Diamonds at Over 6 Carats P/T and the Market Doesn’t Care

December 1, 2015

Within days of Dunnedin Ventures (DVI.V) announcing what looked like exceptional diamond results from the Kahuna Diamond Project, near Rankin Inlet, Nunavut, Lucara Diamonds (LUC.T) announced the recovery of an 1100 carat diamond from their mine in Botswana. This huge diamond news from Lucara created a lot of buzz for diamonds and diamond stocks, Lucara’s stock took off and Dunnedin’s stock is trading like they have little more than caribou pasture.

Before moving on, I need to make some disclosure. I used to be a strategic advisor to Dunnedin, I left the company after disputes with Chris Taylor, President and CEO of Dunnedin and the board of directors. I wrote a post about my side of the story here and I’m also a shareholder of the company.

 

In a bleak market for resource stocks, Lucara brought a lot of investor attention to diamond stocks, the timing was good to have news out of high-grade diamonds. Especially when Dunnedin was trading around five pennies, with less than a CAD $2 million valuation. So when Dunnedin announced some of the highest grade diamond results in Canadian diamond history, you would have thought they would have seen a move to a much higher valuation.

 

As in many things in life, the devils in the details, and in diamonds that is definitely true. In a news release on Nov. 23, 2015, Chris Taylor encouraged investors to compare these diamond results with other Canadian diamond projects. If you look at the reported sample grade, it has a higher grade than the highest grade diamond mine in Canada.

 

On Nov. 12/15, Chris Taylor stated, “These are some of the best diamond results reported in Canada and distinguish Dunnedin’s Kahuna project as having kimberlites with both high grades and large diamonds,” in a news release announcing the diamond results from the summer exploration work.

 

Initially, the market on that day traded a lot of shares, there was some new buying but also a lot of selling pressure. The day after and since there has been no follow through momentum. With those results, if the market had confidence in the reported sample grade the stock would have plenty of momentum. No matter how bad the market is for resource stocks, there are still plenty of diamond investors out there, look at how the market reacted to the big news from Lucara.

 

Why was there a lack of follow through? In the Nov. 12 news release, they mentioned photographs of the diamonds were being taken and images would be posted on the website in the coming days. Not having them ready when the news was out is a stumble for a diamond company with significant diamond results. It is also a red flag for seasoned investors in diamond stocks.Taking pictures of the stones and getting them up on the website shouldn’t take long at all, the lab where the work has been done has seen a lot of diamonds over the years and taken plenty of pictures of them.

 

If you went to Dunnedin’s website, which is a key tool a public company uses to market their projects and disseminate news to shareholders and potential new investors, you would have found it took a week to update the website with the news release of the diamond results, and another few days after that to prepare a document with images of the diamonds. I know this because I had to send an email to one of the companies largest shareholders and Chris Taylor to let them know the news release and the pictures of the diamonds hadn’t been added to the website. I also pointed out the leadership of the company was dropping the ball when it comes to marketing these diamond results. Shortly after that they got them up on the website.

 

The market knew something was wrong when those pictures of the diamonds weren’t put out quickly when they had “some of the best diamond results reported in Canada.”

 

The answer to why they were in no hurry came on Nov. 23 when they finally got around to putting out a news release and providing a document with the images of the diamonds. If you look at the largest “stone” it is actually difficult to call it a diamond, it is more like a ball of tiny little diamonds. It has been awhile since I looked at the CIM guidelines for reporting diamonds, but calling that a diamond and including it in the parcel of stones to include in the sample grade is pretty iffy as far as I’m concerned.

 

Regardless of what you call it, the value of the stone is close to zero.

 

In the sample taken of 820 kg, the largest “diamond” weighed 2.22 carats and the total amount of stones recovered was 5.34 carats. Close to half of the sample grade is made up of what is questionably a diamond. The second largest stone is better, but not very good, in the small diamond sizes, there are better looking stones, but it looks like there could be breakage issues.

 

Reporting the diamond results the way Chris Taylor and the board did is further evidence of their lack of experience in diamonds. There is an old saying in the stock market that you want to under promise and over deliver. The reporting of these diamonds the way they did is over-promising with a likelihood to under deliver.

 

It also highlights another issue, the diamond distribution curve and the stones at this stage give an indication of what will come if they take a larger sample. Based on these stones, you have to guess the big stones from the PST kimberlite won’t carry much value. I still think it is too early to come to that conclusion, a larger sample is needed, preferably from other spots in the kimberlite that will give a clearer picture on the grade and valuations of the diamonds.

 

It is safe to say, promoting these results like you have one of the best diamond projects in Canadian diamond history is a stretch and not exactly the best way to gain the confidence of shareholders or the community of diamond investors and the diamond industry. The diamond world is a tightly knit community built on trust, it is crucial to have the trust of shareholders that leadership can steer the company through this challenging business. It is also important to have industry confidence, this is already a project that had previously been worked on by others, it doesn’t need to be hampered by over promoting the diamond news to try to drive the stock price higher.

 

When a diamond company sends in a parcel of diamonds for valuation, most of the value will come from the largest stones, the market seems to have done the math and it doesn’t add up as rosy as having some of the best diamond results in Canadian diamond history.

 

As always, my commentary on the market and individual companies is for information purposes only, before making any investment decisions it is important to do your homework and speak with your financial advisors.

 

I still have shares and plenty of friends that also own the stock, I haven’t lost faith in the project, my concern is with leadership guiding the company, their lack of diamond experience is painfully obvious and expensive for all shareholders.

 

Allan Barry Laboucan

 

 

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Not Investment Advice

It is important for you to understand, Allan Barry Laboucan is not a licensed investment advisor and all readers should consult a licensed investment advisor before making any investment decision and to consult the company’s latest regulatory filings to fully understand the risks. This site represents the opinion of Allan Barry Laboucan alone. Do not trade in securities you read about online unless you have independently verified all information and understand that speculating in small, speculative securities like those discussed on AllanBarryReports.com often results in total loss. Readers are responsible for their own trades.