True North steps up its gem hunt

2008-07-14 14:01 ET - Street Wire

by Will Purcell

Andrew Smith's True North Gems Inc. will spend another $5-million on exploration this year on its gem project on the western coast of Greenland. The company is planning is largest mini-bulk test yet on the Aappaluttoq deposit, with drilling in store for another target in the Siggartartulik region. Bigger tests are planned for 2009, and the company thinks it could be producing rubies and sapphires within three years.

The exploration

True North director, Nick Houghton, said the company would be spending nearly $10-million through 2008 and a bigger budget is in store for next year. The work will include up to 5,000 metres of drilling on the Siggartartulik target. The company will drill the holes to an average depth of 100 metres and it plans to test the structure every 100 metres. The Siggartartulik feature runs for about five kilometres, so True North will need about 50 holes.

Drilling expenses chew up a significant part of the budget, as the costs to get a rig and crew to the remote coastline and keep them supplied are high. True North uses helicopters to ferry the equipment and crews about, and they consume fuel, nowadays precious fuel, at prodigious rates.

True North will be spending much of its cash on a 250-tonne mini-bulk test of the Aappaluttoq deposit. The company completed about 120 tonnes of testing over the past few years at Aappaluttoq, which means "Big Red" in the local Inuit language.

The name is fitting, as a 30-tonne test of the deposit in 2006 yielded about $33,000 (U.S.) of rough rubies and pink sapphires, worth nearly $1-million after cutting and polishing. (Both are varieties of corundum. Rubies are coloured blood red down to pink, while the term sapphire applies to all other colours of corundum.)

The plan

True North is working on its environmental studies and it will start a scoping study shortly, but the company already has an idea of the possible economics. Mr. Houghton said True North expected to be in production by 2011. He believed the cost of a mine would be about $50-million. True North thinks its operating costs will be nearly $200 (U.S.) per tonne, including the costs to extract, crush and put the material through a dense media separation plant, and then optically sort and polish the gems.

The cost is abnormally high because the company plans to run the mine for just a few months each year, extracting no more than 30,000 tonnes of material. The company thinks its modest production could nevertheless generate annual revenues of $100-million (U.S.). That would account for at least 5 per cent of the world's annual ruby production, which is worth about $2.1-billion (U.S.).

Rubies are in need of some marketing help these days. The top producer of quality gems is Burma, and larger jewelers are increasingly reluctant to deal with the military junta running the country for the past 20 years. The situation is not unlike the blood diamond issue that plagued the diamond industry several years ago.

Mr. Houghton said the company did not want to jack up the supply through big production numbers, but wanted to displace the poorer rubies now produced in places like Southeast Asia and parts of Africa. As well, touting a safe and secure supply from frigid-but-friendly Greenland will undoubtedly be a good marketing ploy.

True North is already building up a significant inventory of valuable rubies and sapphires, but it is unable to sell them. The company's exploration licences allow it to dig up and polish the stones, but it will need an exploitation permit to sell the gems. Mr. Houghton said the company expected to have about $10-million in inventory by the time the project reaches production.

True North closed unchanged at 31.5 cents Friday on 7,000 shares.