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Kaiser Media Watch Blog - October 1, 2015 to October 31, 2015


Kaiser Media Watch Blog enables John Kaiser to share online content from other media he deems interesting or relevant to Kaiser Research Online audiences. He collects links to such content and writes a brief explanation. The KMW Blog gets updated during the evening KRO update. After a week or so the current KMW Blog gets archived and a new one is started. Tweets are sent with a link to the item in the KMW Blog when it is of particular interest. Right clicking the JK header allows one to share or copy a link directly to that specific blog post.

Posted: Oct 31, 2015JK: Themes from Pat Sheahan's November 2015 Diamond Lireature Reference Compilation
Published: Oct 31, 2015KRO: Sheahan Diamond Literature Compilation - November 2015
Pat Sheahan's collection of diamond related references in her November 2015 issue is now available in the KRO Diamond Resource Center. The November scientific, media and corporate references are highlighted in yellow in the 2015 SDL Compilation. I introduced the KRO/Sheahan collaboration in KMW Blog Post - Oct 13, 2015 in which I also explained why the market is ripe for a revival of interest in advanced diamond exploration. We are suffering the down-side of the raw materials super-cycle which peaked in 2011 and which may require a few years to unwind the over-capacity mobilized by the mining industry. While gold cannot be analyzed in commodity cycle terms, its price is also unlikely to rise in the face of slowing global prosperity growth now characterized as "secular stagnation". The best upside hope for gold in the near term is for a geopolitical stress-related shock, for which there is ample reason to be concerned in light of China and Russia squaring off against a superpower whose leadership has a 50% chance of ending up with one of the candidates in the sack of hammers competing for the Republican presidential nomination. Gold would be rocketing higher if Hillary Clinton had not done such a good job staring down her Benghazi inquisitors and edging her chances over the 50% mark against a future opponent likely to engage Xi or Putin with blowhard nonsense. Unless they are willing to engage in sophisticated "security of supply" strategies, speculators hoping for upside via resource juniors will have to focus on discovery exploration where success is measured by a project's capacity to be profitable at the prevailing metal price.

Weakness in the diamond sector that began in the summer has rippled through to diamond producers who have been forced to cut back sales or accept reduced prices for their diamonds. The SDLC November 2015 issue, which references media articles published in October, reveals growing concern about weakening demand for polished diamonds, the emergence of synthetic diamonds as a competitive threat to natural diamonds, and a potential consumer backlash toward natural diamonds not just due to sourcing from conflict ridden regions such as the Central African Republic, but also in terms of the high carbon footprint associated with mined natural diamonds in contrast with manufactured diamonds.

The slump in rough diamond demand is largely linked to a decrease in demand from Chinese consumers where Xi Jinping's crackdown on corruption has hurt demand for luxury goods in general (see Diamond Investing News: Can Miners Buck the Diamond Price Trend 2015? - Oct 19, 2015)). But while the slump in Chinese demand can be construed as temporary, problems of a perceptual nature continue to gnaw at the future of diamonds.

The problem of conflict diamonds as a disrupter of local society has not disappeared with the implementation of the Kimberley Process, a chain of custody certification system developed by the diamond industry to keep conflict diamonds out of the retail pipeline. An in-depth article by Fellipe Abreu and Luiz Felipe Silva of Insight Crime, How Illegal Diamond Mining Threatens Brazil's Indigenous Communities - Oct 14, 2015, describes the turmoil afflicting the Cinta-Larga indigenous group in western Brazil whose reserve sits on the Roosevelt diamond "deposit" discovered in 1999. The lack of a proper legal framework enabling the Cinta-Larga to commercially exploit this diamond source, which may be a very large and rich kimberlite pipe, has resulted in an unholy entanglement of indigenous locals, artisanal miners, and criminal traders who feed the illegally mined diamonds into the black market through Venezuela which is not party to the Kimberley Process, and into the legitimate retail supply chain by blending the diamonds with supposed alluvial production from Guyana. A similar theme is raised by an 85 page report published by Amnesty International (Chains of Abuse - 2015) which uses the conflict between Muslims and Christians in the Central African Republic to argue that the KP is ineffective at keeping conflict diamonds out of the global supply chain through "export bans". Martin Rapaport, who has more than a vested interest in preserving the legitimacy of natural diamonds, urges the KP to listen to consumers in Kimberley Process: Where is it Now? published in the September issue of Rapaport Magazine.

The perception that a natural diamond purchased through a jewelry retailer cannot be guaranteed to be truly clean of "blood" plays into the hands of the synthetic diamond producers, who are also pointing out that a natural diamond carries a very much bigger carbon footprint per carat than a lab grown diamond. The diamond industry's response to news that synthetic diamonds have shown up in retail centers has been to ban synthetic diamonds outright (see Rough & Polished: Synthetic diamonds will not be considered precious stones in Russia - Oct 15, 2015) or develop detection systems so that they cannot enter the supply chain disguised as natural diamonds (see Bloomberg: Why This De Beers Lab Makes Diamonds It Will Never Sell - Oct 7, 2015). While India and Russia are trying to ban synthetic diamonds as not being precious at all, others argue that the diamond industry should embrace synthetic diamonds but insist that it be done with the condition of transparency. Synthetic Diamonds: Legitimize, Don’t Ostracize - Oct 15, 2015 by Avi Krawitz of Rapaport not only explores this avenue, but makes the case that future diamond demand from millennials will be guided by their penchant for social and environmental consciousness. The argument is that the specialness of diamond should be preserved, especially given that by 2050 natural diamond supply in all size categories will have undergone severe depleition. Naturally this reason appeals more to downstream members of the diamond supply chain than upstream producers of natural diamonds. A further danger for future diamond demand is that millennials may forgo diamonds as a luxury good in favor of expensive gadgets such as smartphones which not only have a $600 replacement cost every couple years but carry a monthly data fee easily approaching $100. Given the relentless push towards the marginalization of human labor through automation, and the concomitant decline in consumer purchasing power, this is not an idle speculation.

And this brings me back to the theme of diamond exploration which during the past two decades was entirely focused on diamond grade as the key to economic value. Because it usually takes a couple years for a grassroots diamond exploration play to reach a point where the junior can start to spend serious money and another couple years to find out if a new kimberlite has economic potential, a market shift to discovery exploration in the current context of sideways metal prices should leave diamond projects stranded on the sidelines. That is true with regard to diamond projects where the goal is to find a kimberlite pipe, but not so for previously discovered diamondiferous kimberlites that were discarded because of tonnage and grade limitations. A couple months ago Pat Sheahan sent out a request to her diamond list for updates on the use of micro-diamonds for macro grade estimation. Of the 45 responses she got 75% were requests for information on the same topic. The remainder she has presented as references with the key word "microdiamonds - responses", which for me was a walk down memory lane for I was very much part of the analyst community that struggled to make sense of the "micro-macro" results reported by the juniors. For a quick tour of the past check out Igor Kryvoshlyk's System of Mathematical Calculation of a Kimberlite Diamond Grade which points out all the nonsense outcomes generated by improper use of micro diamonds as a macro grade prediction tool. (Kryvoshlyk's idiosyncratic "slide show" does not explain his method for calculating macro grade on the basis of garnet chemistry, which can be useful for predicting the diamond payload capacity of the xenocrysts picked up by the ascending kimberlitic magma, but which cannot shed any information on kimberlite body grade determinants such as how much diamond bearing mantle xenolith was entrained by what volume of magma, how much carat weight was lost due to resorption during the ascent, and how much country rock dilution of the kimbertlite occurred during emplacement - physical processes that have no causal relationship to the chemistry of indicator minerals that grew side by side with diamond crystals). Mineral Services Canada Inc in conjunction with UBC's Mineral Deposit Research Unit is offering an affiliate short course on January 23-24, 2016 in Vancouver on Microdiamonds: Origin, Relationship to Macrodiamonds and use in Kimberlite Evaluation that will be a timely update on an evaluation method that has made tremendous progress since 1992 and whose details remain largely outside the public domain.

The next frontier in diamond deposit evaluation is the assessment of sub-populations that may not follow the lognormal size-weight distributions that define the macro grade of a kimberlite. These would be the Type IIa diamonds of very large size and quality that reside in a De Beers reject pipe called AK6 that Lucara transformed into the Karowe Mine. Historically the only way to "discover" the presence of these large high value diamonds was through commercial production where the risk existed that the recovery flowsheet was not optimized to recover large diamonds without crushing them (hardness refers to scratching, not toughness). As far as diamond discovery exploration by resource juniors is concerned, the days of getting funded for grassroots regional exploration in search of very large medium grade or small very high grade pipes are over. Most of the exposed terrains on prospective cratons have been hit hard with reconnaissance sampling; what remains are covered terrains, such as De Beers and others are pursuing in Botswana (see Wall Street Journal: Inside De Beers’s Hunt for Africa’s Elusive Diamonds - Oct 23, 2015). Juniors which acquire an existing diamondiferous kimberlite that may have potential for large Type IIa diamonds have a much better shot at getting funded than grassroots explorers. The tonnage volume of the pipe is known, as is the macro grade, but the value of a potential sub-population whose own diamond size distribution is blended into the more robust distribution of the lower quality population remains unknown. Given the emergence of mid-tier producers like Lucara specializing in "specials" for which there will always be an elite consumer market, for which it will be a long time before synthetic versions of equivalent size and quality are created, and which are never going to lose their allure as a natural diamond, juniors that deliver evidence of such a pipe will have a ready exit strategy. Whatever technical knowledge has evolved during the past decade with regard to assessing the presence of exotic diamond populations is proprietary, though that may change over the next decade as juniors revisit old discards. There are very view serious diamond juniors left; those that remain deserve close attention.


Posted: Oct 13, 2015JK: Sheahan Diamond Literature Compilation
Published: Oct 1, 2015KRO: KRO Diamond Resource Center
The KRO Diamond Resource Center is a new feature established during September 2015 that is intended to make it easier for KRO members to track down KRO comments and news releases related to companies in a specific sector, in this case diamonds. Currently I am tracking only 20 Canadian listed companies that I regard as having a primary and serious diamond focus. Interestingly, there remain very few superfluous juniors pretending to be engaged in diamond exploration compared to the hundreds that clogged the market during the nineties in the wake of the diamond discoveries in Canada's Arctic by Dia Met, Aber, Mountain Province and Winspear, Kensington/Shore Gold in Saskatchewan, and Ashton/Stornoway in Quebec. Diamond juniors lost their allure during the feasibility demonstration boom of the past decade as the market focused on advanced metal projects whose value was pegged to readily available metal prices. But even in the arena of discovery exploration the market had tired of diamond exploration because of the long timelines and heavy expense needed to establish the potential economic value of a new discovery. Today there is little appetite for grassroots diamond exploration, which is not surprising because glaciated terrains have been scoured for indicator mineral trains since the 1990's, and covered regions such as Botswana have seen nearly every geophysical anomaly lurking beneath the Kalahari Sands or thin Karoo basalt veneer poked at with a drill. The potential for discovering major new kimberlite fields is severely diminished, though hope still burns that world class loner pipes remain to be discovered on cratons known to have been blessed with a diamond stability field.

The diamond exploration focus, however, has shifted to brownfields exploration of known kimberlites and clusters where discoveries discarded by past owners as lacking economic potential are being revisited. The inspiration is not higher diamond prices, or even the hope thereof, for while long term supply shortages for gem diamonds are projected as existing diamond mines deplete, slowing emerging market growth and China's corruption crackdown have softened demand for luxury goods and weakened rough diamond prices. The inspiration comes from the realization that kimberlite evaluation has undergone gigantic strides since the early days of the Canadian diamond boom when nonsensical "results" such as single grain indicator mineral chemistry and "longest dimension" micro-diamond counts served as the basis for spending decisions. The initial decades also had a bias toward the "grade times tonnage" equation which overlooked the potential for sub-populations of very high value diamonds whose confirmation entailed expensive and statistically competent bulk sampling. The focus of today is more the re-evaluation of known kimberlites than the quest for new kimberlites.

In this regard "brownfields" diamond exploration still qualifies as discovery exploration, for although the physical kimberlite has been found, the key to economic value, namely value per carat, remains to be determined. In terms of grassroots exploration, diamond exploration cannot compete with grassroots precious and base metals exploration when a "game on" mood pervades the market. When a geochemical or geophysical anomaly yields a metal "discovery" intersection, the scope of the potential economic value in the geological context can be quickly discerned, enabling the junior to raise funds for discovery delineation at substantial premiums to prices that prevailed during the target generation and testing stages of the exploration-development cycle. But with diamond exploration the discovery of a new kimberlite kicks off another year of grade and tonnage determination, followed by at least another year of carat value determination, at which point the market finally has a basis to estimate a potential economic value range ahead of feasibility studies. If the current "glass permanently empty" mood were to switch to a "glass half-full" mood such as prevailed during the eighties and nineties, perhaps triggered by a surprise discovery involving a widely held junior that has replication implications, the market will rush into grassroots metal plays with their two year success delivery timeline while it shuns grassroots diamond exploration with its minimum four year delivery timeline.

In fact, given the current tremendous aversion to discovery exploration for metals - "why would one look for new deposits when there are so many left over from the past boom now available at a fraction of their sunk feasibility demonstration costs?" - brownfields diamond exploration has a superior attraction. The knock against the ounce and pounds in the ground projects is that until we see higher metal prices, these projects are nothing more than options on future trends over which the company management has zero influence. Bottom-fishing for these projects with a patient time horizon incurs the risk that management will succumb to a very dilutionary financing so that it can busy itself doing something other than watching paint dry, or the risk that a bigger company with a longer time horizon than management and deeper pockets scoops the junior with a buyout offer whose 100% premium to market sounds impressive when compared to pitiful treasury bill yields, but which still represents a fraction of the valuation multiple gain the project would undergo with a mere 50% rebound in the metal price. Deposits which are marginal at current metal prices are bogged down by the world's current supply over-capacity which may take several years to unwind, possibly longer if state owned enterprises resist rationalization for socio-political reasons. The potential for higher metal prices is also bucking a demand head-wind as China's economy shifts to a less capital intensive consumption basis, and the global economy's descent into secular stagnation approaches a stall threshold that could usher in a global recession for which to turn around monetary policy has no bullets left while fiscal stimulus policy remains off limits thanks to the overwhelming influence of the austerity scolds. Gold is another matter, since the 5.4 billion ounce above ground stock already sits around serving only an "insurance" function, and thus could trade at any price. But in the global recession scenario which is bad for metal prices, gold prices are unlikely to increase unless the market senses that the crisis is so severe it will force nations to ramp up fiscal spending on infrastructure renewal.

If we are stuck with an extended period of flat or possibly lower metal prices, bottom-fishing for existing deposits is not a recipe for five, ten, twenty fold price gains of the sort that have historically made resource juniors an attractive target for investors seeking high risk, high reward exposure. Past resource junior bear markets have often ended in the midst of an economic downturn when new discoveries like Hemlo, Eskay Creek, Ekati and Voisey's Bay erupt out of nowhere. The downside for discovery exploration in this context of weak metal prices is that the bar is very high for what counts as a new discovery, namely one whose grade and tonnage imply a substantial economic value using prevailing metal prices. In the case of a brownfields diamond project it may appear to have marginal value, but this marginality needs to be confirmed by exploration work that targets the diamond quality and to some degree a better understanding of diamond grade which can vary within a kimberlite body. The difference between a grassroots metal play and a brownfields diamond play is that with the former one has nothing until a target emerges and is turned into a discovery, a possibly eternal timeline, while with the diamond play one has something potentially valuable whose assessment involves a fairly clear-cut exploration program with a distinct timeline.

I constructed the KRO Diamond Resource Center because I believe the timing is good for a revival of market interest in diamond exploration, the field has been reduced to a manageable group of diamond juniors, valuations are very low compared to the diamond boom decades, and diamond evaluation is far more sophisticated and transparent than it has ever been. The main inspiration, however, came from a conversation I had with Pat Sheahan, who has chaired the diamond technical session at PDAC for decades. Pat has spent her career sifting through technical journals in search of articles related to geology, with an emphasis on diamond geology. In 2000 she donated her reference compilation to the Mineral Deposit Research Unit of the University of British Columbia which formed the subscription-based Sheahan-MDRU Literature Service. But MDRU stopped the service several years ago, stranding the compilation in limbo. Fortunately Pat had continued to compile diamond related references which since 2004 she has made available as a monthly pdf emailed to a small list of people interested in the diamond sector (see the latest monthly SLS issue - October 2015).

I have been on that list for a number of years, but found it about as useful as a printed catalog of titles whose hidden content was effectively inaccessible. If I were fully immersed in the diamond sector I would be reasonably abreast of the academic and media literature, and would look forward to Pat's monthly compilation to see if there was anything new I should track down. But my focus on the diamond sector is sporadic, requiring me to periodically immerse myself in the literature to get caught up. The problem was that each monthly issue was just a snapshot, and the idea of going back through many monthly pdfs, well, that was never going to happen.

When it became apparent that there was no commercial basis for Pat's Sheahan Diamond Literature Compilations, that it was a labor of love intended to benefit the broader scientific community, I suggested that she could reach a much larger community in a much more efficient manner if she migrated her reference compilations online to a site such as Kaiser Research Online. So Pat and I spent September migrating her 2004-2015 compilations into a digital format that is now available through the KRO Diamond Resource Center. Each year has its own web page that also includes links to each of that year's monthly pdfs. It was quite a scramble for Pat, because she had not maintained her source files in one location. They were scattered about on various memory sticks and semi-defunct old computers, but eventually she tracked down every single month and we completed the migration in early October.

Now every reference is at the finger-tips of anybody in the world with Internet access. It is not a proper database system with search functionability, such as as the KRO Search Engine which allows paying KRO members to search on the basis of company and project level critteria, but one can use the browser word search function to find certain authors or technical terms. Best of all, when I have tracked down and added the link to each reference's online location, whether it be unrestricted or free, a viewer could achieve instant gratification from any reference that caught his or her attention. In the case of scientific articles that usually requires a credit card, though because scientific articles come with free abstracts that sometimes are quite detailed, I've added those to the online version of Pat's references. Each annual compilation is sorted alphabetically by author, company or media organization, with references from the most recent monthly issue highlighted in yellow. I have tracked down the links and abstracts for the September and October issues (see the 2015 Sheahan Diamond Literature Reference Compilation), and will gradually work my way backwards. I have to admit, having all this diamond related stuff at my finger-tips has played more than a minor role in spurring my renewed interest in the diamond sector. And my hope is that others will also discover it as a gateway to renewed interest in the diamond juniors.


 
 

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