Mountain Province Diamonds Inc (MPV-T: $4.95)
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Spec Value Hunter Comment - August 24, 2011: Mountain Province gearing up for scale changing exploration

Spec Value Hunters should be looking at the recent weakness in Mountain Province Diamonds Inc as a buying opportunity in anticipation of exploration results by Q1 of 2012 that could boost the price target well beyond the $6-$8 per share range based on the current mining plan and the modeled carat value (see Spec Value Hunter Comment - October 8, 2010). On August 24, 2011 Mountain Province announced that it had received "unsolicited expressions of interest from third parties" but has now decided to cease further discussions. My assumption was that diamond dealers and wholesalers were bugging the junior about offtake agreements for future production from the Gahcho Kue diamond project in the NWT which is currently at the permitting stage of the development cycle. But CEO Patrick Evans has indicated that these parties were major diamond producers, which excludes the small AIM listed diamond producers, and by definition of not being a "third party", De Beers itself. That leaves a small group consisting of BHP Billiton, operator of the Ekati mine, Rio Tinto and Harry Winston, operators of the Diavik mine, and possibly Alrosa, operator of the Russian diamond mines. This is the first indication I have received from management that major diamond producers apart from De Beers have expressed a serious interest in taking out Mountain Province, which is a 49% participating partner with diamond marketing rights in the Gahcho Kue joint venture with De Beers.

On August 2 Mountain Province reported that the Mackenzie Valley environmental review panel has ruled that the 11,000 page Environmental Impact Statement filed by De Beers in December 2010 conforms with its terms of reference, and that formal review hearings will begin on November 20, 2011. This stage of the permitting process allows stakeholders to make public comment on the Gahcho Kue project, which proposes to open pit mine 3 million tonnes annually to produce about 50 million carats over an 11 year mine life. This process can drag on indefinitely, but Evans is hopeful that formal approval for the diamond mine will be in hand by the end of 2012, preferably by late summer to allow deployment of materials over the 2012-2013 winter road. Key to the speed of the review process will be the successful negotiation of an impact benefits agreement with the three First Nations groups affected by Gahcho Kue, which happen to be the same ones with whom De Beers negotiated agreements for the Snap Lake project. Evans is optimistic that agreements with all three groups will be secured by the end of 2011, a milestone that would accelerate the urgency of mine approval. Mountain Province has also been approached by a major Canadian commercial bank with regard to providing construction debt financing, another positive sign that Mountain Province will not be caught in a financing squeeze as happened to Aber, the junior partner in Diavik. Mountain Province decided to suspend discussions with suitors because it is about to embark on a couple exploration programs that could have a high impact on the stock's valuation.

De Beers plans to drill five holes starting in September to test the projected extension of the Tuzo pipe beneath the 350 m level to which an indicated plus inferred resource of 15,700,000 tonnes at 134 cpht representing 21 million carats has been estimated. Tuzo is an unusual kimberlite in that it looks like an upside down carrot, with the diameter of the pipe flaring at depth similar to what Stornoway has observed at its Renard project in Quebec. The grade of Tuzo's open pittable resource has been diluted by large blocks of country rock in the upper portion, though at the 300-350 m level the grade is at 175 cpht compared to 121 cpht in the upper portion. Past drilling has indicated that Tuzo continues to flare at a depth of 400 m. The diagram above from Mountain Province's 2011 AGM Presentation shows both the junior's wishful extrapolation of the pipe's flaring and a more conservative vertical pipe wall projection from the 350 m level by De Beers. The De Beers scenario has a tonnage footprint of 30 million tonnes between 350-750 m, which at a grade of 175 cpht would represent an extra 50 million carats. If the 5 hole drill program confirms this tonnage geometry, and micro diamond analysis confirms the macro grade potential, this would double the overall Gahcho Kue 49 million carat probable reserve scheduled for the current mining plan.

The Gahcho Kue production profile above shows that during the eighth year carat production will drop from 5 million carats annually to just below 3 million carats as Tuzo open pit mining gets underway. If De Beers can confirm the existence of a substantial high grade resource beneath the 350 m level at Tuzo, it will consider driving an adit from the pit bottom of the 5034 pipe, which will be depleted by the sixth year, to access Tuzo for underground mining at the same time that the upper portion is open pit mined. We should know by the end of 2011 how the geometry of Tuzo behaves at depth, and by Q2 of 2012 we should see what the micro diamond results indicate about the macro grade potential. Good news on this front will not require modification of the mining plan currently before the review board, but it will allow investors and potential takeover bidders to adjust their discounted cash flow model based valuations of the project.

In addition to waiting to see what the "Tuzo Deep" potential might add to the value of its 49% stake in the Gahcho Kue project, Mountain Province is also very eager to see what its 100% owned Kennady North claims might hold. These claims were part of the 200,000 plus hectare land package Mountain Province held during the Lac de Gras area play of the nineties when juniors and majors staked an area the size of Switzerland in the wake of Dia Met's Ekati discovery. After De Beers optioned the project on March 7, 1997 it conducted till sampling and airborne geophysical surveys within the overall land package, and did discover three dyke like kimberlites called Hobbes, Kelvin and Faraday along a linear trend 7-12 km northeast of the main Gahcho Kue cluster. During those days De Beers still reported micro diamond results according to its own sieve system, which is slightly different than the one used today for reporting micro diamond results. The size distribution chart below plots the De Beers sieve based results for the 5034 and Hearne pipes, which have probable reserve grades of 177 cpht and 210 cpht respectively, as well as the results for Kelvin and Faraday which despite small sample sizes yielded curves very similar to those of 5034 and Hearne. The composite curve for the Knife pipe which bulk sampled at about 30 cpht is provided for contrast. The conclusion is that the Faraday and Kelvin kimberlites sampled the same diamond source rock as the main cluster. The obvious question is why does Mountain Province own these claims 100%?

There is no obvious answer, even within De Beers today, but in 2006 De Beers decided to take only four claims to mining lease as part of the joint venture, and Mountain Province decided to keep the rest. The best one can guess is that De Beers was satisfied that on the basis of geophysical surveys and till sampling there were no other kimberlites of meaningful size left to be found, and the Faraday and Kelvin bodies were too small to ever be of economic interest. What De Beers seems to have overlooked are gravity surveys, which measure relative density. De Beers has done ground gravity surveys on the Gahcho Kue pipes and established that they do stand out as distinct gravity anomalies. It has now occurred to De Beers that it should have done gravity surveys on its mining leases as a form of condemnation work just in case there are high value kimberlites lacking magnetic and indicator mineral signatures. No doubt the "fat-bottomed" nature of Tuzo has raised suspicions that there may be more than meets the eye at surface. Starting in September Mountain Province will conduct a gravity survey with 50 metre spacing on the joint venture leases as well as its 100% owned ground. De Beers will process and interpret the results. This could yield positive surprises within the joint venture ground in close proximity to the main pipes which benefits De Beers, as well as surprises on Kennady North which would be of enormous benefit to Mountain Province and a serious headache for De Beers, especially given that Mountain Province is contemplating a spin-off of the 100% owned ground as a separate entity to its shareholders. Mountain Province expects to know if it has any drill targets by the end of October, and would drill them in Q1 of 2012 as soon as freezeup has made them accessible.

*JK owns shares in Mountain Province Diamonds Inc>