Shining Mining: A Look at Diamonds

01/23/2004 12:00 am EST

Focus:

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

"Right now, more money is being spent on diamond exploration in Canada than anywhere else in the world," says Gordon Pape, editor of The Internet Wealth Builder. Here, the advisor offers a speculative six-pack of diamond mining plays.

"There are only a few ways that investors can participate in this northern boom. The stock markets aren’t exactly flooded with diamond issues, and most of the ones that are available are speculative. The biggest player in the Canadian north is international diamond giant DeBeers, which was taken private in 2001. The best-known and most-established domestic company in the business is Aber Diamond (ABER NASDAQ), which is the only publicly listed pure Canadian diamond producer. We caution, however, that the stock looks expensive for a company that is expected to post a small loss in fiscal 2003 and a profit of about 39 cents per share in 2004.

"None of the other publicly traded companies that are active in the Canadian north has a stake in a producing diamond mine at present. The closest to opening one is penny stock, Tahera Corp. (CA:TAH Toronto), an exploration and development company whose main asset is the Jericho Diamond Project, which is located in approximately 400 kilometers northeast of Yellowknife. The company has completed a feasibility study and an environmental impact study on developing a Jericho mine. Tahara is currently operating at a deficit, with a loss of more than $1.5 million in the first nine months of 2003.

"Other publicly traded junior diamond companies include Diamondex Resources (CA:DSP Toronto), also a penny stock, and SouthernEra Resources (CA:SUF Toronto). Although not a pure Canadian diamond play, SouthernEra is actively involved in exploration projects in the Northwest Territories. SouthernEra is mainly known for its African interests, however there has been speculation for years that there could be a jumbo kimberlite pipe hiding somewhere in the company’s exploration area. There have been some positive finds in the area but nothing spectacular yet.

"Two veteran fund managers are keeping a close watch on the diamond industry and Metalex Ventures (CA:MTX Toronto) is a stock that they hold in their portfolios. Norm Lamarche and Frank Mersch, both former Altamira stars, are with recently-formed Front Street Capital in Toronto. Lamarche finds Metalex especially interesting because of the involvement of diamond pioneer Charles Fipke, who was named chairman of the company in 2002. In December, Metalex announced a private placement flow-through deal for 1.6 million shares at $3.50 as well as a common share issue of 2.2 million shares at $3.10. These will produce net proceeds of approximately $11.5 million, which the company will use for exploration work in a promising area. Of course, this doesn’t mean that Metalax will uncover an economically-viable pipe of its own, but the prospects plus Fipke’s involvement intrigue some investors.

"Stornaway Diamond (CA:SWY Toronto) is another diamond play in the Front Street Capital portfolios. It claims to be second only to De Beers in its Canadian land holdings, with over 11 million acres of mineral rights currently under exploration for diamonds. Norm Lamarche likes Stornaway in part because of the strong management team, which is one of the key things he looks at in a company. Shear Minerals Ltd. (CA:SRM Toronto) has 51% of the rights to a million-acre territory. The company is also involved in other areas, including the Lac de Gras region where it has had some encouraging finds. The company is headed by geologist Pamela Strand, who has many years of experience in the Canadian north.

"What is our diamond investing strategy? If you’re willing to take the long view, a stake in Aber might pay off a few years down the road if earnings rise as expected. Among the smaller companies, Tahera looks like the best bet because they appear to be on track towards building a real mine. A more speculative approach is to buy a basket of exploration stocks. If even one company hits pay dirt, it could lead to huge profits. There is no way of knowing which, if any, of these will come up with an economically viable diamond find. But for those aware of the high risks, owning a mini-fund of junior companies might be a good idea. We suggest roughly equal dollar amounts of each of the following six stocks: Tahera, Diamondex, SouthernEra, Metalex, Stornaway, and Shear."

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