By Ragnar Haagen

Shore Gold feasible, but needs to see more green

Oct 17, 2011 | 6:42 AM

A study released in response to a feasibility report on Shore Gold’s proposed diamond mines shows that with the right help, the company could be very lucrative.

“I took an interest in this some time ago when Shore Gold originally discovered the kimberlites in the Fort a la Corne region,” said Barry Allan, senior analyst with Mackie Research.

“At that time, there were considerable questions marks about whether there was potential for an economic diamond mine in Saskatchewan. The reason for that is these are somewhat different kinds of kimberlite or diamond inference kimberlite occurrences in the world — in the sense that they’re very different from what you find in other regions of Canada. They are very large, but relatively lower grade, compared to diamond deposits in Northern Canada, so the economic approach to exploiting these kinds of deposits is quite different.”

The economics will be the biggest hurdle for this project, especially for the up-front capital cost. It is expected to cost around $2 billion and Allan says for a company that has a market cap in the $200 million range — that could be a problem.

“That means it will need a big brother; it will need a moneyed up, major mining company to step in and really carry this to the goal line,” Allan said.

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“It will take someone like Newmont Mining (who showed early interest) or a major mining company of the world, and I would suggest that refers to someone like a BHP, Tech Cominco, or Rio Tinto to really have the horsepower. It will not be Shore Gold by itself.”

While the stock has fallen nearly 40 per cent this year to close at 49 cents, Allen continues to believe in the company’s potential, as evidenced by his ‘buy’ signal. He also has a target price of $2 per share based on Shore Gold’s feasibility study that concluded there is a reserve of 279-million tonnes of kimberlite, containing 34.4 million carats.

“I can argue for a $2 underlying value, but that’s not what’s being reflected in the market place at all,” Allan said.

“The feasibility study shows in detail that there is an economic diamond mine, so that question has been removed from the markets mind. The part has not been removed is how you’re going to fund it.”

Allan said that even if the company had the money in their pocket today, there is so much to be done that it must be looked at in a three-to-five year timeline.

“You’re talking about 2016 timeline on this project. It’s all positive in the detail feasibility that show there is an economic proposition here, but we still need someone to fund it, and build it. And that skill set is a very different skill set from someone who finds it and takes it to feasibility.”

The biggest thing that Allan took away from the feasibility study is that there is an economic diamond mine here in Saskatchewan and that was contrary to what a lot of people in the industry had been thinking.

Shore Gold is a Saskatoon-based junior mining company whose primary asset is an undeveloped diamond resource that may be one of the largest kimberlite fields in the world.

rhaagen@panow.com