(Photograph by Aber Diamond Corporation.)

TOP VIEW Hundreds of intrepid geologists are trolling beneath Canada’s glacial crust for signs of diamonds. Optimists claim the eventual haul will rival lodes in Botswana or Russia. Small, public diamond exploration companies offer a way for investors willing to bear large risks to test that theory.

However, the lure of riches in this new mining frontier continues to attract investors, many of whom buy in at the ground floor—the juniors’ exploration stage. If the company subsequently obtains an optimistic feasibility study on a site, it can either partner with or be acquired by a large, capital-rich mining company. At this point, the original investors will have reaped a significant return.

The Ekati diamond cache was hidden under one of the thousands of unnamed small lakes that dot Canada’s far north. To finance production, Fipke formed a joint venture with Australia-based BHP Billiton, which provided funding to drain the lake and, in 1998, start mining. Two years later, BHP bought DiaMet for nearly $580 million. Fipke and Blusson have each retained 10 percent stakes in the project, which now supplies some 6 percent of the world’s diamonds.

Observers believe that the high capital costs of mining diamonds will eventually cause the Canadian production industry to fall into the hands of the mining  behemoths, especially De Beers, BHP and U.K.-based Rio Tinto. Along the way, however, juniors and their investors are occasionally making tidy profits.

Dan Bergman, of Kelowna, retired when he was 40, after amassing a fortune in the real estate business. On the lookout for new investment opportunities, he heard about DiaMet from a geologist friend who had worked for Fipke. Bergman read up on the arcana of diamond exploration and took a hard look at the company’s claims. He decided to buy DiaMet stock when it was trading at 75 Canadian cents. He sold it at $39 when the mine went into production. “I did quite well on that,” he says. In 2003, he put $40,000 into another junior, Shore Gold. Today his stake is worth nearly $300,000.

Diavik Are Forever
Eira Thomas, a soft-spoken but commanding woman, was only 29 in 1994 when she led a team of geologists and a dog named Thor across the tundra and found kimberlite at a site 18 miles from Ekati. At that time, she was head of geology for a junior called Aber Resources (now Aber Diamond), founded by her father, Grenville. According to industry lore, Thomas slept with the stone under her pillow, not even daring to call her father in case a competitor intercepted her news. Her discovery turned out to be the highest-grade cluster of diamond pipes ever found, and launched Canada’s second diamond mine.



Rio Tinto backs Thomas’s Diavik mine, where production began in 2003. Diavik and Ekati together generate 13 percent of the world’s diamonds, making Canada the third-largest source behind Botswana, where De Beers controls the mining interests, and Russia, where the state owns the mines. Because Canada has no similar monopolies or near-monopolies, many see it as having the best opportunities for individual investors. (Click image to enlarge)

Soon after the discovery, Thomas launched an exploration company called Stornoway Diamond, which is now sampling deposits on 20 million acres in Nunavut, the Northwest Territories and Quebec. Aber Diamond, meanwhile, has evolved from an exploration company to a diamond producer. It is responsible for marketing 40 percent of the rough diamonds from Diavik and owns 51 percent of legendary U.S. retailer Harry Winston.

Inspired by the success of these first two mines, new juniors have sprouted up, hoping to be the next Fipke or Thomas. Shore Gold, which is drilling for diamonds in the Fort à la Corne area of northern Saskatchewan, has sunk $23 million into collecting, sorting and valuing the kimberlite deposits there since its management acquired the rights to the venture, which it calls the Star Diamond project, in 1993. The company recently reported preliminary results from what is called a bulk sample—a costly and crucial stage of exploration that determines grade. Out of 22,000 tons of ore processed, Shore Gold recovered 3,092 carats that appear to be high grade.

The company is now assessing the economic feasibility of building a mine. To do that, it must obtain an average per-carat price (through a third-party valuation in Antwerp), then weigh the value of the ore against the costs of operating the mine. Shore Gold’s vice president of exploration, George Read, speculates the appraised value will be a healthy $135 per carat; meanwhile, he, his colleagues and their backers anxiously await confirmation.

The feasibility study will take at least two years; Shore Gold must also apply to various Canadian government agencies for water and land licenses and seek environmental approvals. The next stage will be to establish impact and benefit agreements with local aboriginal groups, a process that can be costly and unpredictable. After that, the company faces deve/opment costs of more than $410 million.

Read hopes to operate the Star Diamond project at a cost of $10 per ton, a bargain compared to most. The Ekati mine, located above the frost line, operates at $35 per ton; Diavik at $66 per ton. By comparison, De Beers’ Venetia mine in South Africa operates at $15 per ton.

Bergman has been following the Star Diamond project and likes it because, he says, “It’s accessible.” The mine is close to a power grid and a highway. These are not minor considerations; everything from construction supplies to staff had to be airlifted to the Diavik and Ekati sites. In the final run-up to the completion of the Ekati mine, BHP was burning through $33 million a month transporting materials and workers. At the Star Diamond site, Bergman notes, “You could order a pizza from the next town.”

Carats and Sticks
Last year, several of the exploration companies visited Israel to participate in a conference on diamond mine development to help spur investment from the local cutters. Every would-be diamond producer courted two of the gem world’s most wanted power brokers, Benny Steinmetz and Lev Leviev. Steinmetz, an international investor with extensive interests in diamonds, natural resources, engineering and real estate, holds a stake in several exploration companies. The Steinmetz Diamond Group controls Magma Diamond Resources, which is the majority stakeholder (holding approximately 10 percent) in Shore Gold. Leviev, who owns shares in mines in Angola and Russia and cutting factories around the globe, has also been looking into Canadian partnerships. A proposed deal fell through in February, however, because of a dispute with BHP over the number of rough diamonds to be supplied.

De Beers, late to the game but quickly catching up, is now spending more than 40 percent of its exploration budget in Canada. It is currently developing one Canadian mine at a site called Snap Lake, which it acquired from Aber Diamond. De Beers also holds a majority stake in Kensington Resources, a junior that is exploring a number of kimberlite finds in the Fort à la Corne area. Because Snap Lake lies closely to Shore Gold’s Star Diamond project, some observers speculate that Shore Gold could soon be in play if De Beers’ interest in the area grows.

Fipke, whose life story was told in the book Fire into Ice: Charles Fipke and the Great Diamond Hunt, still obsesses over the hunt for the next big strike. He has launched a new junior, Metalex Ventures, and owns a controlling interest in a parcel of claims near the town of Attawapiskat in northern Ontario. De Beers is not far behind—the company is prospecting extensively in the area and may soon develop a site there.

Carol Besler, based in Toronto, writes about Jewelry and Gems. carol@style.ca

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