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Mathew Ingram

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Chilly-chilly bling bling

Mathew Ingram

 

TORONTO (GlobeinvestorGOLD) — Aber Diamond Corp., one of Canada's premier mining companies, is now inextricably linked to movie stars such as Cameron Diaz and Jennifer Aniston. How? Because the company just finished buying 51 per cent of legendary jeweller to the stars Harry Winston Inc., one of the retailers that routinely lend multimillion-dollar necklaces to actresses for their appearances at the Oscars. What was once a tiny Canadian mining company is now connected to the rich and powerful in Hollywood.

Aber's share price during the past 12 months

It may seem an odd marriage, but most industry analysts say Aber's move makes sense. In the diamond business, most of the value appears in the finished product rather than at the mine gate, which is why South African giant De Beers Consolidated — the company that virtually created the modern diamond industry — spent so much time controlling every aspect of the diamond retailing process. As its legendary hold over the industry has waned, thanks in part to Canada's diamond discoveries, De Beers has also moved further into the retail end, forming a partnership with luxury retailer LVMH.

Griffiths McBurney said in a recent research report that the purchase of Harry Winston makes sense because it "gives [Aber] a strong foothold in the retail market and positions the company in the two segments of the diamond pipeline with the most attractive returns. By operating at both ends of the industry, it is expected that the combined entity will capture all of the upside." The firm said it also provides Harry Winston with "ready access to the higher end of Aber's share of rough diamond production from the Diavik mine," which will benefit the retailer.

The past decade has seen Aber undergo an incredible transformation. In the late 1980s, it was just another junior mining company scrabbling around in the dirt in Canada's Northwest Territories, looking for gold and other precious metals, and for diamonds — although no one in their right mind thought that there might be enough diamonds for an actual diamond mine. About the only person who believed that was prospector Chuck Fipke, the founder of Dia-Met Minerals.

It's true that South African giant De Beers had looked around in Alberta and the Northwest Territories for diamonds, and found some kimberlite — the kind of mineral usually associated with diamonds — but De Beers eventually decided it was a wild goose chase and gave up, leaving the field to companies such as Dia-Met and Aber Resources. And for years, both traded for pennies on the Vancouver Stock Exchange.

Then Chuck Fipke announced that he and his partner, mining giant Broken Hill Proprietary Co. of Australia, had found diamonds in the Territories in 1991, and the land rush was on. But Aber Resources and Dia-Met had already staked hundreds of square miles of the best property.

Dia-Met and Broken Hill eventually created the Ekati mine, one of the world's most valuable diamond properties, and Aber and its partner Rio Tinto Plc created what would be the Diavik mine. Those two mines alone have catapulted Canada into the top ranks of the world's producers, turning out 10 per cent of global supply. By 2010 some expect Canada will be the third-largest producer, tied with South Africa.

Despite Aber's success in becoming a major diamond player, there are still risks an investor should be aware. One of those, obviously, is that the Harry Winston purchase doesn't pan out. More than one analyst pointed out that the deal was priced higher (at $80-million U.S.) than many had expected, and that it would dilute Aber's profit for the current year, although it was expected to contribute to it by 2006.

Others also pointed out that the diamond business is a volatile one, since pricing is so dependent on a variety of supply and demand factors. Recently, for example, Aber said that its production would be lower than expected this year because it had encountered a zone of mud and rock surrounding the main deposit and would have to work through it. That put downward pressure on the stock price, and RBC Dominion Securities warned that it "only reaffirms our view of the lack of visibility in its earnings stream." RBC said that the stock still looked expensive given the "ongoing uncertainty."

What is clear, however, is that diamonds in the Northwest Territories are a part of Canada now, and will be for some time to come, and that includes Aber.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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