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Norman Barnett

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Northern lights

Norm Barnett

All that glisters is not gold;
Often have you heard that told
The Merchant of Venice
William Shakespeare

TORONTO (GlobeinvestorGOLD)—The Canadian north is thought of as a vast plain of white snow and sparkling ice, the very image of purity; just like Canada's diamonds. And in a business where image is almost everything, that perception is providing a competitive advantage to the companies who mine this country's diamonds.

The question is whether a competitive advantage for these miners will translate into better performance for your stock portfolio.

Sure, it feels odd to say the phrase, "Canadian diamonds." But as diamond production in this country grows into a multi-billion-dollar industry, investors are starting to realize the sector is out of its infancy. In fact, if growth remains on track, Canada will soon overtake South Africa as the world's fourth-largest diamond producer, behind Russia, Botswana and Angola. And much of that is thanks to the Canadian diamond industry's unsullied reputation.

Watch the Report on Business Television Your Money segment from January 30, 2002 on diamonds as an Investment.

To understand why image is so important just trace the route diamonds typically take to market. Many of these diamonds are mined in countries where the profits support civil wars or dictatorial regimes, and are sometimes mined under brutal working conditions. Once mined, the vast majority of these so-called "blood diamonds" go to diamond brokers in Antwerp, Belgium for cutting, polishing and sorting. And then they make their way to retailers around the world

When diamonds were discovered in the great white north in the early 1990s exploration quickly began in earnest. Ekati, Canada's first diamond mine, opened for business in the fall of 1998. A 300-kilometre flight over the tundra from Yellowknife in the Northwest Territories, and originally established by Dia Met Minerals, the mine was bought by Britain's BHP Billiton Ltd. Since production began at Ekati, it has turned out an average of about 10,000 carats of rough gems a day. Most of the gems have also been of a very high quality and total sales have now topped $1-billion (U.S.).

Dirty business

In the coming weeks, Canada's second diamond mine will swing into full operation. Just a few kilometres away from Ekati, the Diavik mine is jointly owned by Toronto-based Aber Diamond Corp. and British miner, Rio Tinto Ltd. Together, the companies have spent more than $1.2-billion to bring the operation on line, which may seem expensive, but consider that diamond mining is dirty business and the company has had to dig through deep water just to get to the mud where the diamond pipe starts.

One-Year Chart: ABZ-TMike Curran, a mining analyst at Merrill Lynch Canada, says it will be a few months before anyone can tell whether the quality of the diamonds coming out of Diavik will meet expectations. The fact that no one can be completely sure of the quality of the gems highlights the fact that risks remain for investors.

That said, the market seems ready to absorb whatever product Canada wants to turn out. Almost $8-billion (U.S.) of diamonds were sold globally in 2001, much of it in the U.S., and total sales of diamond-based jewelry topped $13-billion (U.S.). One of the biggest jewelry retailers in the U.S., Tiffany & Co. is a minority partner in the Diavik mine. The company has also built a $3-million cutting and polishing centre in NWT in addition to guaranteeing that it will buy at least $50-million of diamonds each year from Diavik as a way of offering its customers gems that haven't been tainted by controversy.

Biggest kid on the block

So, where does DeBeers, the company that has all but monopolized the diamond industry for the last 100 years, fit in? The company created by controversial British imperialist and business magnate Cecil Rhodes in 1880 has seen its share of the market slip to about 60 per cent from 90 per cent in recent years. And in 2001, disappointed with market reaction to the company, DeBeers went private again, closing its books to prying eyes.

Wanting to claim its own stake in the Canadian diamond rush, DeBeers has invested in the development of the Snap Lake property, also in NWT, and we also know that the company's mining arm, DeBeers Consolidated Mines Ltd., is spending half its worldwide exploration budget in Canada.

Buying DeBeers may no longer be an option for Canadian investors but the number of players is increasing. Investors who bought into Aber three years ago have seen the stock more than triple to $30. And there are up-and-comers to watch, such as Ashton Mining of Canada Inc. The company and its partners are spending about $6-million in the search for diamonds in Northern Quebec. Ashton's stock has been on a bit of a roller-coaster ride over the past five years, going from more than $5 down to pennies and then almost back again. The company also has the backing of Rio Tinto, who themselves have gone from almost pulling out of Canada just last year, to spending more money on exploration and development.

There are more than thirty separate exploration projects underway right now in the Ekati/Diavik area alone. And of course Diamond Fields International is back in the diamond mining business. The company became famous years ago when it was known as Diamond Fields Resources and accidentally discovered the Voisey's Bay nickel deposit while exploring for gems. The company is now mainly focused on mining in Namibia.

The Canadian diamond industry is booming, but investing is never without its pitfalls. Still, if you are looking to add some sparkle to your portfolio and gold has lost its luster, try casting your eye over Canada's diamond miners.

Norm Barnett is a producer at Report on Business Television.

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