Topic: Mining Stocks

Canadian diamond stock teams with DeBeers to open new mine

debeers

Note: The Gahcho Kue diamond mine began its the ramp up to production in August 2016.  Below was our initial 2012 look at one of its major stakeholders,  Mountain Province Diamonds. Today the stock trades at $3.93 and has a market cap of $629 million.

Pat McKeough responds to many personal questions on investing in stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions, such as this one on a joint venture between a Canadian junior diamond stock and DeBeers.


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Here’s a look back at Pat’s 2012 assessment of Mountain Province Diamonds.

Q: Pat: Could you give me your opinion on Mountain Province Diamonds? I presently own this stock and am wondering if I should continue to hold or sell. Thanks.

A: Mountain Province Diamonds (symbol MPV on Toronto; www.mountainprovince.com) holds 49% of the Gahcho Kue joint venture in Canada’s Northwest Territories. De Beers Canada owns the other 51%.

Gahcho Kue consists of a cluster of four kimberlites (see below for more on these rock formations), three of which have a combined probable mineral reserve of 35.4 million tonnes grading 1.57 carats per tonne, for a total diamond content of 49 million carats.

The partners are now building Gahcho Kue, which will be the Northwest Territories’ fourth diamond mine. The $1.0-billion project is now over 62% complete and is scheduled for completion by the end of 2016; it’s forecast to produce 4.3 million carats annually over 12 years.

De Beers Canada’s involvement in Gahcho Kue is a significant plus for Mountain Province, both in raising funds and for technical support. De Beers Canada is a subsidiary of De Beers, the world’s biggest diamond producer.

Mining giant Anglo American took full control of De Beers in 2012, after it bought a 40% stake from South Africa’s Oppenheimer family for $5.2 billion. It then increased its interest to 85%. The government of Botswana, where De Beers’ biggest diamond mines are located, owns the remaining 15%.

De Beers once produced about 90% of the world’s diamonds by number of carats. Its output is now about 35% of the world total, but the company remains a major factor in global diamond production, and Anglo American’s new majority ownership will give it the financial strength to pursue big projects like Gahcho Kue.

As well, De Beers may choose to take 100% control of the project. This is made more likely by the fact that Mountain Province has the right to market its share of Gahcho Kue’s rough diamond production, and De Beers continually aims to boost its share of global diamond marketing.

Mountain Province’s near-term production prospects give it speculative appeal. The chance of a takeover adds to that appeal.

The stock is okay to hold, but only for highly aggressive investors.

Diamonds are the transparent form of pure carbon, and their dense crystal structure makes them the hardest substance known.

Aside from jewelry, they’re widely used for machining plastic, glass and metal. Diamonds’ resistance to wear makes them essential for automated processes that produce many copies of the same product, while their hardness makes them useful as an abrasive and grinding material. They’re also used in knives, scalpels for precise surgery and dental drills.

In September 1991, explorers discovered the first economic diamond-bearing kimberlite deposit in Canada, located in the Lac De Gras area in the Northwest Territories, after over a decade of searching. Kimberlites are cone-shaped pipes comprised of a mixture of magma (molten rock) and rock that is carried by volcanic activity to the surface of the earth from depths greater than 150 kilometers. Diamonds form at those depths, under a mix of extreme pressure and high temperatures. Kimberlites may also pick up diamonds along the way—sometimes in quantities large enough to justify a mine.

Charles Fipke led the way

Kimberlites are small—generally with a surface area of less than 12 hectares—which makes them difficult to find. However, along with diamonds, the molten rock of the kimberlite also picks up other minerals, which diamond explorers call kimberlitic indicator minerals, as it rises to the surface. The team that found the first kimberlites in Canada, led by Charles Fipke, knew it would be next to impossible to directly locate a small kimberlite pipe. However, they reasoned that they could find the pipes by tracking trails of kimberlitic indicator minerals (which are more plentiful than diamonds in kimberlite) leading away from the pipes.

Over the last 1.5 million years or so, a series of glacial ice sheets has eroded the surface of Canada. As part of that erosion, the glaciers scraped the surface of the kimberlite pipes and dispersed the indicator minerals from the pipes over hundreds or even thousands of kilometres in what have proven to be traceable patterns. The indicator minerals can survive long-distance transportation and are resistant to weathering.

Other exploration methods can aid in the discovery of kimberlite. For example, the pipes can present a different magnetic signature than the surrounding rock, and that magnetic signature often has a distinctive circular pattern.

Hard to find … but hugely profitable

Still, the discovery process is far from perfect. While the minerals’ presence indicates the existence of kimberlite, the ancient ebb and flow of glaciers makes it hard to trace which glacial advance transported the indicator minerals. As well, not all kimberlites contain diamonds, and only a few of the ones that do will hold commercial quantities.

Once a kimberlite is found, tons of rock are collected from the top of the pipe and processed. Extracting kimberlite material to check for diamonds from the ground is difficult because kimberlite wears down faster than most surrounding rock; over time, this creates depressions over the kimberlite pipes. These then fill up with water or glacial debris, making it difficult to reach the kimberlite.

If diamonds are found, further drilling and analysis is necessary to give more details about the extent of the deposit and information about its diamond content.

So far, five diamond mines have opened in Canada: the Ekati mine in the Northwest Territories, which developed from Charles Fipke’s discovery; the Diavik mine in the Northwest Territories; the Jericho mine in Nunavut; the Snap Lake mine in the Northwest Territories (owned by DeBeers Canada); and the Victor mine in northern Ontario (also owned by DeBeers).

Investing in diamond-exploration stocks is risky. It’s a long way between the exploration phase and commercial production, when they begin to produce diamonds for sale and start making money. As well, there’s often a long time lag between news of progress toward a mine, and share prices can drift down in the meantime.

However, finding diamonds in mineable quantities can be hugely profitable. For example, the $700-million Ekati mine started up in 1998 and is generating over $500 million a year in revenue; it has an expected life of more than 20 years.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

What sort of experience have you had with low-priced mineral development stocks like Mountain Province? Did you make or lose money in them? Can you think of anything you’d do differently if you dabbled in these stocks again? Let us know what you think.

Note: This article was originally published in 2012 and is regularly updated.

Comments

  • A Greiner

    I have been following your emails you have sent me, and was wondering how or when you decide to re-balance the 5 sectors in the portfolios. What is the determining factor is it time say every 3 months, or whenever one position moves significantly or a combination? What is the discipline that triggers the re-balance of portfolio? What are the 5 sectors of the TSX, as it seems to be out of balance at times with companies like Nortel and Rim with high valuations at times followed by lower valuations a few years later, yet some people compare to how their portfolio compares to the the overall TSX? I think the universal goal is to preserve and grow portfolio, how does one consistently achieve that goal?

  • Ivor Langston

    Pat Ihave found your advice most informative and useful. I have been trying to locate the landlord who leases properties to Wal-Mart and other high profile retailers like Home Depot and Target etc.Thank you for solving my research problem. I find your articles most helpful. I.C.l

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