2008-02-05 21:01 ET - Street Wire

by Will Purcell

Well, so much for that theory. Speculators who paid over $2 for shares of Diamonds North Resources Ltd. just a month ago watched as disappointing diamond counts from Qavvik-1 cut their investment in half. The market had based its enthusiasm on gaudy stone tallies from several Nunavut kimberlites and the notion that the bodies contained many more macrodiamonds than indicated. Now, they just have the diamond counts from Tuktu-1 and Qavvik-4 to support their hopes. Diamonds North is not ready to abandon its theory and has a new spin. Unfortunately there is no guarantee it will fare any better.

The flop

In a Feb. 5 press release, Diamonds North announced that 976.75 kilograms of Qavvik-1 kimberlite yielded 483 diamonds larger than a 0.106-millimetre cutoff. Only 8.7 per cent of the stones sat on a 0.30-millimetre sieve and the haul from the 0.85-millimetre mesh was as barren as the terrain near the Arctic coast.

Earlier, Diamonds North pulled 368 gems from 397.05 kilograms of Qavvik-1 kimberlite. According to the company's theory, the reverse circulation drill likely broke most of the large diamonds and would also reduce the overall stone count. Not so, according to the numbers, as the core samples in the latest tests yielded gems at barely half the rate of the initial test. Worse, the size distribution profile was the same.

With its theory, not its diamonds, in tatters, Diamonds North added a new provision. The Qavvik-1 kimberlite was soft and the company thinks that prevented the reverse circulation drill from battering the larger stones to bits. The idea is not only logical: other diamond deposits experienced similar results. Unfortunately, Diamonds North knows little about the hardness characteristics of its remaining kimberlites, notably Tuktu-1 and Qavvik-4.

Investors will not know if Diamonds North's revised thinking is right until the company completes more testing, which will occur later this year. Both sites will see a significant amount of drilling to collect larger amounts of kimberlite core.

The encouragement

The hardness theory seemed to work out at Umingmak, the company's first Amaruk pipe. About 250 kilograms of reverse circulation chips yielded 27 diamonds, or about 110 stones per tonne. Meanwhile, 601.77 kilograms of outcrop from the body contained 166 gems. The chips therefore yielded diamonds at less than half the rate of the outcrop. The latter parcel included 18 gems larger than a 0.30-millimetre screen, or nearly 11 per cent of the haul. The reverse circulation sample contained none.

The numbers support Diamonds North's contention, but there is a less rosy explanation. The two Umingmak tests might have hit kimberlite with varying diamond counts. Further, the variations could be the result of statistical variation within samples with small weights.

Fortunately, the diamond counts from Qavvik-3, Qavvik-4 and especially Tuktu-1 give those bodies a clear advantage over the failed Qavvik-1. The mineral chemistry near the Tuktu cluster adds more hope, although the company is not yet certain its discoveries are the origin of the mineral grains.

The Tuktu cluster does offer size potential. Tuktu-1 spans just 1.5 hectares and three other bodies are within 100 metres. That leaves the possibility the five-hectare area represents one larger kimberlite complex. The Qavvik-4 body covers 1.5 hectares, but Qavvik-3 body is a lower priority because it covers less than one hectare. The company is waiting for diamond counts from a dozen other bodies, and its priority list for core drilling and larger samples could grow before drilling on Amaruk starts this spring.

Diamonds North closed down 41 cents to 97 cents Tuesday on 1.75 million shares.