Diamond exploration is heating up across the country, and this year the really big money is going to Saskatchewan.

Partners De Beers Canada Mining Inc. of Toronto (42.25%), Kensington Resources Ltd. of Vancouver (42.25%) and Saskatoon-based Cameco Corp. (15.5%) are sinking $25.6 million — about five times more than they spent last year — to further explore and evaluate their Fort à la Corne (FALC) property in central Saskatchewan.

Next door, Shore Gold Inc. of Saskatoon is launching a $43-million pre-feasibility study of the Star kimberlite, which straddles the border of the two landholdings.

The goal is to outline enough high-grade zones to justify production at FALC, a huge kimberlite field that contains some of the world’s largest kimberlite bodies but has yielded disappointing grades.

“What we’ve found is that there are higher-grade zones that are something like three times the average grade of the pipe.
Because the pipes are so big, those zones can be quite large — 30 million tonnes or more,” says Andrew Williams, De Beers Canada’s senior project manager for FALC.
“If you can focus your early mining efforts on them, it improves cash flow in the early stages of the mine and you can pay off capital. The lower-grade rock then becomes more attractive.”

He says the joint venture raised the ante at FALC, once the better results from these zones were combined with forecasts of worldwide diamond shortages.

Some South African mines are reaching the end of their lives, while major operations in Botswana will be forced to go underground in the next decade. Lack of supply translates into higher prices, which, in turn, makes deposits that may have seemed marginal a few years ago look much more attractive.

“The other thing Saskatchewan has going for it is that you’re surrounded by infrastructure,” says Williams. “Compared with any of the northern mines, you have it all: power, roads, people, rail.”

The joint venture’s annual exploration budget could balloon to $40 million in 2006 and 2007 in order to outline a resource of 70 million carats within three high-priority kimberlites, says Catherine Gignac, a mining analyst with Wellington West Capital Markets Inc.

But big expenditures do not necessarily translate into an accelerated timeline. Even if all goes according to plan, De Beers Canada does not expect FALC to reach production for another 10 years.

Shore Gold can afford to be more aggressive on the adjoining property because it is evaluating just one kimberlite.
While the FALC joint venture will not reach the pre-feasibility stage until 2008, Shore Gold has already launched a pre-feasibility study to establish mineral reserve for the Star kimberlite. Star returned more than 4,000 carats from a 28,000-tonne bulk sample extracted last year.

The Saskatchewan play became even more intriguing in March, when Denver-based Newmont Mining Corp., the world’s largest gold miner, bought a 9.9% stake in Shore Gold for $50 million. Shore Gold is a good catch for Newmont because it represents an opportunity to participate in the lucrative diamond market without diluting current Newmont shareholders, says Wendy Yang,
Newmont’s director of investor relations.

She points out that Newmont has held interests in non-gold assets, including diamonds, since its takeover of royalty-holder Franco-Nevada Mining Corp.
in 2002 and is open to other “small investments in diamonds from time to time.”

Some analysts speculate that gold miners
are looking to diversify into the diamond industry because their growth is impeded by the scarcity of large, low-cost gold deposits.
Not long after Newmont’s unexpected move, rival Barrick Gold Corp. of Toronto invested up to US$10 million for a 20% stake in Diamondex Resources Ltd. of Vancouver, which has several diamond exploration targets in Canada’s North.

“This would be a very positive development for Canada, if the gold producers take a serious interest in adding diamond production to their portfolios,” says John Kaiser, a newsletter writer who follows the Canadian diamond scene from his office in California.

Diamonds were first discovered in the Fort à la Corne area in 1987; two years later, Cameco discovered seven kimberlite pipes through drilling. Over the years, the kimberlite cluster has swelled to more than 70 bodies, 70% of which are diamond-bearing. But until recently, the FALC project progressed at a glacial pace as De Beers Canada strived to get a handle on the complex geology and diamond-grade distribution within the field.

@page_break@Exploration efforts were further hampered by a 100-metre blanket of overburden, the remnant of a large inland sea that once covered the kimberlite field. Drill holes that did penetrate the overburden produced uninspiring results: grades were low and the macrodiamonds needed to make a diamond deposit economical were scarce.

But last year, Shore Gold shook up the camp by spending $8 million to sink a 250-metre shaft into the centre of the Star kimberlite for bulk sampling. The gamble paid off, yielding more than 4,000 carats with numerous large stones — including a 5.4-carat transparent yellow octahedron, a 4.8-carat flawless white diamond and a 19.7-carat fragment.
The sample had an average grade of 0.14 carats per tonne and a modelled value of US$135 per carat.

The results alerted investors to the potential of the area, allowing Shore Gold to raise $116.5 million for further exploration and shifting the Saskatchewan play into high gear. Kaiser says the new challenge for Shore Gold will be to replicate the grades found at the heart of Star as drills move to the margins of the pipe to “prove up” a 200-million-tonne resource. “That’s the big question: whether or not what it got near the vent maps out to the periphery of the kimberlite,” says Kaiser. “That’s what this big pre-feasibility study is designed to prove.”

The other active company in the area is Forest Gate Resources Inc. of Montreal. The tiny junior has staked 43,000 hectares to the southeast and along the same trend as the FALC kimberlites in hopes of identifying a second cluster. It is also drilling a diamond-bearing kimberlite and other targets on its nearby East Side property.
IE