Sunday, July 17, 2016

Numbers don't lie

Chidliak has all been about numbers and data sets and a string of events (some unfortunate, some fortunate).

Some might think the development of Chidliak has been based on the movie --

Lemony Snicket's A Series of Unfortunate Events

..maybe a very boring version of that...but unfortunate events have been endowed to the project over the years.

First off...numbers don't lie. The PEA results are preliminary in nature, but are based on very conservative numbers (some assumed, some inherited) and subsequent work has significant probability of increasing the numbers to even better then what is currently stated.

Here are those numbers:

pre-construction capital costs
 - CAD $95 million (all-weather road to site from Iqaluit)
 - CAD $283.2 million (site specific costs)
 - CAD $56.7 million (contingency)

pre-tax (@7.5% discount)
 - NPV - CAD$743.7 million
 - IRR - 38.1%

after-tax (@7.5% discount)
 - NPV - CAD$471.2 million
 - IRR - 29.8%
 - Payback - 2 years

Those numbers are extremely positive for a Phase 1 development that has plenty of upside in the tank.
But...what did it take to get to those numbers and what has happened since and what will happen in the future? History, past and present. Starting to sound like an excerpt from A Christmas Carol.


Company was created and was a majority owner of DO-27 in Lac De Gras.
Money was spent and there were some positive results out of DO-27 work, but not enough to progress it any further. The story of DO-27 is not it sounds like The Neverending Story.

Initially money was raised at $5 per share and the market did a nice gradual downdraft.
At $2 or more per share...the thought of a better market ahead was suspected and a share buyback occurred.
Didn't happen and subsequent to that, the company raised money at a lower price (unfortunate event).

Signed up with BHP and a special airplane based system to try and locate a new diamond field. This was very successful and managed to find a few potential projects. One of these being Chidliak. (fortunate event).

Some preliminary work was done on Chidliak and at the same time, a merger was being looked at between Peregrine Diamonds and its sister company Peregrine Metals.

Once CH-1 kimberlite was found and a nice 2.01 carat was found, the merger was off as a pure diamond company going forward in a new diamond field seemed to be the answer.

A discounted rights offering was completed at around 30 to 35 cents with attached warrants @ $1 and further extended for a $1.50 if not exercised.

Then CH-6 results hit the press and BHP signed up for the first option to spend x $$'s for about half the project. Many of the $1 warrants were exercised and the stock went up. A financing at higher prices took place as well. (fortunate event).  Salman Partners and Raymond Goldie become a key institutional player in the marketplace for PGD. Dundee and Ned Goodman also were getting interested.

The next summer, several new kimberlites were discovered in a program that used 2 core drill rigs and an heli RC rig and was paid for by BHP as part of the option agreement. Part of that money went to PGD mgmt as they were still in charge of operations and execution of the program (fortunate event).

Some very promising kimberlite pipes were found, but nothing that replicated the CH-6 pipe. The price of PGD drifted down to a $1 and the company executed another rights offering at around 80 cents. Expectation was to have this fully exercised as things were still positive and the 30 cent rights offering made a lot of shareholders very, very happy.

Before the rights offering concluded, BHP came out to the press and announced they were NOT continuing with diamond mines/projects and all assets in that field were officially for sale. (very unfortunate event).
This was a double whammy for Peregrine Diamonds as they just lost a partner, had to figure out where the half ownership was going to go, and the rights offering was in question as the stock price dipped much below 60 cents.

The market rebounded a bit and a good chunk of the rights offering was completed..but not all.
There was some money in the bank, but an uncertain future.

Peregrine metals (sister company) was sold out to Stillwater mining at a steep premium. Fortunate for those shareholders...but unfortunate for Peregrine Diamonds. PGD now had to pay for full rent on their office premises and some of the shared salaries with its sister company was no longer an option. (unfortunate event).

Peregrine Diamonds was able to buy back the other half of Chidliak at a cost of  a  2% royalty and a few annual $2.5 million payments to BHP. (fortunate to get Chidliak back...unfortunate that an overhang of $2.5 million was to last for a few years)

Company was getting close to running out of money and they had to do something. They portrayed having three options (Plan A, B, and C). Plan A was an option agreement with De Beers Canada and the other 2 options have never been disclosed. De Beers did a private placement with PGD at a premium and also paid for one of the BHP payments as well as paying for some work on site, including a desktop study. (fortunate event). Gravity surveys become new to Chidliak and helped add a tool (expensive tool) that could be used for future exploration.

Subsequent to the De Beers initial option commitment, Robert Friedland entered the picture via a private placement at around 40 cents. (fortunate event)

There was a steep commitment to get the next phase of the option with De Beers and the timing of it was such that the first significant stones coming out of a CH-6 bulk sample would not be available for viewing until after the option expired. That option was for about $50 million over a few years.
As that option was coming due...Anglo managed to purchase a big chunk of De Beers from the original family and immediately started closing the purse strings with De Beers and also its other entities.
With that big brother mentally of Anglo, De Beers Canada was speculated to not have the permission to exercise that option (unfortunate event). It has been mentioned in the press that De Beers Canada technical staff saw this move as a big missed opportunity.

De Beers has left, but gave some reprieve to PGD by way of an at-cost expense to process the remaining CH-6 bulk sample material at its sudbury lab before heading to the SRC (Saskatchewan Research Centre) for final recovery.

What was next? A bulk sample of CH-7 was required. Dundee was still in the game and Salman Partners hadn't said a peep for a couple of years. Money needed to be raised.
A very large discounted offering at 21 cents per share was completed and backed by Robert Friedland, Eric Friedland and Ned Goodman. This bulk sample program was needed and money was going to be raised. All shareholders had an option to participate with the three backstops.

The offering was completed and the bulk sample program was well on its way.

CH-7 bulk sample deserves its own movie of unfortunate events.
Here is a whole blog on the journey of that bulk sample -- Journey of 558 tonnes
Mother nature was not going to give up that data set easily at all.

Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.

Subsequent to the offering and may be a continuation before that, but Dundee continually sold off their positions. Dundee had problems and later on sold half (liquidated) of their assets to a new entry into the market. Selling off those PGD shares were probably more of a symptom of the business model of Dundee and the market itself as opposed to the fundamentals of Chidliak.

Salman Partners also came to the press recently and announced they were closing their business.
Both Ned Goodman and Ray Goldie have now had the business they work for or built part of...go into serious downsizing. These guys have both been around for a long time and are not the future of the institutional market anymore. That is the last big institutional influence that PGD has had and it has now been put to rest. (unfortunate).

The 2% royalty that BHP still had was tried to be transferred to the South32 entity that was being spun off of BHP. PGD did catch sight of this and tried to enact the first right of refusal. It ended up in the courts for many months and the final result was a settlement that BHP sells that royalty to PGD for a small sum and PGD was able to cancel the royalty. (turned out to be a very fortunate event that may not have occurred if the spin off of South32 didn't happen).

Another rights offering was completed at a discounted 10 cents to get the results of the CH-7 bulk sample, together with CH-6 through to PEA level and have some money still left in the bank.

PEA results get released to the market in summertime and the numbers don't lie. They are robust and have significant upside to grow. A lot of fortunate and unfortunate events were taken to get here..but they weren't over yet.

Conference call on the PEA results were scheduled and with the lacking of institutional following, this was one opportunity to get together with analysts and shareholders for a debrief of the PEA and a subsequent Q&A. The presentation was strong and at the end, the operator opened up the questions and stated verbally to the Tom Peregoodoff that there were no Questions in the queue. This was factually wrong as there were a lot of questions in the queue, but the operator missed something. A lot of times, the operator can be contracted out by the teleconference company and be set at a home office with a headset, and a computer application that links into all the features to host the call. Human error or computer problems could easily be blamed here. Tom Peregoodoff ended up closing the call, not knowing the queue did exist...but emphasized that questions could be submitted to Peregrine or Tom or Eric and they will be answered.  The market took the lack of Q&A as a bad sign and gave it as a signal to sell the stock.

Pausing here and acknowledging that all these unfortunate events have had nothing to do with the quantity, quality and finally, economics of the Chidliak kimberlite pipes themselves.

If past is any sign of the future, how does one actually contemplate an investment in Chidliak?
The background noise with PGD is off the charts and shareholders alike have lost any sort of context between the true fundamentals and what could possibly hit Chidliak next.

Those PEA numbers do not lie and if all those fortunate and unfortunate events were needed to get to this point, so be it. Now it is up to the investment community to decipher the numbers and try to look past the noise. Acknowledging the true fact that most of those unfortunate vents were completely external and out of the control to PGD itself.

Without these unfortunate events, there may not have been a way for a junior explorer to own 100% of all rights to a project that has a PEA of close to half billion CAD $$'s and at the same time own all the claims in the vicinity of the PEA kimberlites and the associated 74 kimberlites and undisclosed number of drilling targets. A junior company owning just 20% of this might have the same market capitalization that PGD has today...but in that case, the other 80% would be the one bearing the fortunate/unfortunate event stigma and not PGD. 

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