THE DIAMOND PAGE — Chinese diamond deal revised

Amendments have been made to an option agreement allowing Kensington Resources (KRT-V) to buy 50% interests in three diamond joint-ventures in China’s Shandong province.

The agreement affects Kensington and four other companies: VVSI, China Best (Asia), Crystal Bright (Asia) and China Diamond. The Chinese government holds the remaining interest in the projects, which account for more than half the country’s diamond production.

The revised agreement changes the schedule for advancing loans to the three joint ventures and allows time for Kensington to obtain necessary approvals.

It also reflects a change in the corporate structure of one of the partners.

Kensington now has the option of buying from China Diamond (a company owned 30% by Robert Friedland) all outstanding shares of a numbered company incorporated in the Bahamas. That company, to be named Win Luck (Bahamas), now holds all the shares of VVSI, China Best and Crystal Bright.

VVSI holds a 50% interest in Changma Diamond, China’s largest operating open-pit diamond mine. China Best holds 50% of the 702 Joint Venture, a 1,600-sq.-km area surrounding the mine, while Crystal Bright holds a 50% interest in the 703 Joint Venture, a 1,500-sq.-km area south of the Changma mine.

“Security is weak at the mine,” says Kensington spokesman Judy Ryan. “Workers have been known to show up for work with big cuffs on their pants [to smuggle diamonds].” She adds that the recovery technique currently in use is unsatisfactory in that many of the larger diamonds end up crushed.

The company plans to increase annual production to 250,000 carats from the current 45,000 carats. Ryan says Kensington’s is the first mining licence ever issued by the Chinese government. Flour Daniel Wright is conducting a technical evaluation and an operating plan for all three projects.

Kensington has exercised its option to acquire the Win Luck shares, and must close the transaction no later than June 2. It will deliver 25 million common Kensington shares to China Diamond, as well as $6 million in debentures.

Kensington will also provide US$2.4 million in non-interest loans directly to the three joint ventures.