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Diamonds are forever, but diamond stocks…not so much.
The vast majority of publicly listed diamond stocks are speculative exploration plays that trade for $1.50 or less, which suggests that buying them is more a form of gambling than investing. However, there are some more established diamond miners with properties that are either producing diamonds right now, or that have shown strong potential to do so. These are the gems of the Canadian diamond sector and they’re worth a look if you want to invest in the world’s everlasting hunger for diamonds without actually going to expense of buying your own rock.
For example, there’s Aber Diamond Corp., which owns a stake in a diamond mine in the Northwest Territories as well as a jewelry retailer; Shore Gold Inc., which is developing a diamond mine in Saskatchewan; and, Tahera Diamond Corp., which owns a mine in Nunavut that began production this summer. There are several global diamond producers as well, but few of them are easily accessible to Canadian investors. Anyway, there are some good arguments for investing in domestic diamond companies rather than those active in other diamond production areas like Africa.
The recent film Blood Diamond has drawn attention to way in which diamonds in Africa are used to finance destructive civil wars. The global diamond industry has adopted guidelines to reduce the trade in these blood diamonds, and it claims that they now represent just 1 per cent of all traded diamonds. Still, Canadian production is free of these concerns. Canadian diamonds are also considered to be of high quality, and there’s a growing supply at a time when global stocks are starting to decline.
The most established Canadian diamond producer is Toronto-based Aber Diamond, which holds a 40-per-cent interest in the Diavik diamond mine about 300 kilometres north of Yellowknife (the other 60 per cent is owned by the British mining giant Rio Tinto PLC). The Diavik mine is highly profitable and RBC Capital Markets says it will produce about 10 million carats in 2007, or about 3 per cent of global rough diamond production. What makes Aber unique among Canadian diamond companies is that it also owns a controlling interest in the high-end diamond jewelry retailer Harry Winston. Aber is a solid enough enterprise overall that it pays a dividend yielding about 2.7 per cent based on a late 2006 price of $42.25. RBC rated the stock an “outperform,” with a price target of $48.
Another well-established Canadian diamond mine is called Ekati and it’s controlled by the diversified Australian mining conglomerate BHP Billiton, which is listed on the New York Stock Exchange. One of Canada’s newest diamond mines is called Jericho and it’s controlled by Toronto-based Tahera Diamond. Tahera ran into some operational problems in 2006 getting the Jericho mine up and running, and its share price had plunged to the $1.20 area at year’s end from $4 in February. The good news is that mining giant Teck Cominco has given Tahera a cash infusion by purchasing a 16-per-cent stake in the company that could later rise to 24.9 per cent.
A more speculative diamond play, given that its Saskatchewan properties are still in the development phase and thus uncertain, is Saskatoon-based Shore Gold. RBC Capital Markets has rated the stock an “outperform” and the one-year target price is $8.25, up from $6.15 at the end of 2006.
Anyone investing in diamond stocks has to understand the risks, including the usual sort of challenges involved in locating promising properties and then bringing them into production. A complicating factor for Canadian diamond miners is that their properties are often located in the Far North, where the climate poses some limitations on activity. There’s also a demand-related risk for mining diamonds - if the global economy were to slow substantially, then demand for these gems could tail off. Of course, that’s only a passing risk because diamonds are forever.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.