The BarkerLetter

Greetings investors!

I haven’t posted since April, when I decided to take a time out pending the inevitable correction in world markets. Not that we’re in the process of that, I’ve renewed my interest in the mineral stocks. I think we’re in for a sustained period of growth.

I’m particularly excited about diamonds. The forecast to 2015 of a 3% annual rise in diamond demand has not changed, and as no important new discoveries have been announced, a substantial supply shortfall is predicted within five or six years.

Friends of this newsletter know I’ve been following Canada’s expanding diamond play since its inception in the early 90s. I’m still optimistic that a number of new mines will be found and exploited in the Northwest Territories over the coming years.

One of my favorite projects is the former Tli Kwi Cho pipe, the DO-27, which has been subjected to on-again, off-again exploration for some 15 years.

I like projects that have an exploration history because as exploration technologies evolve, they stand a greater chance of being rendered profitable. Moreover, having a warehouse of historical drilling data is very comforting for the investor. The DO-27 is a also located within hailing distance of BHP Billiton’s multi billion dollar Ekati pipe cluster, which is another good thing.

In fact we had some news from DO-27 project recently when Peregrine Diamonds (PGD.TSX-V) finally released the grades from last summer’s bulk sampling program.

The results were mixed in my view, but largely positive.

The company hoped for a total yield of + 3,000 carats but actually got 1,724.57 carats; that doesn’t qualify as ‘barnburning’ results, though it’s not bad either. The good news is they confirmed the grade there at 0.89 carats per tonne, and snagged a handful of fancy yellow gems as well.

The average weight per stone was rather small at 0.094 carats. However, some are of exceptional value, including a 4.35 carat fancy yellow gem, the first to be recovered there. The twenty largest diamonds in the package range from +2 to +9 carats each, and 12 of those are gem quality.

Grade can be deceiving in terms of the economics of a diamond project. It is quite possible for a mine to be profitable not from the average value of its stones, but the extremely high quality of a mere handful of them. However, finding those is more luck than science, which doesn’t make much of a case for the stock.

In any case we’re still a long way from an economic appraisal of the DO-27 project, although the signs are encouraging. Previous bulk sample estimates there have ranged from 0.90 carats per tonne in 2005 to 0.88 carats per tonne in 2006. That continuity of grade there is grounds for going the distance. Moreover, there was a follow up surprise some days after the initial press release when PGD confirmed that newly discovered kimberlites located below the main diamond bearing unit of the northeast lobe are diamondiferous.

That is good news indeed, since it suggests the potential money pit has the potential for an extension. The area below 204 meters was thought to be mostly granite.

With it’s stock price still under $2 per share, Peregrine is one of the most exciting exploration plays for the money in my view. Diamonds are a great story: they are always in demand, and their pricing doesn’t follow the gut wrenching ups and downs of other commodities such as gold. It’s true that the story tends to fade from view during times of high mineral prices, but the discovery of an economic diamond mine is big news in any kind of market.

Moreover, I think somebody, (hopefully Peregrine!), is going to discover something big, and soon. You can’t have the drills turning as long as they have without bumping into something exciting. The rising tide will lift all boats.

An even better value than Peregrine is Dentonia Resources (DTA.TSX-V), which has a percentage of the DO-27 but still trades under a dime. We didn’t see a significant rise in the share prices of either company, which means the story is still bubbling beneath the surface. I’m looking for a gradual rise over the coming months as the results of additional work are released.

Dentonia qualifies as a buy under my top down investment system: the right commodity, the right place (Canada’s NWT has arguably the best gems in the world, plus the DO-27 is spitting distance from a world class producer, the Ekati), and mostly, the right price.

- Kevin Barker