The NewsGurus Market BULLet
Opportunity - NEM
Canada has become a major diamond producer. It continues to discover new diamonds and is set to double its production in 2003. Changes underway in the diamond market are turning diamonds mined in Canada into a much wanted commodity - one free of controversy brought on by war and smuggling.
The world's richest diamond bearing kimberlite cluster, Lac de Gras in the Slave carton, is in Canada's Northwest Territories, and has spawned two mines, one of which will be the most profitable diamond mine in the world when it opens in April 2003. Today, this region already produces over 5% of global production.
Canada is in the middle of an exploration boom that is attracting international investors. This exploration explosion over the last ten years has been driven by a pool of expanding knowledge, superior geology, high grade discoveries and the movement to name branded, source certified, collectible diamonds. The two producers above have each reached market valuation of over CAD $2 billion with stock price gains of 10,000% and 2,500% respectively to early investors
A third discovery, Snap Lake, was bought by the world's largest diamond company, De Beers, for CAD $500 million in 2001. Subscribers to this newsletter participated in this discovery and had gains of over 400%.
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I am confident that within 10 years, diamond production from Canada will double again. With advanced exploration programs now underway in many regions of Canada, it is now time again to begin looking for the next winner.
Our current focus is on the closest kimberlite cluster to Lac de Gras - Coronation Gulf, 250 km north. Several promising diamond counts sparked a massive staking rush (area play) and investing frenzy in late 2001. The investment community has high hopes a new mine will be found.
Northern Empire Minerals [NEM-CA]:TSXV has the highest leverage and lowest risk in this play. The discovery creating this play was on their property. They then quickly staked a large land position in Coronation Gulf, and smartly joint-ventured it out to some of the best diamond exploration teams in the business. These JV partners have now discovered more than 150 targets for new kimberlites - all at no cost or dilution to NEM. The company also has two confirmed diamondiferous pipes on one of their properties.
The company is well funded (one year working capital), and has strong financial backing. The company has a large, diversified and highly prospective land position, so any new discovery on their ground could give investors a healthy return with a rapid rise in the stock. A concerted exploration is underway right now on all their properties, with results coming in steadily over the next four months. NEM is the most conservative way to invest in this play.
Background/Introduction:
Few people - even well read investors - realize that Canada is one of the richest diamond countries in the world. When the Diavik mine in the Lac de Gras area of the Northwest Territories opens next year, it will be the richest diamond mine in the world. Nine of the richest 13 diamond pipes in the world right now are in Canada's north.
Canada has a 40-year history of diamond exploration. Kimberlites, a geological body in which diamonds are found, were originally found in the late 1950s. But it was not until geologist and prospector Chuck Fipke discovered kimberlites in the Northwest Territories in 1991 that diamond fever gripped Canadian investors.
Mr. Fipke's company, DiaMet Minerals, charged from 40 cents to over $60 in two years, and its 29% stake in what became the first diamond mine in Canada, the Ekati Mine, was purchased for CAD$687 million. Aber Resources [ABZ-CA]:TSX was a 20 cent junior exploration company when it began looking for diamonds in the early 1990s. It was recently touched $30. Today, in the low-$20s, its 40% interest in Diavik gives the company a current market capitalization of almost $1 billion.
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Diamond mines are generally almost twice as rich as gold or base metal mines: to wit, Diavik will pay off its more than $1 billion capital cost within two and a half years.
DiaMet's initial discovery, Pine Lake, was not economic. But an investor flood into diamond exploration stocks caused one of the largest staking rushes in Canadian history, and spawned the discovery of Ekati and Diavik. This is called an area play - companies stake and explore all the area around a major discovery - Ekati - in hopes of finding another deposit - like Diavik.
Diamond area plays have the potential to be much more successful than gold or base metal plays, because kimberlites always occur in clusters, in usually 50 or more. Canada's Lac de Gras cluster is the world's richest, with over 250 kimberlites discovered and an unusually high number were economic - nine. Less than one per cent of the world's kimberlites are economic.
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Now is the time to look at diamond exploration stocks again, for a couple reasons. One, the initial investor frenzy is over, and all these stocks have settled down or even collapsed. This has separated the wheat from the chaff. Only a select few companies are now worth owning.
Second, the news flow from this play is about to increase dramatically. After a long period of no news, results from exploration crews now in the field will start being announced in late summer and throughout the fall.
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In September 2001 Ashton Mining of Canada [ACA-CA] discovered two kimberlites containing diamonds. One of the kimberlites, named Potentilla, is located on Northern Empire's Kikerk Lake property. NEM has owned Kikerk Lake for almost 10 years, and after joint-venturing it to Ashton, now has 30% of this property.
The positive results from this discovery were quickly followed up by a discovery on Ashton's Artemisia pipe (NEM has no interest in Artemisia), and Ashton and Northern Empire both saw their share prices more than triple. Both were able to raise money in good markets; NEM raised theirs with a savvy mining merchant bank called Endeavour Capital. Endeavour is committed to NEM.
Recent poor results from Ashton on another potential diamondiferous pipe have given us an opportunity to enter the play at much lower prices and with a higher knowledge base. At this stage, Northern Empire has a favourable risk/reward profile due to an attractive stock price, funds on hand, extensive property holdings and a pool of knowledgeable partnerships.
The exploration work season in the north is now in full swing. Northern Empire's joint venture partners are diligently searching for new kimberlites on the ground, using the technical data they generated earlier this spring. Several surface kimberlites have already been found this year by simple prospecting.
This is a big difference between Coronation Gulf and Lac de Gras, and as a result, exploration is much faster and cheaper in Coronation. The pipes at Lac de Gras were almost all underwater (Diavik had to drain a lake) and could only be drilled on top of winter ice when there is only a few hours of operating daylight. This is because the rock in the area is quite hard, and the soft kimberlites eroded faster, creating a depression in the land over which lakes developed.
In Coronation Gulf, the rocks erode at the same rate as the kimberlites, so they can be found at surface. What used to be a three year exploration cycle at Lac de Gras - using airborne geophysics, then confirming them with detailed ground work the next spring, then drilling them the following winter - can now be done in one field season at Coronation Gulf.
The 2002 spring airborne geophysical programs by NEM's JV partners have discovered more than 200 targets to be followed up this summer on the ground. This is by far the largest number of targets developed by any junior company in Canada (the majors do not give out these numbers). If one property doesn't come up with good results, another might - NEM has a diversified portfolio of properties. Diversification is a prudent conservative way to invest in the Coronation Gulf Diamond play.
Hopefully many more kimberlites will be found this summer and fall (all at no cost to NEM) - and some may even get drilled this year. Whatever does not get drilled this year will make for a very large drill program next year.
We have not mentioned Northern Empire's properties in eastern Nunavut north of Churchill and south of Baffin Island. NEM is pioneering these previously ignored areas, which management staked because of excellent chemistry that indicates diamondiferous kimberlites could be in the region. NEM has again joint ventured them out.
In summary, NEM's management philosophy is very conservative. Their strength is generating quality exploration plays, and joint venturing them out. This lowers their - and our - risk, reduces dilution for shareholders, and allows their treasury to stay full.
Coronation Gulf is the closest kimberlite cluster to Lac de Gras, the richest cluster in the world. The stock is trading at the same low price it was a year ago with no discoveries. Exploration results have just begun coming in, and will be steady for the next few months. NEM should be accumulated on any dips. |
