BUSINESS

Diamonds in the rough

Canadian prospectors help to fuel a new stock-market frenzy

BARBARA WICKENS May 3 1993
BUSINESS

Diamonds in the rough

Canadian prospectors help to fuel a new stock-market frenzy

BARBARA WICKENS May 3 1993

Diamonds in the rough

Canadian prospectors help to fuel a new stock-market frenzy

Taking off and landing a four-engined Hercules aircraft with a 42,000-pound cargo from a runway carved onto a frozen lake is hazardous work. “Aircraft set up a wave beneath the ice as they move across it,” said Tony Jarvis, chief pilot with charter airline NWT Air. "That can form a hump in the middle of the strip, or it can crack weak ice.” Still, Jarvis and many like him in Yellowknife are clearly willing to take the risk of making such supply runs north of the territorial capital. The reason: diamonds. In November, 1991, prospector Charles (Chuck) Fipke announced that he had discovered diamond-bearing rock in the Northwest Territories’ Lac de Gras area. Now, a diamond rush is on and

Yellowknife, the closest city to the lands where prospectors are staking claims, is a boomtown. There is work for almost everybody from hotel clerks to snowmobile salesmen to men earning $300 a day driving two-foot wooden stakes into the ice every 1,500 feet. The boom has also kept Jarvis and fellow charter airline pilots busy flying the 700-km round-trip. On their flights north, they carry men and equipment and southwards they carry ore samples bound for assay laboratories in southern Canada and the United States for testing. Said Peter Arychuk, president of Air Tindi Ltd.:

“We’re all surviving off the diamonds.” But the diamond rush is still at such an early stage that it is more of a staking rush. According to Tom Hoefer, general manager of the N.W.T. Chamber of Mines, prospectors and explorers from nearly 50 companies have staked more than 34.5 million acres throughout the territories, including nine million acres in the past six weeks alone. Just 81 tiny diamonds, most of them so-called microdiamonds the size of grains of sand, sparked the initial excitement. But for those with the stomach—or bankroll—for high-risk, high-re ward ventures, it was enough to indicate where to look for a potential bonanza of the brilliant gemstones. Those now in the hunt include some of the world’s largest conglomerates, including Broken Hill Proprietary Co. Ltd., based in Melbourne, Australia, and DeBeers Consolidated Mines Ltd. of South Africa, as well as several Canadian junior mining companies. And many stockbrokers attribute the recent surge of activity on Canadian exchanges to the surging popularity of Canada’s diamond mining stocks.

Despite growing acceptance that there may be precious “ice” to be found under the N.W.T. snowfields, Fipke’s original announcement triggered expressions of strong skepticism and, frequently, outright disbelief. “Everybody thought it was a hoax,” said John Eidt, mining analyst with Torontobased investment dealer Dominick & Dominick Securities Inc. “Whoever heard of diamond mines in Canada?” In fact, history records only 50 diamond mines in the world and only 15 are now operating, all of them outside North America. But Robert Bishop, editor of Gold Mining Stock Report in Lafayette, Calif., which also tracks diamonds, said that some people may have been skeptical for another reason: Fipke’s

exploration company, Dia Met Minerals Ltd. of Kelowna, B.C., was listed on the highly speculative Vancouver Stock Exchange. Added Bishop: ‘The Vancouver exchange invites cynicism.”

Dia Met, however, has a well-established partner in BHP Minerals Canada Ltd., Broken Hill’s Canadian subsidiary. In 1990, Fipke, now 46, a geologist who first began looking for diamonds in 1978, signed a jointventure agreement with BHP that provides him with more than $1 million a year for exploration. Under the terms of the unconventional agreement, BHP would also finance a mine, if warranted, for up to $500 million. In return, it would receive a 51-per-cent stake in the claim. Since they joined forces, the partners have reported what they describe as “encouraging” findings, including 105 larger diamonds, from additional samples of host rock. John Hainey, analyst with Toronto-based Canaccord Capital Corp., said that many members of the investment community are now eagerly awaiting the results, likely to be released in June, from a

much larger sampling. “The evidence is quite strong that we have something of historical importance here,” said Hainey. “But we need to know more.” Shares in Dia Met, which have also been listed on the Toronto Stock Exchange since last November, have skyrocketed to a high of $55 a share from its original share price of 60 cents.

Finding a profitable diamond mine anywhere in the world requires beating incredibly long odds. Diamonds are a dense form of carbon which can only crystallize under the extreme pressure and high temperatures found 70 miles or more beneath the earth’s crust. They are transported closer to the surface when a volcanic eruption tears through the ancient, diamond-bearing rocks. When

the lava explodes through the bedrock and then cools, it forms a bluish-green rock called kimberlite, in which diamonds are found.

Even if prospectors locate diamond-bearing kimberlite, they still face many uncertainties—and costs—before they can determine whether a site is worth developing. Tests must determine what type and quality of diamonds are present. Diamonds are ranked in two main classes: industrial and gem. Industrial diamonds, used as abrasives in such high-performance products as drill bits, account for about 85 per cent of the diamonds mined in the world, but represent only about five per cent

of the total dollar value. As a result, a site worth mining must contain a sufficient quantity of gem-quality stones.

In Namibia, 95 per cent of the diamonds recovered are of gemstone quality, the highest average in the world. In contrast, at the Argyle mine in Australia, only about five per cent of the diamonds mined each year are gem quality. But among those are a particularly valuable, deeply colored type called fancies, in this case pink diamonds. At a Christie’s auction last May, a buyer paid $423,000 for a 5.57-carat, pink fancy. In 1905, miners in South Africa recovered the world’s largest diamond, the 3,106-carat Cullinan. Since then, they have recovered a stone of about 50 carats once every three months—and its sale covers the mining costs for the quarter.

Gemstone diamonds have a romantic history going all the way back to the Koh-i-noor, or Mountain of Light. In 1304, history records that Sultan ‘Ala’-ud-Din Khalji took the 191-carat stone from the Raja of Malwa, India, whose family had already owned it for generations. The Koh-i-noor changed hands many times throughout the centuries, but in 1849, when the British annexed the Punjab, it was sent to England where it was placed among the Crown jewels of Queen Victoria. It is now set in the Maltese Cross at the front of the Queen Mother’s crown.

Yet despite the prospects of great financial returns, until recently there was little incentive to look for diamonds in Canada. Not only

were the odds against finding them, but searching for them requires special expertise that few in the world possess. According to Hugo Dummett, manager of North American explorations for BHP, members of the secretive international diamond cartel, dominated since 1905 by DeBeers, closely guarded most of its knowledge until about 20 years ago when independent researchers began developing exploration methods. As

well, with Canada’s abundance of other natural resources, including gold, uranium, base metals and oil and gas, Canadian firms concentrated on extracting them instead. In the past five years, however, world prices for many of those commodities have collapsed and the Canadian mining industry has been in a deep slump. As a result, the diamond development is a welcome, if unexpected, boost. “It’s a shot in the arm for the domestic industry,” said Anthony Andrews, managing director of the Prospectors and Developers Association of Canada.

Still, some mining and diamond experts say that they have believed for some time that Canada has kimberlite that might contain diamonds. Toronto-based Monopros Ltd., DeBeers’ exploration subsidiary in Canada, has prospected for diamonds throughout the country for the past 30 years. In 1989, Monopros said that it had discovered some kimberlite in northern Saskatchewan, but beyond that, company spokesmen have remained close-lipped about their work. “Diamond prospecting is a very long, tedious process,” said Jerilynn Lamb, Monopros’s administrative manager. “We do not like to give out false expectations.”

Lriends and rivals alike give Lipke credit for remarkable geological sleuthing. In the late 1970s, Lipke and two South African geologists, Dummett and Christopher Jennings, were prospecting for diamonds and other commodities in the mountains near the Yukon and N.W.T. border. Since then, Dummett and Jennings have pursued careers elsewhere. Dummett joined BHP, where he was instrumental in convincing his employers to bankroll Lipke. And four years ago, Jennings set up SouthernEra Resources Ltd., which has since staked about four million acres in the Northwest Territories.

Without his original partners, Lipke has continued his single-minded pursuit. His underlying geological theory is that the glaciers that covered the northern half of the continent 25,000 years ago scooped up some of the kimberlite and, as they melted, they deposited diamonds far from their source. Lipke worked 16-hour days following and examining the ancient glaciers’ trail nearly 700 km in reverse to what he believed was their likeliest source. Said Jennings: “Chuck got there first.”

Now, the growing number of prospectors, miners and speculators who are following in Lipke’s footsteps express confidence that there will be at least one profitably operating diamond mine in Canada within the next five years. But investment analysts say that although the science seems sound, caution is still necessary. “This has all the ingredients of a classic exploration play,” said David James, mining analyst with Winnipeg-based Richardson Greenshields Securities Inc. “Each stock has its day in the spotlight.”

BARBARA WICKENS with

ERIK WATT

in Yellowknife