thestar.com
Toronto Star
Feb. 27, 2005. 10:05 AM
A diamond stock for aggressive investors
PAT MCKEOUGH
Diamonds are the transparent form of pure carbon, and their dense crystal structure makes them the hardest substance known.
Diamonds are used in jewelry, but are also widely used for machining plastic, glass and metal. Their resistance to wear makes them essential for automated processes that produce large numbers of copies of the same product, without having to replace the cutting tool. Their hardness also makes them useful as an abrasive and grinding material. Diamonds can also be made into extremely hard and smooth cutting knives and scalpels for precise surgery. As well, diamonds are part of dental drills.
In September 1991, explorers discovered the first economic diamond-bearing kimberlite deposit, located in the Lac De Gras area in the Northwest Territories, after over a decade of searching. Kimberlites are cone-shaped pipes, comprised of a mixture of magma (molten rock) and rock that is carried by volcanic activity to the surface of the earth from depths greater than 150 kilometers. Diamonds form at those depths, under a mixture of extreme pressure and high temperatures.
Kimberlites may pick up diamonds along the way —sometimes in quantities large enough to justify a diamond mine. Kimberlites are small — generally with a surface area of less than 12 hectares — so they are difficult to find. However, along with diamonds, the molten rock of the kimberlite also picks up other minerals as it rises to the surface. These are called kimberlitic indicator minerals by diamond explorers.
Of the over 500 kimberlite pipes found so far in northern Canada, only two mines have opened up so far. The Etaki Mine owned by Stornoway Diamond Corp (TSX: SWY) developed at a cost of $700 million grew out of Charles Fipke's discovery. The $1.3 billion Diavik mine is owned by Diamonds North Resources (TSX: DDN).
However, finding diamonds in mineable quantities can be hugely profitable. For example, the Etaki diamond mine is expected to generate gross revenues of approximately $500 million per year over its 17-year mine life.
Investing in diamond exploration stocks is risky. It's a long way between the exploration phase and the commercial production phase, when a mine begins to produce diamonds for sale and start making money. There's often a long time lag between news of progress toward a mine; share prices can drift down in the meantime. Still, here is our analysis of a promising early-stage diamond stock. It is a buy only for highly aggressive investors.
Stornoway Diamond Corp (TSX: SWY) has exposure to more than 20 million acres of prospective diamond properties in Northern Canada. It has five separate project areas located in Nunavut, the Northwest Territories and Quebec. Stornoway was formed in July 2003, to combine the exploration efforts of several high profile mine finders.
Eira Thomas was a geologist with Aber Resources Ltd. from 1992 until 1996. She led the exploration team that discovered the Diavik kimberlite pipes in 1994 and 1995. That discovery is now Canada's second producing diamond mine.
Catherine McLeod-Seltzer was co-founder of Arequipa Resources. That company sold its huge Peruvian gold deposit to Barrick Gold in 1996 for $1.1 billion. Other members of the management team include John Robins, a founding partner of the Hunter Exploration Group, and Bruce McLeod of the Northair Group of exploration companies. Beyond past exploration successes, this well-known management team has the ability to finance its exploration plans. In 2003, Stornoway Diamond raised $20 million for exploration. It recently raised $20 million more.
These financings will let Stornoway spend $18 million this year for exploration on its projects. This level of expenditure will let Stornoway retain more of the final output if a mineable deposit turns up on any of its properties. While the company has many projects underway in various stages of development at several geographic locations, two main projects are now receiving the bulk of the exploration budget.
Stornoway's stake in more than 12 million acres of the Melville Peninsula (located across from Baffin Island) includes the Aviat project, a joint venture between Stornoway (70%), BHP (20%) and Hunter Exploration (10%). The results of a 2003 mini bulk-sampling program completed at the AV-1 kimberlite on the Aviat project were very promising. Processing of a 7.4-ton kimberlite sample collected from a surface outcrop returned 6.52 carats of diamonds yielding a sample grade of 0.88 carats per tonne. The largest stone weighed 0.40 carats and was a white, transparent diamond. Overall, the diamonds appeared to be dominated by white transparent diamonds. To put that into perspective, those grades, although very preliminary, place AV-1 among the top 4% of kimberlites discovered worldwide.
A larger bulk sample is scheduled for the AV-1 kimberlite at Aviat while further early-stage target definition and drill testing will occur at other locations in the Melville Peninsula. Stornoway's other priority target is its Churchill project in Nunavut. A $7.8 million budget was set for 2004 exploration at Churchill. Stornoway has a 35% interest, with the rest held by Shear Minerals Ltd. (51%) and BHP (14%). In 2003, the joint venture drill-tested a total of 28 targets and discovered 18 kimberlites: 16 at Churchill and two at Churchill West. More than half of the kimberlites contained diamonds.
Stornoway is a buy for highly aggressive investors only.
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Portfolio manager Patrick McKeough publishes The Successful Investor newsletter and is author of Riding the Bull: How You Can Profit in the 1990s Stock Market Boom. He or his clients may hold positions in stocks mentioned. His column appears online Mondays.
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