True North Gems Inc. (CVE:TGX) has the potential to tap into the gemstone market and deliver a new source of rubies and pink sapphires for customers worldwide, creating a girl's newest best friend after diamonds.
The potential is huge, according to president and CEO Nicholas Houghton, who says gemstones are not a controlled commodity, and as a result, the company has the opportunity to get in at the ground level to produce a brand and set a price.
“The gemstone sector can boom,” says Houghton, whose core expertise lies in jewellery manufacturing and design. “DeBeers created the diamond market with confidence because they had a source of stones to sell – before that, the diamond was not as highly valued as a coloured gemstone,” he adds.
True North certainly has the material at hand, with rubies, which Houghton calls the most valued of the “Big Three” – that is, emerald, sapphires, and rubies – along with pink sapphires hailing out of its Aappaluttoq project in Greenland. The property is named for its primary gemstone – ruby - as Aappaluttoq is the Greenlandic term for “big red”.
The Aappaluttoq project will be an open pit mine, and together with the installation of a process plant and associated support and infrastructure, it is forecast to produce up to 20,000 tonnes of ore per year. A rough concentrate of the mineral corundum – for which there are red and pink varieties, the latter of which is pink sapphire – will be produced at the mine site, and will be shipped for further processing at its facility in Nuuk. The resultant final product will be a mix of rough ruby/sapphire, ready for grading and sorting into sale lots.
True North is already a step ahead of other junior mining companies. The company has entered into a strategic partnership to construct and operate the Aappaluttoq ruby mine with LNS Greenland A/S (LNSG). According to the terms of the deal, LNSG commit to invest US$23 million, or approximately 60 per cent of the projected $37.4 million capex for the project in exchange for a 20 per cent stake.
Aside from the obvious cash benefits, True North is also gleaming from LNSG’s Arctic experience to engineer and build the complete mine support infrastructure, with the investment set to cover all civil engineering costs, the capital cost of pre-stripping, and the construction costs of all mine-related buildings. True North, meanwhile, will be tasked with designing and funding capital costs for the ore processing and building, as well as for the rough gem sorting and grading facility and gem marketing and sales.
Houghton describes the partnership – a feat in its own right in these challenging times for junior mining companies -- as perfectly suited for both parties. “We will retain on the operating side processing of the extracted ore as we specialise in gemstones, which includes the processing, the grading, cleaning and marketing,” he says, adding that this is quite a big deal in the fact that True North and its partner will be able to be more surgical with their extraction of the rubies than if they would have had to a hire a third-party operator to run the site. The chromium mineral found in rubies renders it less robust than many other stones, meaning it is served better in the hands of those not being paid on a tonnage basis, and whose best interest would be to blast away and deliver as much rock as possible for processing.
LNSG, as a major supplier of services to the oil, gas and mineral industry in Greenland, will stick to doing what it knows best – that is, the construction of the mine in the region it knows well. The Greenlandic company will retain the right to operate the mine site on a cost plus basis, and will be responsible for providing all the necessary equipment required throughout the mine life.
In addition to this strategic partnership, True North announced a three-tranche financing of almost $16 million to advance the development of its Greenland project, recently completing the first part of the second tranche. “The junior mining industry is not in good shape, and we have managed to keep money in the bank and push the project forward. We have proved that though times are tough, if your project can hold scrutiny and show near term production, financing can be found with hard work,” says Houghton.
The Public Hearing Process for the project’s exploitation permit, or mining permit, started in June and was completed September 12, 2013. Now that it has finished, the company can start negotiating the impact and benefits agreement, which once successfully concluded will be the final step in the overall permitting procedure.
“We’re now getting very excited, as things start to move very quickly once we get to this stage. We’ve been preparing and making sure we plan correctly for quite some time,” Houghton adds.
Indeed, the company’s work on the property dates back to 2004, when it reviewed some broad mapping done by the Danish Geological Society and “realized there was some potential there”. Houghton says the asset fit the bill of an inexpensive mine that could get “up and running” quickly, unlike a diamond mine, “which can have a much longer lead-up time, subsequently being far more costly”. He should know, having more than 35 years of experience in the jewelry manufacturing and gemstone exploration industry, having established his own operation in 1994, Elan Diamonds, which merged with Canadian Diamond Cutters to form Cadiam Investments LTD just six years later.
“We saw the potential for Aappaluttoq after our bulk sampling program in 2006, followed by drilling programs in 2007 and 2008, with the results showing the geology continued at depth.”
The gemstone explorer, which has rights to 100 per cent of the Aappaluttoq property, is looking at constructing a pit that is 200 metres in length, 150 metres wide and 70 metres deep, with hopes of beginning to market the material it has already extracted from bulk sampling later on this year. “We know we can supply material from this deposit for at least nine years, to a gemstone industry where emeralds have taken the front stage through some very good marketing.
“But no one has rubies to sell, and the potential to raise the profile of the stone is what we see for the future,” says Houghton.
The annual global market for the ruby and pink sapphire sector of the coloured gemstone industry is estimated at US$2.1 billion, with analysts predicting growth over the next decade. Currently, about 80 per cent of the global trade in rubies comes from Burma, with trade embargos against Burmese rubies in the U.S. and EU increasing demand for certifiable sources of ruby.
“Clients are looking for traceability. They want to know the material they are buying, and the company they are working with is acting in a sustainable manner that will benefit all the communities,” says Houghton, adding that True North has built and written a software program that traces the material all the way from extraction to finished goods to prove provenance of its gemstones.
“People buying from us will know the source, and the project will be endorsed by the Greenland Government. It will be similar to Canadian diamonds.” In fact, the company places a huge premium on fair trade practices and providing benefit for the Greenlandic population, by making a point of giving first priority to locals for jobs.
Houghton says that the figures hailing from the prefeasibility study for the project – which was done in a “very depressed market when prices were low” – will be firmed up upon production. According to the prefeasibility study from 2011, the company foresees an after-tax net present value of some $17.5 million for the project at an 8 per cent discount rate, and an internal rate of return of 16.5 per cent, with a payback period of five and a half years.
In 2011, Houghton says no one had done consistent marketing with the product, but since then, London-listed Gemfields has worked with emeralds in Zambia, managing to increase the price for the finer material they are selling at auction from $7 a carat to the current $52 a carat.
While prices of rubies fell from record levels in 2010, the gemstones, as recently as last year, eclipsed their previous auction price record, with the sale of a ruby and diamond ring by Chaumet, featuring a ruby weighing 32.08 carats, at Christie’s International in Geneva, selling for $6.6 million last May. Ruby prices continued to climb in 2012, with a 6.04 Burmese ruby by Etcetera selling for $551,000 per carat, or $3.3 million.
So far, the finest polished ruby produced by the company is a 0.69 carat round stone with an estimated wholesale value of US$2,100, with True North saying it isn’t possible to assess the percentage of higher-valued gems until the property has been mined for a period of time. Once mining permits are in hand, the Canadian junior will be able to cut and polish pink sapphires and rubies from Aappaluttoq, with the company having done some test work already to ensure commercial value.
“We feel our figures are on the conservative side but can only prove it once in production, as it is the market place that ultimately determines the value.
“The project is not so much about mining, but more about making sure of the quality of the product produced. We expect 20,000 tonnes of annual output of perfectly extracted material – it’s a tiny amount, but will be a product with the highest standards as we look to maximize the value of our commodity,” explains Houghton.
Aappaluttoq has a total indicated mineral resource of 189,150 tonnes, containing 59 million grams of “total corundum”, with an additional inferred resource of 21 million grams, or 109 million carats. The company anticipates that its supply will add up to about 5 per cent of the estimated $2 billion a year ruby and pink sapphire market, based on current figures.
“There has been a change in the industry since we first undertook this endeavour, and with the confidence we can bring, we believe we can take a substantial piece of that market as we develop our brand,” says Houghton. Red is seen as a cultural symbol of wealth and good fortune, leading to demand from China, India and Eastern Europe, with pink sapphires set to experience a “tag-along” effect. “The coloured gemstone industry has never really had a consistent supply of pink sapphires, and we can really build upon that with the consistency element,” he adds.
With $1.2 million of cash on hand, plus the proceeds from the financing and the strategic partnership with LNSG, True North Gems is ready to hit the ground running once it receives the mining permit, boasting a team of experienced geologists and gemologists that have been working behind the scenes for the last four years on all the work required for permitting.
“We think the ‘Google’ generation wants to find something for themselves, something different than the diamond. We will have some beautiful gemstones offering huge potential that at present is untapped,” Houghton opines.