Will diamonds be forever?

Benj Gallander and Ben Stadelmann
Saturday, June 30, 2001

While the ultimate goal of investing is to post high returns, part of the game can be to have fun while doing it. Stocking up on government bonds, tackling a bevy of T-bills and pouring savings into a cozy mutual fund isn’t exactly exciting. The beguiling enticement of a penny play can add a little zest to the spirit.

Junior mining companies in the diamond sector exemplify this arena with boom or bust written all over them. A number of junior firms are trying to make an impact, hoping for that major strike.

Diamond discoveries are relatively rare, enhancing their allure and price. Total annual rough production is on the north side of 100 million carats, a total that would fit into one industrial skip, which is about 12 cubic metres in size.

How secure is this commodity? Well Benj remains in spectacular Dawson City, Yukon, where at this time of year the light never dies, and interviewed the dancers at Diamond Tooth Gertie’s. Though not necessarily the most random of research samples, all five believed that diamonds were important, representing love, commitment and wealth. One of the women expressed a key sentiment, “I want that rock.”

On the flip side, diamonds are primarily a psychological luxury, similar to gold, and the plunge of that commodity is now an old tune. A small percentage of the market is industrial; these stones are used largely for cutting. About 80 percent of these types of diamonds are man-made.

One company struggling to become a player is Tahera Corp. (TAH-TSE), currently trading at 16.5 cents. While money is always a challenge for this organization, it has managed to strike deals with two majors, BHP Ltd. of Australia and Kennecott Canada Exploration Inc., a unit of Rio Tinto PLC. BHP is the firm that acquired Dia Met Minerals Ltd. and put Canada on the diamond map with their Ekati project in the Northwest Territories. The deal is highly favourable to BHP, which will finance a 200-tonne bulk sample and feasibility study. If all goes well, and the project moves on to commercial production, Tahera expects to see revenue in 2003.

How much this potentially lucrative payday — if it occurs — will mean to investors depends on the ballooning share count. Like many cash-strapped exploration firms, Tahera has issued scads of shares, currently at the 290 million level, and if outstanding warrants and options are counted, a whopping 400 million shares and change could be in the marketplace.

Kennecott is financing the exploration on Tahera’s Rockinghorse and Hood River properties in Nunavut. In addition, the company has alliances with Ashton Mining of Canada Inc. (ACA-TSE) and Navigator Exploration Corp. (NVR-CDNX) and its wholly owned Jericho Diamond Project. This diversification is a definite plus, as a speculative mining outfit ideally has a number of irons in the fire.

Twin Mining Corp. (TWG-TSE) is also hoping that diamonds are forever. Samples from their Torngat play have been processed with the conclusion that on-site work continue. Encouraged by the results, the corporation has staked another 49 claims. Money is in the kitty for an aggressive exploration program this year, but positive results are crucial to obtaining financing.

When chief executive officer Hermann Derbuch sat us contra guys down in the heart of winter to watch his slide show, it was hard to discern which was more impressive: the fantastic returns if everything works perfectly, or how tantalizingly simple it is to transport bells and whistles from one financial forum to another.

Mr. Derbuch is a seasoned hand in the financial game and he has as good a chance as most anybody with limited funds to transform this dream into a reality. Per usual, the necessities are a good patch of ground, diamond prices remaining aloft, a bit of luck, and $50 million or so. The stock price is around half a buck and for those who have some spare change to gamble, this is another possible spot to toss it.

Ultimately these plays do represent a major crapshoot and are definitely not the spot for the mortgage money. But these are likely no bigger a shot in the dark than when South Africa’s De Beers Consolidated Mines Ltd. started convincing people to spend on these sparkling stones.