By Marc Davis, Managing Editor
May/June, 2003

10.23 Carat Diamond Recovered From
Fort À La Corne Kimberlite 140/141

Kensington Resources Ltd. (TSX.V-KRT) (www.kensington-resources.com) is a well-respected junior exploration company that is sitting on top of the world's largest diamond deposit. In fact, Kensington and its partners control a whole cluster of huge diamond-bearing kimberlite pipes. And they're not in some desolate overseas outpost. Remarkably, they are all located in central Canada. The world's pre-eminent diamond experts, De Beers, are certainly impressed enough to commit big money to this joint venture. In fact, for De Beers' Canadian exploration division, this high-stakes project glimmers with the prospect of becoming the world's largest diamond mine.

Located in the Fort à la Corne region of the prairie province of Saskatchewan, a field of 70-plus kimberlite pipes has been the focus of this epic treasure hunt for well over a decade. To date, a total of over $27 million has been spent on exploration by the joint venture partnership. It consists of Kensington (42.25%), De Beers Canada Exploration Inc., (42.25%), Cameco Corporation (5.5%) and UEM Inc. (10% carried). The partnership's numerous kimberlite pipes comprise 121 claims, sprawling over 280 square kilometres or approximately 57,000 acres of table-flat countryside.

Indeed, this prolific diamond field hosts the largest concentration of diamondiferous kimberlite in the world. Remarkably, over 70% of these 69 pipes are diamond-bearing, while half of them contain statistically significant macro-diamonds. (stones larger than 1 mm) This amounts to an estimated mass of nearly 10 billion tonnes of geologically prospective diamond-laced rock. That's quite a daunting figure. By comparison, De Beers' Victor pipe in northern Ontario, which is expected to become Canada's next diamond mine, is comprised of about 25 million tonnes of ore-grade rock.

Among the partnership's exploration highlights to date has been the recovery of a 3.335-carat diamond. Found in 2001 near the surface of the "flagship" 140/141 pipe, it confirms the presence of high quality, gem-sized stones and is valued at US $450 per carat. Moreover, this discovery is especially significant in that gems in excess of one carat are quite rare and can greatly enrich the overall value of a deposit. The prospect of finding more multi-carat stones is proving to be a powerful incentive for the partnership to advance the project in 2003 closer to a production decision.

Many of the highly promising Fort à la Corne pipes remain largely unexplored due to budget constraints. But a small handful has been singled out for detailed examination during the last several years. The highest priority pipes are those whose grade forecasts indicate the presence of commercial-sized stones. These include the 122, 140/141, 147, 148 and 150 pipes. Of all of these, the standout candidate for a commercial deposit at this time is the mammoth 140/141 pipe - the largest in the world. Originally believed to be two adjoining pipes, the 140/141 kimberlite complex has a surface area that covers 250 hectares and contains over 500 million tonnes of diamondiferous rock. This compares with an average surface area of between two and three hectares for each of the producing pipes at the Diavik and Ekati diamond mines in the Northwest Territories. These multi-billion dollar pipes are very representative of the size of commercial mines around the world.

In stark contrast, the Fort à la Corne pipes are virtually unprecedented in terms of their huge mass. This is because Saskatchewan pipes have escaped erosion (unlike pipes elsewhere in Canada) and remain almost completely intact. Protected by thick sedimentary layers left by an ancient inland sea, they have huge surface area, which is both a blessing and a concern for the joint venture partnership. By way of explanation, it makes for the prospect of prolific, relatively low-cost diamond mining operation. But until then, it also involves exhaustive work in determining where exactly the diamonds are concentrated in such large mineral bodies.

It's a challenge, however, that the partnership is very capable of handling - especially with De Beers' bringing to bear its 100-years-plus of diamond hunting expertise.

"The resource here, the potential resource, is by far the largest in the world. But we have a huge amount of work to do before being able to make a decision about mining here," Richard Molyneux, President and CEO of De Beers Canada Corp. announced in late 2002.

"They certainly are, by a long way, the largest diamond deposits known anywhere in the world. That introduces all sorts of positive aspects in terms of the options for very large volume mining operations."

His remarks don't just refer to the scope of the project. They also allude to the fact that the project is located in an easily accessible area only 65 kilometres (40 miles) from the town of Prince Albert. This industry-friendly town functions as a service, retail and distribution centre for northern Saskatchewan's resource industries - mining, forestry and agriculture. An airport, a well-developed highway, a railway service, and ample power sources all contribute to offering ideal infrastructure for a major mining operation.

Also, huge producing pipes tend to have a long mine life - meaning big profits and significant job opportunities for such an economically under-developed region. And the cost of running an open pit mine in central Saskatchewan with solid infrastructure and close proximity to large towns would be a fraction of the cost of operating in the Northwest Territories and other remote regions.

The project also benefits from a high level of government and public support for the mining industry in general. Indeed, this particular project has even received the seal of approval from Lorne Calvert, the Premier of Saskatchewan. He sees the obvious economic advantages not just for the region but also for the whole province. After all, an open pit mine would cost close to $1 billion to build, along with a mill facility, with much of this expenditure benefiting the local economy. Also, a total of 800 to 1,000 jobs would be created. And the joint venture partnership would likely realize about $500 million in taxable annual revenues.

Thus, with all the right dynamics in place for a mine, the emphasis is now on Kensington and its partners to make this "win-win" scenario a reality. But to do that, they first have to get a clearer picture of the grades and stone counts of their best pipes. To this end, a total of 251 drill holes have been completed with 4,290 tonnes of mini bulk samples excavated as of the end of 2002. Bulk samples establish the parameters of grade and stone quality. The process consists of taking large samples of rock from different facies (beds) of a pipe to get a representative idea of its overall diamond content. It's a very inexact science, especially since diamonds are often chaotically dispersed throughout a pipe. So, De Beers' initial calculations are really no more than rough estimations at best. Regardless, De Beers has made some early computer-modeled extrapolations of what the rock is worth.

A cautiously optimistic scenario for the 140/141 pipe suggests a value close to $150 per carat and a grade range of 0.20 to 0.25 carats per tonne. This translates into values of around US $30 per tonne but the early stage of evaluation makes grade and revenue calculations highly speculative. On the basis of industry-quoted numbers, Kensington estimates that operating costs could go as low as US $10 per tonne, making for gross profits of about US $20 per tonne. And with an anticipated daily rate of production of between 40,000 and 60,000 tonnes of ore from the 140/141 pipe, alone, that would make for significant cash flow. The prospect of putting other pipes into production could easily double or triple the mine's output.

However, the biggest criticism of the project to date has been the initial grades of the 140/141 pipe. Yet, a grade of 0.20 to 0.25 carats per tonne is actually similar to De Beers' wholly-owned Victor pipe in Ontario, which is tiny by comparison. Nonetheless, it is expected to be a full operational diamond mine by 2006. Admittedly, the rock value for the Victor pipe is projected to be a much higher US $60 per tonne. Having said that, it needs richer rock as it is only 1/37 of the size of the 140/141 pipe and would be more expensive to mine from an engineering and logistical perspective.

De Beers' modeled values for macro diamonds from kimberlite 140/141 also range from US $20 to $220 per carat - a wild variance suggesting the need to do more systematic bulk sampling in 2003. However, core drilling in 2002 has shown several new phases of kimberlite and an increase in geological complexity from that seen in previous drilling. Continued bulk sampling of these new areas of kimberlite could reveal a number of enriched zones in the body (pipe).

Indeed, such work is crucial to increasing the confidence of grade forecasts and valuations, as well as revenue modeling estimates. The case for an accelerated and more extensive bulk sampling program in 2003 and beyond is especially timely in light of the newly-defined geological complexity (at least four phases of kimberlite) in the 141/140 body, as well as the considerable variations in diamond size distribution.

Meanwhile, a 1,272-tonne 2002 bulk sample program consisting of the large diameter drilling of three 36-inch and five 24-inch drill holes within the 141/140 kimberlite body is expected to go a long way towards extrapolating such invaluable data. And these results, which are expected in late spring, should infuse some sizzle into the project, according to Kensington's President David Stone.

"I think, as was the case in 2002, the diamond recovery will reveal good gem-quality diamonds that are bigger than what we have seen in the past," he says.

Indeed no one is more anxious to see these diamond counts than Kensington's technical team. Experts with the mining junior are very optimistic but still have some concerns that De Beers' grade forecasts may have erred on the low side. This is due to the small diamond sample accumulated to date and a lack of systematic sampling across the breadth of the 140/141 kimberlite body. (It appears to be a valid concern that is echoed by other independent diamond industry experts that SmallCapMedia spoke with).

"As for moving forward, we need to sample the pipe more thoroughly than has been the case to date. There could be any number of enriched zones that may produce good-to- impressive-sized diamonds like the 3.335-carat one that was found near the pipe's surface. Interestingly, that facies of the pipe hasn't been bulk sampled at all as De Beers believes that the best diamonds are likely to be found at depth," Stone adds.

"But the important thing is that we are making solid progress in understanding the potential of the pipe. And as a group, we all believe that there will be a mine here. Otherwise, we would have walked away years ago."

Meanwhile, Stone is keen to point out that key exploration decisions do not rest solely with De Beers. The conservative-minded diamond cartel has been accused in the past of taking a plodding, dogmatic approach -- rather than an innovative one -- to exploring these enigmatic kimberlite pipes. In fact, the partnership trio makes all exploration decisions multilaterally. And that is why Kensington has stacked its management and advisory team with seasoned, highly regarded natural resource industry professionals, particularly in the diamond industry sector.

David Stone, Kensington's affable President, has undertaken the task of assembling such an illustrious team. He, himself, has over twenty years of experience in mining and mineral exploration. This includes a decade of experience as a director and officer of a number of publicly listed natural resource companies. Also a Kensington director, Mr. Stone has served as President since June 1997.

The company also benefits from the considerable experience of fellow director James Rothwell. He was President and CEO of Dia Met Minerals Ltd. between 2000 and 2001. This famed diamond junior was a founding partner in the multi-billion dollar Ekati Diamond Mine and is credited with the mine's discovery. Mr. Rothwell successfully implemented the board of directors' decision to sell the company at a significant premium for its shareholders. Prior to that, he worked for nearly 15 years for the global mining powerhouse and the majority owner of the Ekati Mine, BHP Minerals. His tenure with BHP culminated in being appointed President of the company's diamond division, BHP Diamonds, from 1997 to 2000. Mr. Rothwell led BHP's entry into the diamond industry via the development of the Ekati Mine -- Canada's first ever diamond mine. All told, he has over 25 years of experience in corporate strategic planning and business development in North America and overseas.

Also, the company's board of directors is further strengthened by the involvement of Bill Zimmerman who has more than 30 years of experience in the mineral exploration business with the major mining companies BHP Minerals and Utah International. In 1994, he became instrumental in the development of the Ekati Mine's marketing program. He later also served as President of BHP Diamonds and became a director of Kensington after his retirement from BHP in 2001.

A key member of Kensington's technical advisory team is Professor Peter Nixon, PhD. He is an Emeritus Professor at the School of Earth Sciences, University of Leeds in the United Kingdom. Regarded as a world authority on diamonds and diamond exploration, Professor Nixon has written over 100 scientific papers and two books on the subject. Furthermore, during his distinguished career, he has been actively involved in diamond exploration in all of the world's renowned diamond producing regions. Most recently, he has co-authored several important documents on the geology of the partnership's extraordinary Fort à la Corne diamond pipes.

On a technical note, Kensington has 48.96 million outstanding (54.56 million fully diluted) with a market cap of approximately US $25.5 million or Can. $38 million. SmallCapMedia believes that the company's share price is significantly undervalued. We're not alone in this assessment. For instance, John Kaiser, arguably North America's most astute analyst of diamond exploration and mining companies, has assigned a theoretical project value of between US $200 million and US $500 million to the Fort à la Corne project. With Kensington's 42.5% interest in this venture, this suggests the company's market cap should ideally be three to eight times higher at between US $85 million and $212 million.

Meanwhile, with the company's share price languishing from a lack of substantial news over the winter period, it appears to have found support near its two-year lows. This suggests a consolidation phase has been entered from which the share price has solid upside potential on the likelihood of encouraging news from the 2002 bulk sample results. Any positive news regarding these diamond counts will likely prompt the partnership to embark upon an ambitious 2003 exploration and development program. And that, in itself, should act as a further catalyst to revitalizing Kensington's share price. Accordingly, SmallCapMedia believes that Kensington's share price is poised to make appreciable gains throughout the balance of 2003 once the 2002 bulk sample results are announced.