Business Review

Background

Thirteen years ago your company and its joint venture partner, Spider Resources Inc., undertook a program to locate diamonds in Ontario at a time when diamonds were only just being discovered and developed in the Northwest Territories. The Joint Venture partners were the first junior companies to locate new kimberlites (7 pipes/bodies) in the James Bay Lowlands after Monopros, the Canadian exploration arm of De Beers Consolidated Mines had located 16 kimberlites there.

The Victor Diamond Mine, owned by De Beers Canada, is the next diamond mine expected to enter production in 2008. It is located 90 km west of the coastal community of Attawapiskat, Ontario situated on James Bay. Year-round access is available by air or a 350-km winter road.

The Victor Diamond Mine has a reported reserve of 27.4 million tonnes with an average grade of 0.23 carats/tonne (ranging between 0.20 – 0.30 carats/tonne). The average value per tonne is estimated at C$117 implying a value of US$300 per carat, for a total project value of C$2.2 billion.

The mine will produce at a rate of 7,000 tonnes per day from an open-pit mine with processing in an on-site dense media separation plant. At the average grade the expected life of the mine will be 12 years; with a total project life of 17 years. The diamond stones recovered will be shipped off-site for valuation and sorting.

KWG has identified 5 diamondiferous kimberlite pipes on its MacFadyen claims (all part of the Attawapiskat Kimberlite Swarm which hosts the now 18 known De Beers pipes.). The MacFadyen Pipes are in close proximity to each other (all within 1.5 km) and occur along the same lineament structure as the Victor Mine. Over 200 sample diamonds (micros and macros) have been recovered to date through drilling done in 1994 and 2003-2004 by Ashton Mining of Canada and KWG. The geochemistry of the known KWG pipes is considered analogous to that of the Victor pipe.

Recently, KWG and joint venture partner Spider Resources, have entered into an agreement with De Beers Canada whereby:

1. KWG and Spider will provide a surface easement for installations extending from the Victor Mine across the MacFadyen property;
2. De Beers will provide access to exploration and transportation equipment and services available at Victor for 5 years;
3. De Beers will also process a bulk sample of up to 500 tonnes between 2009 and 2013, and will provide KWG and Spider with data from any new geophysical survey that De Beers may conduct over MacFadyen.

Over the years the Joint Venture has accumulated a vast quantity of geological and geophysical data. Data was acquired over a 12,600 square kilometre area on the western edge of the Carbonate platform that covers the James Bay Lowlands and in 2000-2001, Monopros formed a Joint Venture with us to assess the data and the area it covered for other diamond sources.

Regrettably none of the 13 holes drilled by Monopros intersected kimberlite; however, one did intersect massive sulphide mineralization later to be designated as the McFaulds #1 occurrence or showing. This discovery kicked off a whole new chapter in the development of KWG. Since this discovery in 2001 the Joint Venture has demonstrated that the McFaulds Lake Greenstone Belt has the potential to host significant base metal deposits. Several targets selected from the airborne survey proved to host economically significant grades of copper and zinc (discussed below) and there are many more that we believe are yet to be discovered.

In the Wawa area, which is experiencing yet again another round of diamond exploration interest due to results published by Dianore, the Joint Venture partners continued to methodically assess the diamond potential of the unusual geology found on our claims. To date, a total of 1,017 diamonds have been recovered from 62 individual prospecting samples taken at 33 locations on the property. Of these, four are possible commercial stones.

Of the forty-seven (47) different diamond occurrences identified on the property:

• 8 have returned grades of 0.25 carats per tonne,
• 4 have returned grades of 0.5 carats per tonne and,
• 1 has returned grades of 2.61 carats per tonne.

A 0.33 carat diamond was recovered from one of the Bulk samples taken for testing last year.

After a couple of false starts and several months of discussion the management of each of the Joint Venture partners agreed to a realignment of our respective interests, in the Joint Venture Projects. As a consequence KWG will return to its roots and focus on the continued exploration and development of the MacFadyen Diamond occurrences, to earn a higher interest level than currently held, whilst having our interests eventually diluted to the 331/3% level in the McFaulds Lake and Wawa Projects. As implied elsewhere herein, management believes that the MacFadyen Kimberlite Pipes in the Attawapiskat Diamond Field offers the best opportunity to add shareholder value in the shortest possible time. KWG can earn up to a 66.7% interest in the Project by incurring the next $3.9 million in exploration expenditures.

MacFadyen Project

The five mining claims comprising the MacFadyen Project are located within a contiguous De Beers claim block hosting the Victor mine (within 8 kilometres), Tango and Tango extension kimberlites (within 1.5 kilometres). De Beers has spent in excess of $100 million on the Victor Mine project and they have received final environmental approval to develop the Victor Mine. This approval sets the stage for further development in the area.

Of more particular interest to the Company is that De Beers has drilled the Tango Extension kimberlite immediately adjacent to the MacFadyen Property (1.5 kilometres to the west) and reported “encouraging results” (see map below). During the winter of 2002-2003, a 360 metric tonne sample was taken from this body, by drilling three large diameter holes as part of the De Beers Victor Extension exploration project.

Location Access & Infrastructure Development

The MacFadyen Project is located along the Attawapiskat River in a remote part of the central James Bay Lowlands. Fuel, food, camping equipment and personnel need to be flown into fully equipped all-season self-sufficient exploration camps. Charter air service is available from Nakina (~350 km distant to the SW), using float planes in the summer and ski or wheeled aircraft in the winter.

Presently, there is no permanent infrastructure on or near the MacFadyen Property. Future development of the MacFadyen Project might be accomplished by winter road haulage along the south bank of the Attawapiskat River from the community of Attawapiskat to the east (~100 km distant) to the De Beers Victor Mine site which is approximately ~8 km to the SE of the MacFadyen Property. Subject to the permitting process, this winter road system could be extended to the MacFadyen Project site.

Attawapiskat Regional Geology And Kimberlite

In common with all pre-Cambrian shields worldwide, kimberlite ages in any given region are likely to be variable. The MacFadyen #1 kimberlite was age-dated at the University of Alberta using U/Pb methods, with a result of 256.3± Ma. This is a Carboniferous age, in keeping with the penetration of the Attawapiskat kimberlite swarm through the Hudson Platform Palaeozoic cover (limestones and clastic sediments).

The five MacFadyen kimberlites are among 23 known kimberlite bodies that are aligned along a fairly strong NW-trending magnetic lineament - a strike that is crudely parallel to the faults of the Lake Timiskaming Graben farther SE on the Quebec border and a feature that might be interpreted as a possible feeder for the Attawapiskat kimberlite swarm (or cluster), or the margin of a Proterozoic diabase acting as a preferred fracture control for kimberlite emplacement. Five of the De Beers kimberlites are positioned close to this alignment; five others on a somewhat displaced southerly continuation; four kimberlites are located within 1 km of this alignment; and two kimberlites are within 10 km.

The Joint Venture has invested considerable time and money conducting two grid-controlled detailed ground magnetic surveys on the MacFadyen Property covering the NW-striking elongate magnetic high to develop a plausible explanation for it to be the source for the Attawapiskat kimberlite cluster. The deep seated “feeder” or dike-like feature is buried under 300+m of Palaeozoic limestone and sandstones. However, such ideas have not led to strong target predictors for locating kimberlite swarms.

Because kimberlite is usually very soft and quite susceptible to deep weathering relative to their surrounds, kimberlite pipes are often found residing in recessive topographic features, and rarely appear in outcrop. In the Slave geological province of the N.W.T, they often occupy the bottom of small lakes scoured out by Pleistocene ice-sheets. Although this is not a definitive means of locating kimberlite targets, researchers have observed a potential correlation between the concentration of economic kimberlites in the Slave Craton and the margins of a 30 km-wide corridor of abundant diabase dykes (magnetic highs). In the outcrop-poor James Bay Lowlands, however, the post-glacial Tyrrell Sea left a flat featureless terrain and kimberlites are unlikely to be found associated necessarily with distinctive landforms.

Several attempts were made to drill into the linear magnetic anomaly thought to represent the feeder dyke, however, all failed to reach the target and this illusive target remains untested. Successfully reaching depths of +300 m through the bad ground conditions of the carbonate platform will require a heavy drill machine in the future.

In 1994, six drill holes were collared on the property using a light-weight hydraulic diamond drill. Three of these holes encountered kimberlite. The MacFadyen #1 kimberlite pipe has diamond grade of 1.94 carats per tonne (based upon drill core analysis of 33 kg). This grade is considered significant given its proximity to the Victor pipe.

In 2004-2005, 14 drill holes were collared on the property, however, only eight holes encountered kimberlite logged as both “hypabyssal” and “deep-crater facies”. Sampling of kimberlite in drill core, using caustic fusion yielded 190 small diamonds, 4 of which could not pass the 0.5 mm sieve (i.e. were greater than 0.5mm). The largest stone weighed 0.0765 carats, and all from a very small (4.94 kg) sample implying that this and the other discoveries cannot be meaningfully treated in a proper statistical manner.

Magnetic survey of the MacFadyen #’s 1 and 2 Kimberlites and the Good Friday Pipe.

The Attawapiskat Diamond Field Revisited

Of the thousand or so explored kimberlites in South Africa, only ~50 contain a notable diamond population, and not all of these are economic. Because the content of diamond in economic kimberlites is low (<1 ppm, an order of magnitude less than that seen in gold ores), to determine economic viability, it is necessary to take substantial (large) bulk-samples (note De Beers test of 360 tones of the nearby Tango Pipe) to obtain viable statistics on the commercial diamond grade, and to determine the actual value per carat (quality, size and clarity).

Recent published information characterizes the De Beers kimberlites adjacent to the MacFadyen property. In summary, many of the Attawapiskat kimberlite pipes formed by a two-stage process; a pipe or crater-clearing (explosion) excavation process; followed by crater-infilling with pyroclastic deposits and / or a “hypabyssal-like” complex (a mixture of pyroclastics and back-fall of the exploded ejecta).

The main Victor deposit comprises two “adjacent but separate” pipes; Victor North and Victor South (see also the De Beers Canada website Gemcom 3D rotating model).

Both Victor South and a large part of Victor North consist of spinel-carbonate kimberlite pyroclastic deposits, some juvenile lapilli, an array of mantle-derived xenocrysts and a small portion of country rock fragments. These partly bedded, lapilli-bearing olivine “tuffs” have been interpreted as sub-aerial “fire-fountain” and “air-fall” deposits. The bowl-shaped Victor South pipe starts to flare outwards (forming the classic carrot shaped structure) from just below the basal Palaeozoic sandstone - just inside the Precambrian basement. When the rising kimberlite magma contacted an aquifer in the basal sandstone the steam pressure release resulted in a major explosion, and initial pipe excavation.

However, the internal structure of the Victor North pipe is a more complex mixture of rock facies dominated by darker hypabyssal-facies kimberlite (crater infilling) with lapilli and country rock fragments as well as volcaniclastics. In other words, this dark “hypabyssal facies” is an early crater infilling phase. Recent detailed descriptions of the distribution of diamond grades in the Victor pipes indicated that the separate pyroclastics units have contrasting Macro-diamond grades (meaning significant internal variation in grade), and the final pyroclastic pipe infill phase in the main part of the Victor North pipe appears to consist of at least three geological/grade zones.

These observations suggest a complete reappraisal of rock units logged as “hypabyssal facies” in all of the MacFadyen kimberlites examined to-date. It also indicates a clear necessity in future drilling programs to sample all such units separately to determine their “macro-diamond (>2 mm)” contents. This detailed sampling procedure will ultimately result in a better understanding of the grade distribution of diamond in these pipes.

In the first half of 2006, KWG expects to commence an expanded exploration program to better define the MacFadyen Kimberlites.  A semi-permanent base camp will be established and a medium-sized drill rig will be deployed on the property.  The program will consist of (a) NQ diameter core for definition drilling and (b) fusion analysis to determine indicator mineralogy and diamond size distribution.  The estimated budget for this exploration program is $1,500,000.

Dependent on results, it is anticipated that an expanded drill program will be designed for the 2nd half of 2006 which will include large scale bulk sampling.

McFaulds Lake Project

The McFaulds Lake base metal discovery is the first new base metal mining camp to be discovered in Ontario in over 30 years. Thus far, seven (7) new base metal sulphide occurrences, tested with two or more drill holes, have been located on the Joint Venture’s 135 square kilometre property.

The following is a summary of the drilling results from the various occurrences or showings referenced as MCF on the sketch map below.

• KWG Spider drilling encountered massive sulphide –16 holes used to define McFaulds #1 and #2 occurrences – both still open to depth, along plunge and along strike
• McFaulds #1 – 14 holes – best result: Hole 2003-08 intersected 5.6 meters averaging 3.39% Cu as well as 4.1 meters averaging 7.64% Zn, drilling down dip and plunge will be required for resource definition
• McFaulds #2 - 2 holes – best result: 1.8% Cu over 12 meters
• McFaulds #3 – 23 holes – 4, 450 meters – best result: hole McF-04-57 intersected 8.02% Cu over a drill length of 18.8 meters, additional drilling is required for resource definition
• McFaulds # 4 – 3 holes – best result: 0.93% Cu over 3.75 meters
• McFaulds # 5 – 2 holes – best result: 0.86% Cu over 1.07 meters
• McFaulds # 6 – 2 holes – best result: 1.82% Cu over 3.30 meters
• McFaulds # 7 – 2 holes – best result: 1.15 % Zn over 2.05 meters
  
  

The un-designated target located between MCF 1 and MCF 3 on the sketch plan above is a sizable gravity anomaly in which the Joint venture attempted to drill near the end of the winter drilling season in 2005. For a variety of mechanical and technical reasons this target was not successfully tested and remains a primary drilling target.

The absence of transportation infrastructure in the remote locations of the Joint Venture’s discoveries, (McFaulds Lake and the Kyle Diamond occurrences) have currently dictated that the mineralization identified, in the quantities delineated thus far, might not be economic. But, the numerous mineral occurrences identified by all the claim-holders to date, combined with the undiscovered metallic-mineral concentrations of possible economic interest forecasted to be found by the community of earth scientists, may ultimately provide the justifying for the massive investment to create such infrastructure. In the meantime KWG will focus its attention and financial resources on those areas and targets where management can develop increased shareholder value in a time frame meeting their expectations.

The Wawa Project

The Wawa project covers an area of 45 square kilometres of prospective diamond exploration terrain located along the Trans Canada Highway, 35 kilometres north of the town of Wawa, Ontario. To date, 1,017 diamonds have been recovered from 62 individual prospecting samples taken at 33 locations on the property, including four possible commercial stones. Forty-seven (47) different diamond occurrences have been identified on the property. Of these diamond occurrences,

• 8 have returned grades of 0.25 carats per tonne,
• 4 have returned grades of 0.5 carats per tonne and,
• 1 has returned grades of 2.61 carats per tonne.

Bulk sampling and processing of two 5 tonne samples from the Menzies 107 and Lalibert 156 showings took place in 2004 / 2005. Theses sample sites located along and proximal to the eastern claim boundary of the Joint Venture are contiguous with Pele Mountain’s Destiny occurrence which is in turn on strike with their Crystal occurrence, where a 0.72 carats diamond nicknamed “the Big Goose” was recovered in early 2003. This has been the largest diamond recovered in the Wawa area thus far.

The area around the bulk samples was stripped, mapped, re-sampled with an emphasis on collecting samples that were biased with xenolith material from samples composed essentially of the host matrix rock. This sampling has demonstrated that the rock units containing abundant xenoliths (see photo below) contain very significant (if not incredible) diamond counts as follows:

The processing of these bulk samples has produced some encouraging results. A 0.33 carat diamond was recovered from one bulk sample BK-9, collected last fall. The diamond is the second largest found yet in the Wawa area after Pele Mountain’s 0.75 carat Big Goose. The recovery of this and other diamonds from the formations containing the football-shaped xenoliths supports the hypothesis that these extraordinary rocks are the host units of the diamonds in the Wawa area.

Sample BK – 9 yielded a total of 10 diamonds with an aggregate carat weight of 0.454 carats. The largest diamond with dimensions of 3.99mm by 3.56mm by 2.75mm and weighing 0.326 carats is described as being: off-white, transparent 99% preserved octahedral surface fragment, twinned, with very significant cleavage.

Sample BK – 8 yielded 14 diamonds with the largest diamond having dimensions of 2.51mm X 2.08mm X 1.53mm and weighing 0.061 carats. It is described as being: white, translucent, with an 85% preserved octahedral crystal.

Photo 1 - Outcrop of the Diamond Bearing Xenolithic host rock.


Photo 2 - The 0.33 carat Diamond recovered from Bulk sample 9, Wawa, Ont. Scale = 2mm

Although a 0.33 carats stone is encouraging, and a breakthrough in the understanding of the significance of the xenolith host rocks is an important step forward, it does little to dispel the notion that the preponderance of the diamonds on this property are small and of marginal economic significance. After 10 years of prospecting the Wawa property, the evidence of the existence of a population of larger economic diamonds has yet to be determined. The decision by KWG to dilute its interest by no means indicates that we no longer think the Wawa property has merit. The above results clearly indicate that it does, and KWG will maintain a 331/3% interest in the project. However, until there are more compelling results to warrant a significant additional investment, management has determined that shareholder value can be better developed in the MacFadyen Project.