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Lithoquest Diamonds Inc (CVE:LDI) CEO on Key Drill Targets at North Kimberley Diamond Project

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Lithoquest Diamonds Inc (CVE:LDI) is a diamond exploration company primarily focused on its North Kimberley Diamond Project in Western Australia. CEO Bruce Counts discusses the site’s potential for diamond discovery. During the company’s first drill program in 2018 kimberlite was found, which indicates the site has diamond-bearing sources. Lithoquest has identified 15 to 20 key targets for its upcoming drill program and Counts wants a 30 percent success rate for hits. Counts notes that the company raised $5 million during its RTO and he expects this year’s drill program to cost approximately $2 million. Counts addresses current commodities pricing and the potential for diamond projects to be exceptionally profitable. He notes that Rio Tinto Ltd’s (OTCMKTS:RTNTF) (FRA:CRA1) Argyle mine, which produces 40 percent of the world’s diamonds, will be coming off the market in a few years, and this should raise the value of lower quality diamonds.

Transcript:

James West:   My guest today is Bruce Counts. He’s the CEO of Lithoquest Diamonds Inc., trading on the TSX Venture under the symbol LDI. Bruce, welcome.

Bruce Counts: Thank you very much.

James West:   Bruce, as the name suggests, you’re in the diamond exploration business. Give us an overview of your projects and status.

Bruce Counts: So the company is relatively new. We started trading on the Venture Exchange at the end of November 2017, and was really predicated on some very strong evidence that there was a new field of diamond-bearing kimberlites on a project in northwestern Australia. So it’s quite remote; it’s in the very north part of Western Australia, but we have great access to the property through a road, and then we’re also on tide water.

But the real reason for capturing the project was based on some rocks that were collected in 2007 by a colleague of mine that had kimberlite indicator minerals with chemical compositions that suggested that diamonds should be present in the kimberlites in that field. So that was the impetus for creating the company and capturing the project and moving it forward.

James West:   And is Australia historically a diamond producer?

Bruce Counts: It is. One of the world’s largest producers, called Argyle Diamond Mine, which at one point was producing 40 percent of the world’s diamonds by volume, is located in western Australia about 300 kilometres from our project.

James West:   Oh! Well, that’s promising.

Bruce Counts: It is.

James West:   And so, is the diamondiferous kimberlites that you’re exploring in the same geological setting as Argyle Mine?

Bruce Counts: No, it’s a bit different. Argyle is actually a lamproite, which is a related rock to kimberlite. So kimberlite is the primary source for diamond, and it’s just a rare type of volcano; lamproite is a related rock, but they tend to occur on cratonic margins. So cratons are the oldest part of the Earth’s crust, and they’ll occur on margins, whereas we’re in the middle of the cratons. So we’re expecting a more bona fide kimberlite as opposed to a lamproite.

James West:   Okay. And so, what kind of diamonds have you discovered so far?

Bruce Counts: Well, the diamonds that we found so far, we found some in a rock sample that we found on surface, as well as some in the stream sediment samples, and certainly that’s very encouraging in terms of believing that there are diamonds. In this part of Australia, there’s been no glaciation. So you know, the only thing moving things around here are wind and water; we’re also up on a plateau which is above the surrounding plain by sort of five to 30 metres, which means, you know, if you’ve got diamonds up on that plateau, the thinking is there’s got to be a local source.

We’re not the first to find diamonds up there. The place has been explored periodically off and on for the last 40 years, and other companies have found diamonds, including a 1.7 carat stone, up on that plateau. So there’s lots of evidence that there was a kimberlite around, there was just nobody had found any.

The occurrence of finding boulders up there, and now we’ve established we’ve got four locations where we’ve found boulders with kimberlite indicated minerals, and we’ve also found the diamonds. This is pretty strong evidence that there’s a field of kimberlites. In 2018, which was our first field program as a publicly traded company, we drilled our first kimberlite; it was actually the first kimberlite drilled in Australia in 25 years. And while it didn’t have any diamonds in it, it does confirm that there’s a field of kimberlites there.

So what’s important to know about diamond-bearing kimberlites, or kimberlite fields, is that kimberlites first of all occur in fields; and a field can be anywhere from a few kimberlites to more than 100. In a productive field in general, less than 10 percent are economic. So you’ll have, you know, a field of 100 kimberlites and less than 10 will be economic. So it’s not unusual to find bearing kimberlites within a field, as well.

So for us to have found a kimberlite in the first drill program is a great win for us. No diamonds, but that’s not that surprising given that there are diamonds all over the property and the indicator minerals we’ve been finding in boulders, which are widely spaced on the property, suggest that there are diamond-bearing sources there, is great encouragement for us to keep moving.

James West:   Okay, so is this a case of, you’re going to have to, you know, drill a grid to find where to zero in on which ones might be diamondiferous, economic kimberlites, or do you more establish drill targets through another means?

Bruce Counts: Yeah, it’s a little bit more strategic or surgical than that. We’ll, we’ve identified nine areas on the property where we either have boulders with kimberlite indicators in it, diamonds, or kimberlite-indicator, like, high quantities or concentrations of indicator minerals in the soil that suggest that there’s a kimberlite very close to that area.

So we’ll go in with ground geophysics, primarily magnetics and gravity, to establish targets, and then bring a drill in later on in the season and drill-test those targets; the idea being, you want to try sort of 15 to 20 targets with the hopes of having, you know, 25 or 30 percent success rate of hits.

James West:   Interesting. How much have you put into the exploration program in terms of money at this point? How much do you have left, and how much are you going to need to get to the next level?

Bruce Counts: So we raised 5 million on the go-public round, which was an RTO. We spent about 2.5 million on exploration, 2.5 million to 2.8 million on exploration last year; we still have 1.5 million in the treasury. I expect that we’ll spend a little less than we did last year; we’ve, you know, last year was our first season, so there was a little bit of a learning curve on how to operate efficiently, but I think we’ll be a lot more efficient this year and the program, we’re expecting sort of a $2 million to $2.2 million program will get us not only the geophysics but a drilling program that would allow us to test 15 to 20 targets.

James West:   Hmm. And I imagine in that region of Australia, it’s a year-round proposition?

Bruce Counts: No, actually, it’s not. There’s a wet season that starts at the beginning of December and runs until the end of March. So as an exploration company, we wouldn’t operate through that season. You could, it’s just, it’s very, it’s stormy because you get monsoonal rains, and it’s very hot, so 45 degrees with 100 percent humidity.

So you can operate through that time, but you just have to be, you know, it’s like operating in the high North; you just have to be prepared to operate through those difficult conditions.

Our real field season is, begins in the middle of April and runs until, you can effectively operate until the end of October and sometimes into November; it’s just about when those rains will start.

James West:   I’ve followed diamond companies for most of my investing career, and the one thing that I’ve noticed is, it takes a long time to prove up an economic diamond find.

Bruce Counts: Sure.

James West:   And I mean, we’re talking 30 years here, in some cases, in worst case scenario, we’ll call that. So how do you – what do you say to investors when you’re raising money? Like, is the proposition that this is a long-term investment?

Bruce Counts: Well, obviously, you know, we want people to be thinking a little bit longer game; it’s not just a one or two year program. That said, you know, we discovered a kimberlite in our very first drill program, which isn’t unusual in Canada where you’ve got glaciation and you’re generally tracking these kimberlite indicator minerals back to source before you can establish a target and drill.

You know, we’re in an area where, again, there’s no glaciation. So the fact that we’re getting boulders and indicator minerals suggests that we’re very close to exactly where the sources are. So I would like to think we’re not that long – I mean, from my perspective, three to five years should give us a pretty good window on what we’re sitting on here, whether or not we’ve got diamondiferous kimberlites, and can we find them, are they big enough – to answer all those economic questions.

James West:   Wow. Then, the investor appetite for diamond exploration plays, is it robust? Is it tepid?

Bruce Counts: I would say tepid at best. You know, look, it’s the riskiest in a risky business, there’s no question. But if you can find a diamond mine, they can be exceptionally profitable. A great example is the Ekati diamond mine in Canada. You know, Diamet, which had a 29 percent stake in that mine, their stock went from $0.65 to $65.00 in 18 months, and that was through that discovery period. That’s really where you get the biggest lift, is where you’re finding the kimberlites and also establishing they’ve got a decent diamond content. You know, it was a $900 million CapEx in the Arctic, in the barren lands, so really rough conditions, but the payback time was 18 months. So it was making $600 million a year in profit even in those conditions. So they can be exceptionally profitable, and that’s what excites investors. And if you can convince them that the potential for that kind of discovery exists, then you’ll find investors that are willing to participate, and certainly, that was the case for us.

James West:   What is the condition generally of the gem-grade diamond market?

Bruce Counts: So that’s a complicated question, because unlike gold, you know, gold’s got one price; it’s for gold per ounce. In diamonds, there’s 1,500 categories of diamond. So in the world of diamonds, what is considered, they’re called the smalls, or smaller carats and generally lower quality, those prices have suffered pretty significantly; they’re down, you know, 50 percent in the last few years. But in the larger stone categories, so the 2 carats and the white, really good gem quality, the prices there are very robust.

So it just depends on what part of the market you’re producing, your stones are, you know, filling. If you’ve got those really nice quality stones, things are going really well. If you’re dealing with the smalls and the lower quality goods, it’s been a bit more challenging. Sort of the light at the end of the tunnel for those companies, those miners that are producing those smalls, is that Argyle Diamond Mine, which was producing 40 percent of the world’s diamonds by volume, but only 5 percent by value, which means they were producing a lot of those smalls. That mine is due to come off production and close down in a couple of years, so that will dry up all of that production, and that would then sort of give the companies that are still producing those smaller, lower quality stones, a better market, and should lift the price. At least in theory, that’s what the expectation is.

James West:   Hmm. And so, has the ownership of the Argyle Diamond Mine not undertaken exploration to try to prolong the life of the mine?

Bruce Counts: They certainly, I’m sure they have; this is owned by Rio Tinto. And, you know, I think they’ve done what they can to increase the life of that mine, and I think it’s gone already past expectations. And Rio Tinto, because they only have Argyle and 60 percent stake in Diavik, which is the second mine in Canada, they’ve become fairly aggressive in looking for other projects, if you will. So you know, I’d like to think that our project has the right sort of metrics that would attract a company like De Boers or Rio Tinto, or some of the – 20 years ago, there was only a couple of producers; now there is a range of producers, including mid-tier producers. So even if you’re not hitting the bar for the large projects that would move the needle over a Rio Tinto or a De Boers, it might become attractive for one of the mid-tier producers.

So certainly, Rio Tinto, I think, would be watching with interest what we’re doing; we’re right in their backyard, if you will.

James West:   Right.

Bruce Counts: But I’m quite certain that other companies are watching with interest, as well.

James West:   Sure. All right, Bruce, that’s a fantastic introduction to the company. We’ll leave it there for you and come back to you after more what we hope will be drilling success, and follow the story. Thanks for joining me today.

Bruce Counts: Thank you.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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