The Huge Profit Potential of Diamonds in Canada (From MPV Thread)
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The discovery of diamonds in northern Canada in 1991 touched off one of the
biggest staking rushes in Canadian history, involving more than 185 companies.
Dia Met Minerals was a junior company set up to fund two geologists in their
search for diamonds. Today, it is one of the very few institutional class diamond
producers in the world. Along the way, Dia Met gave its early investors a one
hundred to one return. One of the biggest mining companies in the world spent
US$700 million to turn Dia Met's discovery into one of the most significant diamond
mines in the world. That mine began production late last year.
Partly because there are very few good companies involved in diamond exploration
and mining, most investors know little about this extremely profitable industry. De
Beers, the leading diamond company, complained of a disastrous year in 1998 that
saw its profits slashed to only US$639 million. The price of De Beers' stock has
more than doubled in the past few months as the company and the industry are
rapidly recovering from the slump of the past two years. Other diamond company
stocks remain stuck in the cellar as the good news about the recovery in diamond
industry goes largely unnoticed.
Almost ignored by most investors is the fact that Canada has now become an
important producer of diamonds. Even more important, the process of developing
the immense diamond wealth of northern Canada is only just beginning. Several
more deposits have already been discovered, and are being rapidly advanced
toward production. There is also excellent potential for additional discoveries.
Leading the pack is Aber Resources, with a 40% interest in a project that is almost
certain to become Canada's second major diamond mine.
A well regarded British brokerage firm, in an attempt to get through to its readers,
compared Aber's diamond deposit to a gold deposit. The analogy is stunning. They
stated that Aber's Diavik deposit "is the equivalent of a gold mine with 20
million ounces in reserves / resources, with a cash cost of production of US$60/oz
and capital costs of just US$30/oz of reserves. We know of no such gold mine in
the world."
Aber's deposit contains 26 million tonnes and has an average value of US$218 per
tonne. The grade of the ore mined in the early years will be even higher. The
operation will mine more than 1.5 million tonnes per annum, with the operating cost
projected to be US$42 per tonne.
Aber is only just beginning to get the respect it deserves as the next world-class
diamond producer. Several other companies, that are not far behind Aber and Dia
Met, remain almost totally ignored.
The diamond deposits being found in northern Canada have unusually high values
of diamonds. Of the ten highest value kimberlite pipes in the world (measured as
US$/tonne of diamond content), seven, including the top three, are located in
northern Canada.
De Beers, and other major mining companies are well aware of the incredible value
of the Canadian diamond deposits. These companies are spending enormous
amounts of money exploring for new deposits. Virtually all of the ground is held by
Canadian juniors, who, as usual, were the quickest to take action. The juniors are
getting excellent deals from the majors, who are competing for the rights to
participate in these potentially profitable projects. For example, Dia Met's major
company joint venture partner provided US$700 million to fund the project to
production to earn its 60% interest.
Currently, most diamond production comes from Africa and Russia. Even though it
has only been producing diamonds for a few months, Canada is already the
largest producer of gem quality diamonds in the "first world". Its role in the
diamond industry will escalate rapidly over the next few years.
Investors interested in the Canadian diamond industry have a range of options,
from a profitable, institutional-class mining company, to the explorers with a one
hundred to one pay off potential. Several companies that have already made
discoveries offer a comfortable balance between risk and reward.
The diamond industry, like all resource sectors, went through a rough time over the
past few years. The share price of industry leader De Beers fell to near $11, less
than one third of its level of first half 1997. De Beers has already recovered to $25,
reflecting the substantial turn around that has already occurred in the world
diamond industry. The other diamond companies have not yet made a real move.
Dia Met's Canadian project is just reaching full production levels. Upcoming
earnings reports will focus attention on the huge profit potential of the Canadian
diamond deposits. Aber's project is moving quickly towards a construction
go-ahead, and is therefore attracting the attention of institutional investors.
The attention that these two leading companies are bringing to the Canadian
diamond industry is sure to generate interest in the lesser known companies that
also represent outstanding value.
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