carter, who is currently Peregrine's chief operating officer. He was an exploration manager for Rio Tinto and was also a manager with BHP, where he was involved with diamonds.
Also proposed as directors for the merged company are Jonathan Challis, who joined Mr. Friedland as a director of DiamondWorks Ltd. in 1996 and remained with the company until 1999, and Myron Goldstein, who popped up on the board of DiamondWorks late in 1995, for what turned into a two-year stint.
The final director for the new company, Bernie Poznanski, also has a connection to Mr. Friedland through DiamondWorks. He was added to the company's board in 2001, long after Mr. Friedland had departed, but he also served as a lawyer for the company for a number of years prior to that.
Dunsmuir's shares have bounced off their recent low, although the stock is still well below the 40-cent mark. The stock added one-half cent on Monday, closing at 26 cents.
[This message has been edited by northernprophet (edited August 18, 2004).]