Archangel Diamond Corporation (ADC), the Toronto-listed junior diamond miner, headed by De Beers lawyer Jonathan Dickman, has trapped itself in an awkward contradiction over the value of its Russian asset, the Grib pipe in Arkhangelsk region. The contradiction also appears to have been relevant to share trading in mid-May, when nearly a million ADC shares exchanged hands, causing a sharp drop in the price.

On April 29, the day after Toronto Stock Exchange trading in ADC shares recommenced after a six months suspension, ADC was reported as telling Street Wire the company would begin technical work that would lead to what amounts to a feasibility study by 2010. A production decision would follow the expected favourable result, with engagement of contractors and the start of construction beginning early next decade (emphasis added).

If ADC was expecting a favourable result on April 29, it did not appear to be thinking so on April 8, when the NI 43-101 Technical Report, prepared by De Beers analysts Johan Ferreira and WEolf Skublak, signed off on their Net Present Valuation of the project, along with estimates of the diamond value in the Grib pipe, if mined to the 1,000-metre level.

The Ferreira-Skublak report reiterated what ADC had already said in the wake of its agreement with LUKoil to end litigation over the Grib pipe, and to jointly develop the diamond mining project over the next several years. De Beers is paying $100 million at closure of this deal, which will give it a 49.99% stake in the project; another $75 million after feasibility studies and mine plans are approved for project go-ahead; and a third instalment of $50 million on commercial diamond production at the site.

ADC and the De Beers technical report now claim the Grib mineral resource comprises a large indicated mineral resource estimated to contain 50.2 million carats at US$105 per carat and an inferred mineral resource estimated to contain 24.3 million carats at US$119 per carat to a depth of 774 metres below surface. This sums to $8.2 billion.

But there is more: by extending the resource at depth, the estimated resource represents an overall increase in diamond content from the 67.4 million carats of +1mm diamonds, at an average diamond value of US$79 per carat, first reported by Archangel in 1999. And more still: located directly below the estimated inferred and indicated mineral resources, an additional potential mineral deposit has been estimated to contain 6.8 million to 12.9 million carats at US$118 per carat to a depth of 1,050 metres below surface, such estimated tonnage, grade and diamond value are conceptual in nature as they result from insufficient drilling to define a resource. If it's possible to mine to the thousand-metre mark, that makes a hypothetical addition of $1.5 billion, for a grand total of $9.7 billion.

The heightened value caused the ADC shares to jump in price  from 35 Canadian cents on October 31, just before suspension, to C$2 on April 28. Very little volume was traded, as if ADC shareholders were waiting for even better news. This didn't happen. Instead, on May 1, ADC released the NI 43-101 technical report. Then, on May 13, according to a North American market source, 960,400 shares (1% of the 85 million shares on issue) were sold by Canaccord. Canaccord was also the buyer.  

The market source believes the New York Firebird fund -- with 19%, the largest ADC stakeholder after De Beers -- was involved. Firebird was moving shares from one fund into another, likely to create a loss or gain for the 'seller', depending on what was needed for tax purposes or to boost earnings.

That appears to be wrong. James Passin, who has supervised the ADC stake for many years at Firebird, was asked to say if Firebird had been trading ADC shares last week, and with what outcome. He told Mineweb: We had nothing to do with the block trade in May.

The current share price is C$1.46, down 17% from the recent high.

The seriously dampening news in the technical report on Grib is that the net present value (NPV) of virtually every imaginable application of pit design number 1, calculated according to a half dozen interest rates, turns out to be negative. The NPVs have been figured for ADC's 50% less one share in the project, after taxes and royalties are paid, and including withholding taxes
of 10%.

Pit design number 2, according to Ferreira and Skublak, reduces some of the negative NPV's. But most of the new NPV numbers are in the double-digit millions of dollars; at very best, they fail to produce an NPV of more than $398 million.

A Russian mining source said that NPV mine estimates can be calculated to show negative value on the basis of small samples, and sizeable statistical deviations. A well-known example occurred in the same area in 2005, when SRK assessed the Lomonosov diamond field project of Severalmaz, an Alrosa subsidiary, in negotiation with Benny Steinmetz.

The appearance of a successful deal is also important for ADC's financial advisor, NM Rothschild, and possibly other intermediaries. In the small print of ADC's latest financial report, drafted by Deloitte on April 9, and released on April 29, it is revealed that the Corporation has sought the assistance of financial advisors. For the latter a settlement, which is deemed to be in the best interests of shareholders, would result in an element of success based reward up to a maximum payable amount of $2.5 million (emphasis added).

There are recriminations, nonetheless. A market source familiar with ADC claims there is a scheme to keep the price of Archangel stock low, so that De Beers and Firebird will gain an advantage over minority shareholders, or potential Russian raiders.

But if Firebird wasn't behind last week's trade, who was?  A summary of the reporting requirement for insider trades by the Ontario Securities Commission says: Generally, provincial securities legislation requires any insider (generally, a director, senior officer or a significant security holder) of a public company or similar entity (reporting issuer) to file reports disclosing the insider's direct or indirect beneficial ownership of, or control or direction over, securities of that company, and any changes in that ownership.

If the poor NPV estimates of the technical report are credible, LUKoil may be persuaded not to wait for a bigger sampling and improved numbers, before selling out. This can be arranged, despite the lockup provisions of the April; agreement, if LUKoil is directed by the Russian government to do so.