Allen Barry Report on AberAllan Barry Report on Canadian Diamond Exploration and Mining
August 15/2005
Welcome to the premier edition of our report on Canadian Diamond exploration and mining. In this edition we will discuss the various reasons why we follow the diamond industry and specifically why we follow the diamond exploration and mining industry in Canada. We will also discuss some of the companies that are significantly involved in the diamond industry at this time.
WHY DIAMONDS
Diamonds are more than a girl’s best friend; they are also a miner’s best friend. Of the ten most profitable mines in the world nine are diamond mines. The reason is very simple, the cost of extracting diamonds from diamond bearing rock is around $10.00 per ton, and the diamonds found in that rock can be as high as several hundred dollars per ton.
The largest miner of diamonds in the world is Debeers, they are also a major player in the marketing of rough diamonds. Debeers has raised their prices for rough diamonds several times in the last 5 years and we have seen the price for rough increase by 35% in that time frame. Why has Debeers been able to increase their prices so aggressively? It comes down to supply and demand. The supply of gem quality diamonds coming into the market is not able to feed the increasing demand for these stones.
On the supply side of the equation, there is a misconception that there is an abundance of diamonds in the world. The fact is that diamonds are found in many places in the world. The problem, as it relates to supply, is finding diamonds that are economically mine-able. The reality is that gem quality stones above a half-carat are becoming more and more scarce.
Another major factor as it relates to supply is that many of the diamond mines in the world have been producing diamonds for many years, some for over 100 years. Many of those mines are mined out and are being shutdown. Earlier this year Debeers announced they were shutting down six mines in South Africa.
On the demand side of the equation, diamonds are benefiting from huge demand that is coming from China and India, as is taking place in many other natural resources. Additionally, demand from the U.S.A., the largest market for diamond jewelry is growing at a healthy pace of around 6% in 2005.
In a nutshell the market for diamonds is very strong and looking forward over the next five years it is difficult to see it weaken. In fact we fully believe it is going to continue getting stronger. These are the reasons we are very bullish on the diamond market in general.
CANADA THE NEW KID ON THE BLOCK:
In the global diamond market the new kid on the block is Canada. In the early nineties there were no diamonds being mined in Canada. It was known that diamonds were present in the country but nobody had found an economically mine-able deposit. That all changed when a maverick geologist named Chuck Fipke, who for many years spent his time trying to find diamonds in Canada, made a major discovery that would turn into Canada’s first diamond mine.
Since that time we now have two diamond mines in Canada, the Ekati mine that was found by Chuck Fipke and the Diavik mine that was discovered by Aber Resources. These two mines have taken Canada from being a non-player in the global diamond business to being the third largest producer of diamonds in the world. With the production from these two diamond mines and the mines that are in development, Canada has the potential of developing into the number one producer of diamonds in the world.
We see this as an unstoppable scenario and if one is looking for concrete evidence that this outlook is realistic, look no further than the actions of Debeers. More than 80% of their budget for exploration and development is being spent in Canada. We are in the early years of this long-term scenario and we feel there are plenty of new deposits to be found in Canada. This is why we follow the Canadian diamond scene so keenly.
ABER DIAMOND CORP. A MODEL FOR SUCCESS:
Aber Diamond Corp. is a very unique company for several reasons and it is the model for the type of companies we are looking to invest in. After the discovery of diamonds by Chuck Fipke and his company Diamet Minerals, Aber was quick to act and was able to acquire a very good land package in the area near the Ekati mine. That land package would prove to host several very exciting diamond deposits that would become Canada’s second and most profitable diamond mine.
When an exploration company makes a major discovery, a senior mining company usually buys them out, and the senior mining company mines that discovery. Aber took a different route, they went through the exploration phases and ultimately participated in the development of the mine, and now are the only publicly traded mining company in the world solely focused on diamonds.
Many investors feel that the best performance in Aber’s stock is behind them, I feel their best performance is still in the future. The main reason I believe this is that they have a cash-generating machine from their 40% interest of the Diavik diamond mine. Aber was required to put up 40% of the cost of building the Diavik diamond mine that had a price tag of over one billion dollars. In the first two years of production the company will have earned back their capital expenditures. This in itself is unusual in the mining industry where in many mining developments, companies’ look at a five to seven year period to recover their capital expenditures. The reason for this quick payback is due to the extreme profitability of mining diamonds.
Another recent development in the Aber story is the use of some of the cash generated from their diamond production to purchase Harry Winston Jewelers. Harry Winston Jewelers is one of the largest retailers of high-end jewelry in the USA. If you’ve ever watched the Oscars on T.V. and admired the diamonds worn by many of the movie stars you have seen the jewelry Harry Winston sells. Actually most of those jewels are not owned by the movie stars but are on loan for the Oscars from the Harry Winston collection.
This acquisition offers a unique opportunity for Abers diamond production. When a diamond is produced from a diamond mine it goes through several steps before it reaches the retail market. After a rough diamond is produced, usually the stone is then sold to a Rough Diamond Dealer. The next step is to cut the stone into a finished stone and then on to the retailers of diamond jewelry. Often throughout these steps the diamond is bought and sold several times and each time has a markup.
By purchasing Harry Winston, Aber is able to go from producing rough stones to retailing finished diamonds to the public. This allows them to unlock significant value by eliminating various different middlemen and going directly from the mine to the retail market. This will have a huge impact on Aber’s bottom line and is the main reason we are so bullish about the future performance of Aber’s stock.
The earnings from mining and retailing diamonds will significantly affect the bottom line. This will give the company a cash position that will enable them to pay out to shareholders significant dividends and have a hoard of cash for future acquisitions. Stock performance based on exceptional earnings growth will allow Aber to split the stock in the future, maybe a few times in the next ten years.
These are the reasons we feel that Aber Diamonds stock performance has not seen its best days, it is our opinion that their best performance is ahead of them, not in the past. Abers rise from a junior penny stock into a major player in the diamond industry is the model of the kind of companies we want to invest in during their early days and participate in the phenomenal growth in the share price.
We believe that there are other companies involved in diamond exploration in Canada that have the potential of developing into another Aber type story. Obviously no two companies grow in the same fashion. We are looking for small companies that have the potential of becoming a major success story as Aber ultimately has and continues to be.
OUR DIAMONDS IN THE ROUGH
This section of the report is dedicated to companies we feel have the potential to turn into an Aber Diamonds of the future. We are looking for companies we can invest in on the ground floor and watch grow into much larger companies.
All of the companies included in this section we are shareholders of, or intend on acquiring shares in the near future, we believe strongly in the age-old adage that we eat our own cooking. At times companies we own shares in we also offer consulting services to, when we look at offering our consulting services we are only interested in offering those services to companies we first and foremost want to be shareholders of as well as bringing something significant to the table.
At the beginning of discussion on each of the companies we will indicate if we are a shareholder or a consultant to these companies. We also advise readers to look at our disclaimer at the end of this report. The companies we discuss do not appear in any priority list we are listing them alphabetically.
Arctic Star Diamonds
Currently we do not own shares in Arctic Star, but we intend to purchase a position in the stock after this report has been sent to our readers. The main reason we are going to buy shares in the company is simply because of the people involved in managing this company. Specifically the addition of Buddy Doyle as a director of exploration for this company is, in our view, a very impressive event.
Buddy Doyle brings a great deal of experience in the diamond industry. He has contacts with other very experienced consultants that will be involved in the exploration of the various projects the company is involved in. Arctic Star is involved with several diamond exploration projects throughout Canada; the one we are most excited about is the company’s projects in the Lac De Gras area of the Northwest Territories of Canada. The Lac De Gras area is were Canada’s two diamond mines Diavik and Ekati are located; this project is most definitely in diamond country.
The Credit Lake project was previously operated by Kennecott Canada, a subsidiary of Rio Tinto Zinc, who is the 60% owner of the Diavik Diamond Mine. Kennecott is also the company Buddy Doyle worked with for several years in their diamond exploration division. Kennecott worked on this project for several years and were able to create a very strong database of geological information. Due to the amount of work done at Credit Lake it is far from being a grassroots exploration project.
It is in fact quite advanced as an exploration project and has several drill ready targets that the company is preparing to drill in this upcoming winter drilling season. Because of Buddy Doyle’s experience in this area and the success and knowledge that his team has we feel they have a very good chance of finding kimberlite (kimberlite being the rock that hosts diamonds) on this project.
Based on previous geo-chemical analysis of diamond indicator minerals found on the property if kimberlite is found we feel it has good potential of containing diamonds. As we said earlier the company is preparing to begin drilling on the Credit Lake project this winter and we will be watching closely for the results of this drilling program.
Arctic Star’s stock symbol is ADD and the shares trade on the Toronto Stock Exchange Venture Market. Their website is www.arcticstardiamond.com on the website you will find all direct contact information for the company.
Shear Minerals
Currently we do not own shares of Shear Minerals but intend on purchasing shares in the company after this report is out to our readers.
We have been following this company for a few years; our initial interest began when they first started finding kimberlite pipes on their project in the eastern Arctic area of Canada. As we looked more closely into the company we found a very exciting story on the diamond indicator minerals they had found on their property. Diamond indicator minerals are used in exploration for diamonds as an indicator of where to look for a diamond deposit and as a predictive tool for the potential for a deposit to contain diamonds.
A significant amount of analysis has been done over the last few years on the diamond indicator minerals from Shears project. Those indicator minerals have come from surface samples and drill holes. On several occasions we have also done our own analysis of the diamond indicator minerals from their project. In our opinion when the company finds the kimberlites that these indicator minerals on the surface come from, they will find those kimberlites to contain significant amounts of diamonds.
What initially got this company rolling a few years ago was the discovery of several kimberlite pipes during their drilling campaign. These discoveries when tested for diamonds came out with modest diamond content. Because the size of the samples that were taken from drill core were very small, some of these kimberlites would probably be worth a second look by taking a larger sample. In diamond analysis of a kimberlite pipe the size of the sample is very important. Because diamonds are relatively small in an over all volume of rock, it is very important not to quit on a deposit too early. A perfect example of this is Debeers Victor kimberlite pipe.
When the Victor pipe was initially found and sampled with a small sample size the diamond recovery was very modest. Debeers let the deposit sit for several years, then went in and did a much larger sample. Although the carat per ton number is not as high as is found in Canada’s two diamond mines, the value per carat is very high. With the combination of the carats per ton, the value per carat and the tonnage of kimberlite rock the Victor Pipe is now moving towards production and will be one of Canada’s future diamond mines. We believe there is a realistic argument to be made that some of the previous discoveries made by Shear should be looked at further.
Shear has found a field of kimberlites that so far has over 20 pipes. Most of these kimberlite pipes through small sample sizes have only found a modest amount of diamonds. Due to the variable distribution of diamonds in a kimberlite, we believe that the pipes that are viewed as failures, with larger samples could turn into successes.
Shear has done a great deal of surface sampling, and has found a very large area, with a significant amount of diamond indicator minerals. Many of the diamond indicator minerals in this area contain the same kind of minerals that are found where major diamond deposits have been found throughout the world.
When you find diamond indicator minerals the next step is to have them tested for the chemicals contained in those indicator minerals. The chemical composition of these indicator minerals gives statistics that can be used to compare to other places in the world where diamonds and indicator minerals with similar chemical compositions have been found.
Over the last thirty years there has been a great deal of analysis done by geochemists on diamonds and minerals that are included inside of diamonds. The vast majority of this analysis has centered on garnets. These garnets and other minerals are tested using an electron microprobe that measures the chemical composition of a diamond indicator mineral.
An exploration company looking for a diamond deposit has to use these diamond indicator minerals as a tool when looking for new deposits. The reason they have to look for diamond indicator minerals is because garnets and other minerals are much more abundant in a kimberlite then diamonds. When surface sampling you will rarely find actual diamonds but you can find a good population of diamond indicator minerals in the area if you’re in the right place.
Getting back to Shear Minerals there is plenty of evidence based on their surface sampling that they are in the right place to make a major diamond discovery. Because they have a large amount of kimberlite deposits on their project the next step is to find the ones that have the potential of turning into a major diamond deposit. Based on the abundance of diamond indicator minerals and the chemical composition of those minerals we feel that this project has significant potential to find a diamond mine.
Shear’s summer drilling program is currently underway, we are watching closely for results from this program. We feel that with all the company has learned about this project in the past few years, this years drilling will provide some very exciting results.
Shear Minerals stock symbol is SRM and the shares trade on the Toronto Stock Exchange Venture Market. Their website is www.shearminerals.com on the website you will find all direct contact information for the company.
Snowfield Development Corp.
We are a shareholder and a consultant to Snowfield Development Corp. and have been for several years. We intend on increasing our position after this report is out to our readers.
Snowfields main project is the Ticho Diamond Project that is located 25 miles southeast of Yellowknife, NWT, Canada. This area has significant economic advantages being so close to Yellowknife, primarily being close to infrastructure and professionals with expertise in diamond exploration and development. Additionally being accessible in the winter via ice road and in the summer by water allows the company a much larger window for exploration and development.
The company made a discovery of kimberlite on this project at Mud Lake in the first quarter of 2003. Mud Lake is 4000 meters from the diamond bearing Drybones Bay Pipe; this pipe is the largest diamondiferous kimberlite pipe in the Northwest Territories (home of Canada’s two diamond mines). Snowfield has varying interests in a claim block of 40 000 acres that covers ground to the east and southeast of the Drybones Bay Pipe.
Snowfield originally got involved in this area knowing that only one kimberlite pipe had been found at the time, with kimberlites occurring in clusters, the company viewed this as a good place to look for a new kimberlite field. The lone kimberlite pipe in the area having proved to be diamondiferous was a strong indicator of other kimberlites in this area containing diamonds as well.
Snowfield was able to accomplish something that is very unusual in the mining exploration business; the company found what they were looking for in their first drill hole. The company followed up with a few more holes before te the deposit and find a permits ran out, and then went into an eighteen-month period of waiting for a new 5-year class A permit that was issued in September of 2004.
Upon receiving this new permit the company began drilling this past winter to further delineasuitable location to take a 500 ton sample of kimberlite from. Most often when a company makes a discovery of kimberlite they will do micro diamond analysis of the drill core to test for the presence of diamonds. This approach is often taken because projects way out in the middle of the barren lands of Canada can’t afford larger samples due to the increased costs of taking and moving these samples out of these remote areas.
Snowfield found itself in a much different position when this discovery was made. The company brought its drill core from the discovery to the Prospectors and Developers Associations annual conference in Toronto; this is the largest mining conference in the world. At the conference several representatives of Debeers visited the companies booth and viewed the drill core. Eventually a verbal offer was made that Debeers would cover the cost of processing a 500 ton sample of kimberlite from the Mud Lake kimberlite using their Dense Media Separation plant in Grand Prairie, Alberta.
This handshake agreement was later formalized and the company announced earlier this year that Debeers would be covering the cost of this processing at no cost to Snowfield. Debeers doesn’t receive stock in the company or any interest in the claim block or any first rights of refusal on any diamonds found on the project. What they do get is a look at the data from processing the sample. This is a very rare occurrence for a major mining company like DeBeers to help a junior by saving the junior company approximately 1 million dollars in expense that they would have had to incur if they did this test themselves.
After attending the PDA conference in March of 2003 the company tested the drill core for diamond indicator minerals. The company found a unique suite of diamond indicator minerals that contained an unusually high amount of rare green garnets. A search of scientific papers published over the last thirty years found that only a small amount of green garnets had been discovered and written about. In all cases where green garnets were found diamonds were present, in fact enough high quality diamonds that these kimberlites are some of the most profitable diamond mines in the world.
In the next six months we reasonably expect to see the taking of a 500 ton sample from Mud Lake for macro diamond testing, further airborne geophysical testing, further sampling for diamond indicator minerals and drilling to look for additional kimberlite deposits.
Snowfield’s stock symbol is SNO and the shares trade on the Toronto Stock Exchange Venture Market. Their website is www.snowfield.com on the website you can find all direct contact information for the company.
WHAT MAKES THE ALLAN BARRY REPORT UNIQUE
For the last 12 years the editor of this report has had a career as a consultant to publicly traded junior exploration companies. Services provided to these companies include investor relations, corporate communications, strategic planning, and fund-raising.
As an investor relations consultant to small companies one has to wear several hats, from communicating the companies efforts to the investing community and communicating technical aspects of those efforts, to being involved in raising funds for drilling and exploration, and being involved in the technical analysis and reporting of what has been found.
These efforts have provided a unique opportunity to learn, from an insider’s perspective, the challenges that junior exploration companies face. Additionally it has opened doors to meeting a very accomplished group of technical people.
Spending this time as a consultant to junior exploration companies has provided a unique perspective that is an asset few analysts or newsletter writers possess
IN CLOSING
We would like to take this opportunity to thank you for taking the time to read this report; we hope this information proves to be informative and helpful. We ask the reader not to post this report on any website for at least three days after you receive it and that if it is posted to post the entire report without any editing. We invite our readers to pass on our contact information to anybody they feel may be interested in receiving this report or future reports and we would be glad to add them to our email list for future publications.
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Regards,
Allan Barry Laboucan,
Editor
Allan Barry Reports.