My interest in Canadian diamond exploration and search for value led me to Gren Thomas and North Arrow Minerals, the subject of this post. It’s a collaboration with my friend Tommy Humphreys, founder of CEO.ca, whose video interview with the Canadian diamond pioneer can be seen here.
North Arrow Minerals has all the attributes I look for in a junior exploration company, including high-quality projects, topnotch management with a track record, heavy insider ownership, good share structure, and cash in the bank. I’ve been building a long position in the stock in recent weeks. As it turns out, North Arrow chairman Gren Thomas has also been buying, most recently 50,000 shares at 60 cents on Sept. 26.
Enjoy!As a young boy, long before the hunt for buried treasure in the frozen reaches of the Canadian North and the discovery of one of the world’s richest diamond mines, Gren Thomas’s adventures took place mostly in his imagination.
Thomas grew up in Wales, coal mining country. And he was captivated by the exploits of Biggles, a children’s book hero whose exploits included piloting mineral prospectors to remote corners of the globe.
His own adventures began in earnest after he immigrated to Canada in the early 1960s. The young mine engineer, who was working at the Giant mine near Yellowknife, accepted an invitation to join an Arctic exploration crew that was short a geologist.
“I thought, ‘Well, this is a pretty good life. I’m canoeing around the place, and there’s caribou and wolves and I’m prospecting. The weather’s beautiful and I’m getting paid for it – it’s like being on holiday! After that I got the bug and I could never settle back into mining.”
“I got the bug in the summer of ’65.”
The grin that accompanies this statement is testament: his (unfinished) story in Canadian mineral exploration is every bit as fascinating as the fictional adventures he loved as a child.
Thomas moved in quickly after Chuck Fipke announced that his Dia Met Minerals, along with joint venture partner BHP, had found diamonds at Lac de Gras in November 1991. He was familiar with the territory through previous exploration efforts.
“I made the phone calls and got the crews lined up and Chris and I were up there within 3 to 4 days,” Gren recalls. “We stayed in separate places so no one would see us together and put two and two together.
“Chris went in with a crew and we staked what amounted to about 6 or 700,000 acres immediately adjoining the BHP ground. This was in November and so daylight was fairly limited and it was very cold, probably 30 to 40 below, and dark.”
Thomas’s Aber Resources made its diamond breakthrough at Lac de Gras in the spring of 1994, when a field exploration team that included his daughter Eira Thomas and Robin Hopkins drilled a discovery hole that included a diamond in the core.“I get this phone call from the camp, from Eira, saying, ‘Don’t do that financing, I want to speak to you first,’ ” he says. “I could tell by talking to her that there was something up, but I didn’t expect to see her to show up in Vancouver with a piece of core with a diamond sticking out of it.”
The discovery helped establish Canada as a diamond powerhouse, a major factor in pushing De Beers from its perch atop the global industry.
Investors are certainly glad Thomas made the trip across the Atlantic. Aber traded for dimes before Thomas and partners began hunting for diamonds, and one of the company’s first financings after staking a huge swath of the Northwest Territories was at $1.00 a share.
But the stock surged after the legendary discovery of the Diavik kimberlite pipes, and Aber successor Harry Winston Diamonds later peaked above $50. (“Diavik” is a combination of diamonds and West Viking, one of Thomas’s prior companies.)
The Diavik mine is expected to produce 6.5 million carats this year for operator Rio Tinto (60% owner) and Aber successor Dominion Diamond (40%).
Thomas is most famous for Diavik, but that wasn’t Aber’s only big score. It says something about his career accomplishments that a $173-million asset sale – one made possible by those early staking efforts – is a rarely mentioned footnote.
Aber owned a 32% interest in Randy Turner’s Snap Lake diamond project, which was discovered by Turner’s Winspear Resources and turned into an underground mine by De Beers.
In 2000, Turner’s Winspear sold 68% of the Snap Lake project to De Beers for $305 million. A year later, Aber got $173 million for its 32% share.
Canada’s diamond mines:
1. Ekati, NWT. Canada’s first, discovered by Chuck Fipke (Dia Met Minerals) in 1991. Opened in 1998. Dominion Diamond bought majority interest after BHP’s move out of diamonds.
2. Diavik, NWT. Discovered after Aber geologists Eira Thomas and Robin Hopkins insisted on one more drill hole in the spring of 1994 as the ice was breaking up, yielding a diamond in the core. Opened in January 2003. Very high-grade resource.
3. Snap Lake, NWT. Discovered by Randy Turner’s Winspear Resources (68%) in 1997. Sold by Winspear and Aber (32% owner) to De Beers. Opened in 2008 as De Beers’ first Canadian mine. Underground.
4. Victor, Ontario. De Beers’ second Canadian mine opened in 2008. Large kimberlite field, low-grade resource with a population of valuable stones.
Advanced-stage Canadian projects:
1. Gahcho Kue, NWT. 51% De Beers, 49% Mountain Province Diamonds. Largest new mine under development globally. Commercial production scheduled for 2016.
2. Renard, Quebec. 100% owned by Stornoway Diamonds, which is one-third owned by an arm of the Quebec government. Commercial production scheduled for 2017.
NOT DONE PROSPECTING
His exploration successes landed Thomas in the Canadian Mining Hall of Fame and made him a wealthy man.
But the Welsh immigrant with the passion for prospecting is not done with diamonds – or grassroots mineral exploration – just yet.
His latest diamond play, North Arrow Minerals (NAR.v), emerged from a reorganization of Strongbow Exploration. Under the leadership of CEO Ken Armstrong, North Arrow is advancing several projects in Canada’s North, including two that Thomas is quite excited about.
Qilalugaq, a large-tonnage deposit in Nunavut, hosts a population of yellow diamonds that is now being processed ahead of valuation. Pikoo is a grassroots discovery made last year in northern Saskatchewan that had exceptional diamond counts for such an early-stage project.
Both were optioned from Stornoway Diamond, formerly run by Gren’s daughter Eira Thomas, and are 80/20% owned by North Arrow/Stornoway.
Eira, now CEO of Kaminak Gold and a special advisor to North Arrow, led the field exploration team that discovered the Diavik kimberlite pipes and is an established mining executive in her own right.
Gren Thomas considers himself a prospector first and foremost. “There is nothing now like the amount of grassroots exploration that used to go on when I first started, and most of the things I’ve been involved with, we found right from the beginning,” he says. “I don’t tend to go out and find things that have been worked on before, I tend to do grassroots.”
But the assembly of North Arrow’s projects shows that he also knows a thing or two about leveraging exploration dollars spent by others.
The companies that advanced North Arrow’s projects spent more than $40 million over the years developing them. Qilalugaq, for example, has an inferred resource that was delineated by former Ekati majority owner BHP.
It was Eira’s idea to explore the possibility of optioning Stornoway exploration projects that were languishing in the shadow of Renard, Gren explained.
“Eira suggested we should start to look at some of these diamond projects now that no one was paying a lot of attention to them,” he said. “There were a lot of orphaned diamond projects out there two years ago.”
“It’s hard to believe now, because all of a sudden there’s a diamond thing on.”
The “diamond thing” could gain steam quickly if the 1,500-tonne mini-bulk sample collected recently from Qilalugaq’s Q1-4 kimberlite proves up a population of fancy yellow diamonds.
Qilalugaq: Reasons for optimism
- Population of rare yellow diamonds in smaller sample.
- At 12.5 hectares, largest kimberlite in the eastern Canadian Arctic.
- Existing inferred resource estimate of 26.1 million carats (modelled from surface to 200 metres);
- Just 7 km from tidewater, and 9 km to Repulse Bay.
A (YELLOW) COMPANY MAKER?
You might say the Canadian diamond pioneer is seeing yellow. Or as he puts it, “(Qilalugaq) is potentially a company maker, right now.”
An earlier 64-carat parcel of Q1-4 stones contained a full colour range of yellow diamonds, from light yellow to fully saturated.Since Q1-4 has a diamond grade – .54 carats per tonne – below Canadian averages, the presence of valuable yellow diamonds in the 500+ carat parcel will be key to establishing the value of the stones.
How rare are yellow diamonds? Fewer than 0.1% of all diamonds are yellow. Rarer still are stones so vivid and intense they can be categorized as “fancy yellows.”
Consider this: a single mine in Australia – Kimberley Diamonds’ Ellendale mine – now produces half of the world’s yellows. And a glimpse at the impact of Ellendale’s yellows on the mine’s economics is revealing.
Yellows make up less than 15% of Ellendale’s production but account for 75% of the mine’s revenue. In dollar terms, Ellendale’s yellow diamonds fetched US$4,525/carat in Kimberley’s most recent quarter, compared to an average US$684/carat for all diamonds sold.
Put simply, if Ellendale didn’t have yellow diamonds, the mine probably wouldn’t exist.
Until recently, Kimberley had an offtake agreement with Tiffany, probably the world’s most iconic purveyor of yellow diamond jewelry. That agreement has ended and Kimberley sold its most recent batch of yellow diamonds via auction.
Qilalugaq is subject to a one-time back-in right that allows Stornoway to increase its interest from 20% to 40% through a payment of three times North Arrow’s exploration costs.
Thomas is also excited about the Pikoo discovery, describing it as a “classic exploration success.”
“The regional work is done, the right geology, you narrow it down to a drill target, then you put the drill in the ground,” he says. “It’s a great story.”
North Arrow hit kimberlite in nine of 10 drill holes, and a 210-kg sample of drill core yielded 745 diamonds larger than the .106-mm sieve size, including 23 larger than .85 mm.
“The initial grade and the diamonds we’re seeing in those first three holes, you won’t see anything better in a discovery. They really are good.”
North Arrow has identified new drill targets that it will test in the first quarter of 2015.
Pikoo: Reasons for optimism
1. Grassroots discovery with high initial diamond counts.
2. 10 kilometres from infrastructure.
3. New drill targets to be tested in early 2015.
THE LUNDIN CONNECTION
When North Arrow receives its Qilalugaq valuation, one of the world’s most successful resource entrepreneurs will be paying close attention.
Billionaire mining tycoon Lukas Lundin owns a 20+% stake in North Arrow through Zebra Holdings and Investments, a Lundin family trust.
According to Lundin, the upside in North Arrow shares could be tremendous with a positive Qilalugaq valuation.
The Thomas family retains strong links with Lundin, a tie forged during the formation of his African diamond play Lucara Diamond. Despite a recent pullback, Lucara stock remains one of the diamond market’s rock stars, with a one-year return of 100% on the strength of large, high-value stones pulled from its Botswana mine.
Eira Thomas was instrumental in the formation of Lucara and remains a director of the company, as well as one of its largest shareholders. She told the Vancouver Sun in a recent interview she is “very bullish” on the company, describing CEO William Lamb as a “great CEO.”
“I think he’s going to build a strong foundation for the future,” she said.
Lamb, as a North Arrow director, also has a stake in the success of Qilalugaq.
Just as Thomas’s North Arrow Minerals has caught the attention of Lundin, Thomas has been watching Lucara’s successes with an appreciative eye.
“Lucara’s an outstanding diamond company,” Thomas says. “I’m hoping, of course, we can do something similar with North Arrow here.”
ALL IN THE FAMILY
If Thomas can manage to replicate Aber’s success with North Arrow Minerals, his daughter will likely again be an important part of the equation.
Eira spent a lot of time with her father prospecting and getting mud on her boots in the North, both before and after enrolling at the University of Toronto, where she switched to geology after a year of biology. Gren’s work ethic and positive attitude seems to have rubbed off.
“I’ll never forget, I was walking through Calgary airport and she was about 14 and coming to work with me up north,” he recalls. “We were talking about careers and stuff and I said, ‘Look, you can do anything you want, don’t forget that.’
“She listened,” he added with a smile.
Thomas’s son Gareth is also involved in the exploration game as a director of Westhaven Ventures (WHN.v). Gren is president and CEO of Westhaven, which is advancing early-stage nickel and gold projects in British Columbia.
In March of this year, Westhaven announced the results from its inaugural drill program on its BEN nickel property that included 70.6 metres grading 0.31% nickel and .012% cobalt.
More recently, Westhaven’s share price has bucked the market downtrend. Shares hit a 52 week high of 14 cents on September 24th on the back of assays from a recently completed 1258 metre, 11 hole diamond drill program at BEN.
Although there has only been limited drilling to date, Thomas believes the potential for large tonnage exists at the property, 50 kilometres north of Williams Lake (between Taseko’s Gibraltar copper-gold mine and Imperial Metals’ Mount Polley).
That could grab the attention of the market, especially in a nickel bull market, Thomas says. “It’s got legs, I think. I have a suspicion there could be some very large tonnage of this material.”
Drill results are pending from Westhaven’s Shovelnose gold property south of Merritt. The company drilled six holes for a total of about 662 metres. Prior drill hits included 50.4 metres of .54 g/t gold and 4.77 g/t silver.
Shovelnose has geography on its side – the project is located right beside the Coquihalla Highway, a major B.C. freeway.
NORTH ARROW, THE STOCK
To describe North Arrow Minerals as “under the radar” would be something of an understatement. The stock has a 52-week range of 34-84 cents and the insider ownership/strong hands ensures the microcap is very thinly traded. In the event of positive news, that should give North Arrow shares powerful momentum.
Some days, no stock changes hands. The stock has also seen bursts of unusually high activity.
When diamond counts from the Pikoo discovery were announced, the stock surged from 40 cents to the 80-cent level, before settling back down.
During times when the stock languishes, Gren Thomas often adds to his stake in the company. Most recently he purchased 50,000 shares at a price of about 60 cents on Sept. 26. He owns a 13.5% stake in the company, according to INK Research data.
According to the latest North Arrow corporate presentation, there are about 50 million shares outstanding and North Arrow has about $7 million in the bank, giving the company an enterprise value of just $23 million. The Qilalugaq valuation and Pikoo winter drilling program are fully funded.
Kennady Diamonds, a spinoff from Mountain Province, may be the closest comparable to North Arrow Minerals, despite their differences.
Both companies are run by experienced teams and have deep-pocketed major shareholders. Kennady’s flagship project, Kennady Lake, is earlier-stage than North Arrow’s Qilalugaq. But preliminary samples from its Faraday and Kelvin kimberlites have shown exceptional grades. According to Kennady’s latest corporate presentation, a maiden resource estimate will be released before the end of the year.
Kennady shares, however are trading near 52-week highs and have returned about 60% in the past year. The stock is trading at the $8 level with about 23 million shares outstanding and $4 million in cash, for an enterprise value of about $184 million.
North Arrow Minerals has double that amount of money in the bank and an enterprise value of just $23 million.
For that, you get:
- second-to-none board and management team that has both discovered and developed diamond mines.
- In Qilalugaq and Pikoo, advanced and grassroots projects with plenty of blue sky.
- Call options on a portfolio of several other projects besides Qilalugaq and Pikoo.
- High insider ownership levels.
The macro fundamentals of diamonds are solid. Rough prices are increasing, few new mines are coming online and demand growth is robust in both the United States – still the world’s largest diamond jewelry market – and China.
Word is getting out on the Canadian diamond explorers as well. In May, Dundee issued a bullish diamond report initiating coverage on five Canadian diamond names, including North Arrow Minerals (the others are Mountain Province, Stornoway, Kennady and Peregrine). In a recent update focusing on Pikoo, Dundee Capital Markets described North Arrow as “one of our preferred diamond explorers.”
One way to mitigate the high risk inherent in diamond exploration investing is a basket approach. However, if we had to own only one diamond exploration stock, it would be North Arrow Minerals.
Disclosure: James and Tommy own shares in North Arrow Minerals, a high-risk exploration stock. Always do your own due diligence as you are responsible for your own trades.