The Great Canadian Diamond Rush : Mining Firms Flock North Following ’91 Discovery

The tantalizing early success of a lone diamond prospector here in the inhospitable Northwest Territories has touched off the biggest mineral rush in North American history.

Huge international mining concerns such as De Beers Consolidated Mines, Broken Hill Proprietary Co. and RTZ Corp., as well as about 50 smaller Canadian operations, have staked claims to an area that already totals the size of Belgium and is still growing.

Their goal, minable diamonds, is an elusive one. Until now, no profitable diamond deposit has ever been found in North America. And even in the current rush, no one can say for sure whether the lands being prospected will ever sustain a working mine.

Yet even against those odds, fortunes are already being made on hope alone.

The only company to have actually reported a find so far, tiny Dia Met Minerals Ltd. of Kelowna, British Columbia, saw its stock climb from a 1991 low of about 21 cents to a 1992 high of about $18.50--in trading on the notoriously speculative Vancouver Exchange. Dia Met’s stock has recently settled back to about $17.

Stocks of some of the other prospecting companies have spiraled as well on the belief that diamond-bearing rock formations tend to occur in clusters and that Dia Met can’t possibly have staked all the good ground for itself.

Meanwhile, Yellowknife--the rough-and-tumble capital of the Northwest Territories, and a gold mining supply center whose fortunes had sagged until recently with the price of gold--is suddenly finding itself in the midst of a boom.

At the normally sedate government recording office, officials ran out of the metal tags used to stake claims after a flood of requests. The local lumberyard is doing a banner business in the 2-by-2 posts that prospectors plant to mark the corners of their claims.

“In some years, it’s been quiet down on the bay,” says district geologist Dorothy Atkinson, nodding out her office window toward the wind-whipped waters of Great Slave Lake, where in brisk years for business, prospectors can be constantly heard taking off by float plane for their remote northern claim sites. “But now, there’s been a constant drone, which is nice to hear, because it means people are working.”

Some wishful Canadians even fantasize about shaking the mighty De Beers to its very foundations. The secretive South African company controls about 80% of the world market in uncut diamonds through its London-based cartel, the Central Selling Organization. Lately, however, De Beers has been weakened by a flood of non-cartel diamonds mined by wildcatters in Angola.

“De Beers is afraid of this (Canadian) development,” gloats Dia Met Vice President Wayne Fipke, who was managing an Edmonton theater until he got into the diamond business. “We’re talking about production that could equal Botswana’s,” which turned out 16 million carats last year.

Such predictions are premature, to say the least. Even Fipke--who is known throughout the business for his irrepressible optimism--admits that his company is at least three years away from an actual mine, if one is ever built at all.

But however grandiose Dia Met’s predictions may be, the company cannot be faulted for bad geology. It was Wayne Fipke’s brother, Charles--a founder of Dia Met--who sparked the Great Canadian Diamond Rush by finding a diamond deposit about 180 miles north of Great Slave Lake last year, after nine years of combing the Canadian tundra.

Charles Fipke, a self-made diamond authority who operates his own elaborate geological sampling laboratory in British Columbia, spent his now-famous quest quietly staking ground and digging up samples, camping and hiking his way across a 500-mile swath of the vast, empty Northwest Territories.

“We encountered approximately 22 grizzly bears” in a single year, says the plain-spoken Fipke. He pursued his search for nearly a decade, he says, because of the similarities between northern Canadian and southern African geology. He eventually tracked diamond-indicator rocks to their source, much the way one might trace a wandering river back to where it bubbles up out of the earth.

Diamonds are known to be associated with such geological exotica as garnet, ilmenite and chromite. These minerals may not be of much interest to mainstream geologists, but they can be found in abundance in the Northwest Territories, where they have been scraped away from their original resting places by the various glaciers that have crossed northern Canada over the eons. So the trick for Fipke was to study what is known about the long-gone glaciers, then try to deduce where the garnets and other diamond-associates might have originated.

When he succeeded in finding their source, Fipke also found diamond-bearing rock.

“An outstanding piece of geological sleuthing,” applauds Robert Bishop, editor of the Gold Mining Stock Report, a newsletter that recently published a special issue on the Canadian diamond find.

Charles Fipke is reticent in discussing his tracking methods, noting that he doesn’t like the speculative climate that has emerged as the diamond rush has grown.

“Some companies, and some investors, are going to get burned,” he warns.

Dia Met says that Charles Fipke has so far found 10 kimberlites, the large, carrot-shaped formations that are often the host rock for diamonds. Kimberlites are believed to have been created 70 million to 100 million years ago, as rock from the Earth’s mantle erupted upward through fissures to the surface. The eruptions sometimes carried diamonds up with them; the precious stones tend to be dispersed evenly through the soft kimberlite rock, like raisins in a loaf of bread.

Kimberlites tend to be found in clusters covering areas of as much as 100 square miles, which is why Dia Met’s competitors have staked nearly 13 million acres of land around Fipke’s kimberlites.

But just because a geologist finds a kimberlite doesn’t mean he has found diamonds.

Charles Fipke, who once worked in South Africa cites one South African discovery in which 66 kimberlites were found, and only one diamond emerged from the entire cluster.

So even as its competitors fan out across the Northwest Territories looking for more kimberlites, Dia Met is now busy digging samples of its own kimberlites and analyzing them to see what they contain.

Since August, 1990, Dia Met’s efforts have been financed by the well-established Australian mining giant, Broken Hill Proprietary Co., through its North American branch, BHP Minerals.

Under the terms of the venture, BHP has agreed to pay at least $1 million per year for exploration and up to $500 million to build a mine if Fipke’s diamond deposits turn out to be a sound proposition. In exchange, BHP will get a 51% interest in any eventual mine.

Dia Met has agreed to pay back a portion of the prospective mine’s start-up cost, over a period that will be determined by the value of any diamonds mined.

So far, the Dia Met-BHP venture has revealed its findings for just one kimberlite--and even in that case, it hasn’t given out all the information for which curious but wary investors are clamoring. In November, 1991, it revealed that a 59-kilogram sample of its first kimberlite bore 81 small diamonds, some of gem quality.

Reaction to that news was mixed: Excited investors in London and Australia jumped on Dia Met stock, driving the price up 600% in three weeks. But many Canadian analysts, who tend to view anything traded on the infamous Vancouver stock exchange with healthy skepticism, dismissed the announcement as a massive promotional hype.

“Dia Met’s dreamers are hoping for a fistful of diamonds--experience should tell them they’ll end up with a handful of dust,” warned Canadian Business magazine in its February issue.

But Dia Met then took a much larger, 160-ton sample of the same kimberlite, and last June said that it contained 101 carats of diamonds--or about 56 carats per 100 tons of kimberlite--about a quarter of them of gem quality. While even that sample is far too small to represent the content of the whole kimberlite, the percentage of diamonds to worthless rock compares favorably with the figures for some existing, money-making mines in southern Africa.

However, the cost-effectiveness of a diamond deposit is determined not only by the “grade,” or number of carats per 100 tons of kimberlite, but also by the percentage of those diamonds that are of gem quality. Dia Met’s sample does not stack up so well next to the southern African kimberlites in this respect.

To know the real value of its first sampled kimberlite, Dia Met and BHP will next have to analyze a sample of 5,000 to 10,000 tons of rock. Still, last summer’s preliminary news persuaded more Canadian analysts--although by no means all of them--that Fipke was something more than a mere Vancouver stock tout. The great rush to buy Dia Met stock and stake the Northwest Territories was on.

Today, many investors are still complaining that Dia Met has held back vital information on the color of its diamonds and on other characteristics that will make all the difference in whether the kimberlite can be profitably mined or should be abandoned. There are more than 3,000 separate classifications of diamonds, involving shape, quality, color, weight and other features. The price of diamonds in these various categories can vary wildly. A colored stone, for instance, can easily command four times the cost of a pure-white stone that is equal in all other respects.

Wayne Fipke contends that Dia Met has to keep secret the characteristics of its diamonds if it is to block the De Beers cartel from spoiling its chances of opening a successful mine. He alleges that if De Beers, which regulates world diamond prices by holding large inventories of diamonds, found out the color and grade of Dia Met’s stones, it would flood the market with similar diamonds and drive down the price.

In London, De Beers spokesman Andrew Lamont called Fipke’s theory “ludicrous,” saying: “The last thing De Beers would want is to affect the market in a negative way.”

Boom Town

Yellowknife, capital of Canada’s Northwest Territories, is a former gold-mining supply town whose fortunes sagged as the price of gold declined. With the prospect of new fortunes to be made in diamonds, Yellowknife is finding itself in the midst of a boom again. The diamond rush began with the discovery last year of diamonds in the tundra 180 miles north of Great Slave Lake.

World Diamond Production

Chart ranks top diamond-producing countries according to carats mined in 1991. While Australia leads the list, the former Soviet Union produces gems of greater value.

Value Carats (millions of Rank Country (millions) U.S. dollars) 1 Australia 35.0 210 2 Zaire 25.6 691 3 Botswana 16.0 1,072 4 Soviet Union 12.0 1,140 5 South Africa 8.5 893 6 West Africa 2.7 467 7 South America 1.7 141 8 Angola 1.3 204 9 Namibia 0.9 284 10 Central African Republic 0.5 80

Cross-Section of a Kimberlite Pipe

Kimberlites, also known as diaond pipes, are carrot-shaped holes through which the Earth’s mantle is thought to have erupted tens of millions of years ago. The explosive eruption of a diamond pipe brings other minerals to the surface, including telltale xenoliths--literally “foreign rocks”--such as garnets. In more recent geologic time, the minerals have been dispersed by glaciers throughout Canada and the northern United States.

Glittering Mines

Here is a list of the 10 largest commercial and near-commercial kimberlites in the world:

Rank Country Name of Deposit Acres 1 Tanzania Mwadui 59.1 2 Botswana Orapa 42.9 3 Angola Camafuca Camazambo 27.3 4 Angola Catoca 26.8 5 Botswana Jwaneng 21.9 6 Zaire Talala 20.2 7 Australia Argyle 18.2 8 South Africa Premier 13.0 9 Canada * Point Lake 12.3 10 Soviet Union Zarnitsa 8.7

* Place in chart as a point of reference. Point Lake, Dia Met’s first sampled kimberlite, cannot yet be classified as commercial or near-commercial.

Source: Gold Mining Stock Report