Monday, October 03, 2005 8:37:53 PM
anyone seen this
Content-ID: <2960_2499_1128341644_625@inet3-p286>
De Beers, Peregrine Hunt for Diamonds in the Canadian Arctic
2005-09-29 02:11 (New York)
By Anthony Effinger and Christopher Donville
Sept. 29 (Bloomberg) -- South of the Arctic Circle in
Canada's Northwest Territories, 11 tents stand on the tundra.
Twin Otter floatplanes fly in pancake mix, fruit and steaks for
16 men and women living among the caribou and grizzly bears.
Most important is diesel fuel for the drill that clatters
around the clock, pulling greenish rock from 700 feet (213
meters) under the lakeshore. The rig sits atop a kimberlite, a
carrot-shaped plug of hardened magma that geologist Eric
Friedland is betting brought up lots of diamonds when it shot
through a crack in the Canadian granite 70 million years ago.
Friedland's Peregrine Diamonds Ltd. and some 60 other
companies -- De Beers, the world's largest diamond seller, among
them -- are spending millions of dollars probing the Arctic in a
race to replicate two massive strikes in the early 1990s. Those
mines turned struggling geologists into millionaires and made
Canada the third-largest producer of uncut diamonds in an $11
billion-a-year global market.
New fortunes have been elusive. Building a mine in the far
north can cost $1 billion, so diamond-bearing kimberlites --
called ``pipes'' in the trade -- must be either huge or laden
with stones. ``It's a very, very rare beast,'' says Friedland,
41.
Historically, such pipes have turned up every 10 years or
so, says Buddy Doyle, head of exploration at Vancouver-based
Arctic Star Diamond Corp. ``We're due,'' he says.
India and China
Whoever makes the next big find will enjoy soaring prices
and eager buyers, especially in India and China, where newly
prosperous grooms are purchasing diamonds for their brides.
Johannesburg-based De Beers boosted prices 14 percent for uncut,
unpolished stones in 2004. A polished, 1-carat, flawless white
diamond now sells for $15,000, up from $12,000 in 2002, according
to Antwerp, Belgium-based PolishedPrices.com.
``Prices are rising, and supply has never been tighter,''
says James Passin, 33, manager of the $360 million Firebird
Global Fund in New York. ``It's easy to be bullish on diamonds.''
Passin invested $1 million from his hedge fund in closely
held Peregrine 18 months ago, wagering that Friedland would beat
the industry's long odds and find a rich deposit. Only 15 percent
of the 7,000 kimberlites discovered worldwide bear diamonds, says
Bruce Kjarsgaard, a minerals research scientist at the Geological
Survey of Canada in Ottawa. Fewer than 1 percent have yielded
enough stones to merit a mine.
Proving that a kimberlite is worth exploiting takes years.
``Diamond exploration is one of the riskiest businesses on
earth,'' Passin says.
Ekati and Diavik
Canada, where many of the kimberlites are in the remote
Arctic, is a case in point. After four decades of exploration,
the country has two mines, Ekati and Diavik, 20 miles apart in
the Northwest Territories. Geologists Chuck Fipke and Stewart
Blusson discovered Ekati in 1991 and own 20 percent of it.
Melbourne-based BHP Billiton Ltd., the world's biggest mining
company, owns the rest.
Three years later, Doyle and then 26-year-old geologist Eira
Thomas unearthed Diavik. Toronto-based Aber Diamond Corp., the
once tiny company that Eira's father, Grenville Thomas, started
in Vancouver, owns 40 percent. The rest belongs to London-based
Rio Tinto Group, the world's No. 3 miner.
Together, the two mines produce about 11.5 million carats a
year, or about 13 percent of the world's total by dollar value.
Three new mines, scheduled to open by 2008, are expected to
produce 2.5 million carats a year, or just one-fifth of the haul
coming out of Ekati and Diavik.
`Monster Score'
``There hasn't been a monster score in a long time,'' says
John Kaiser, a Moraga, California-based analyst who has a Web
site about stocks called Kaiser Bottom-Fish Online, which many in
the diamond industry consider required reading.
Doyle, Friedland, Thomas and others are banking on ending
the dry spell. Stornoway Diamond Corp., Eira Thomas's latest
venture, is looking for stones above the Arctic Circle on the
Melville Peninsula in the territory of Nunavut.
Thomas has rewarded investors before. Shares of Aber traded
at 35 Canadian cents when Grenville Thomas started hunting
diamonds in 1991. Eira joined the company in late 1991 after
getting a bachelor's degree in geology from the University of
Toronto. She became a project geologist at Aber in 1993 and led a
team that discovered Diavik a year later. Today, Aber's shares
trade at C$41.18, a 118-fold return.
Both Eira and Gren, as he's known around Vancouver, left
Aber to go back to exploring. Eira remains on Aber's board. As of
January, she owned 26,500 shares, according to regulatory
filings, that were worth about C$1 million on Sept. 28. As of
April, Gren owned 334,233 shares, worth about C$13.8 million on
Sept. 28.
Diamond Earrings
Stornoway shares haven't proved as lucrative. They fell 43
percent in the year ended on Sept. 28, when they traded at C$1.08
on the Toronto Stock Exchange.
``We don't bill Stornoway as a six-month investment,''
Thomas says in her Vancouver office. In each ear, she wears a
sparkling, white, almost-2-carat diamond from Diavik.
The world has run short of diamonds twice in the past 300
years. Both times, a new source emerged to sate demand. Brazilian
gold miners found diamonds in their pans in 1725 as the rivers of
India -- an ancient source -- stopped giving up large numbers.
When Brazil ran out in the 1860s, farmers in South Africa started
picking up the gems in their fields.
Now, many of South Africa's mines are past their prime. Only
two of De Beers's seven mines there turn a profit. In August, the
closely held company shut its underground mine in Kimberley --
the town where the first kimberlites were discovered. The biggest
mine in the world, the Argyle in northern Australia, may close in
2007.
Gaping Pit
``The market needs more stones,'' Friedland says.
These days, some of the best ones are coming from a gaping
pit just 14 miles northwest of Friedland's camp: the Diavik mine.
Among the richest in the world, Diavik produces about $600
million of stones a year.
Dump trucks three stories tall rumble down a spiral road to
the bottom of the hole, where loaders fill them with kimberlite.
The trucks shuttle the rock to the mill, where it's crushed and
whisked by conveyor to a secure room of X-ray machines, which
make the diamonds fluoresce.
Even in a rich mine like Diavik, diamonds are scarce. The
ore coming out of Diavik's best kimberlite averages 4.6 carats
per metric ton (2,205 pounds) compared with 1 carat for all of
the world's mines. One carat is equal to one-fifth of a gram. At
Diavik, that works out to less than 1 gram of diamonds per metric
ton of ore.
Around the Clock
The key to making money is volume. The dump trucks run
around the clock all year long. Each day, about 5,500 metric tons
of ore come into the mill in 25 dump-truck loads. A pile of
diamonds that would fit easily into a hard hat goes out.
Many of Canada's best kimberlites are in the tundra, where
costs are high compared with southern Africa. There are no roads
except in winter, when engineers build one over the frozen lakes
from Yellowknife, the capital of the Northwest Territories. By
then, temperatures can drop to minus 40 degrees Fahrenheit (minus
40 degrees Celsius), cold enough to freeze flesh in seconds.
Summer brings mosquitoes, black flies and bears. An electric
fence has kept grizzlies out of Friedland's camp so far. A
wolverine, a ferocious carnivore that lives on the tundra,
surprised the camp cook by the refrigerator one morning.
Hazard for Investors
There are hazards for investors, too. Most of Canada's
diamond miners are small companies based in Vancouver. Many
raised their first cash on the now-defunct Vancouver Stock
Exchange, which merged with another regional exchange and
ultimately was absorbed by the Toronto Stock Exchange. The
Vancouver exchange suffered repeated instances of fraud by
companies touting fortunes, often in mining.
Canada's biggest mining fraud took place at a company traded
on the Toronto Stock Exchange. Bre-X Minerals Ltd. collapsed in
1997 after investors learned that the company's Busang gold
discovery in Indonesia, thought to be among the world's largest,
was a hoax. The news wiped out $4 billion of value in the
Calgary, Alberta-based company and weighed on Canadian mining for
years.
Sketchy companies persist in the diamond industry. CMKM
Diamonds Inc., a Las Vegas-based company looking for diamonds in
the Canadian province of Saskatchewan, is one of them, Bottom-
Fish's Kaiser says. CMKM says it has mineral rights in an area
known for kimberlites. Urban Casavant, a former prison guard,
started CMKM in 2002. He made his wife, Carolyn, a vice
president, and his son Wesley, then 22, corporate treasurer,
according to the U.S. Securities and Exchange Commission.
Billions of Shares
In July, SEC administrative law judge Brenda Murray revoked
CMKM's securities registration for failing to file financial
reports, starting with its 2002 annual report. The company
claimed an exemption at the time, saying in a July 2003 filing
that it had just 300 shareholders, which freed it from the filing
requirements.
Murray rejected the claim, saying in her ruling that CMKM
either knew it had more shareholders or was reckless in not
knowing. As of December 2004, CMKM had 778 billion shares
outstanding. More than 2 billion CMKM shares traded on some days,
Murray wrote.
CMKM shares, which trade on so-called pink sheets and not on
a major exchange, rose to 2.35 U.S. cents a share in December
2002. They have since fallen to one one-hundredth of a cent.
``They printed paper and sold it,'' Kaiser says. ``As far as I
can tell, they found nothing.''
Robert Maheu, a former FBI agent and aide to deceased
billionaire recluse Howard Hughes, joined CMKM's board as co-
chairman in January. Maheu, now a private investigator based in
Las Vegas, declined to comment.
Dog's Balls
CMKM's lawyer, Don Stoecklein, says the company is appealing
the SEC's ruling on revoking its stock registration. The agency
sought the action while CMKM still had time to catch up on its
filings, he says.
Friedland, meantime, is drilling for riches in the heart of
what has been the most disappointing diamond property in Canadian
history: an ore body called Tli Kwi Cho. The name means dog's
balls in the local Dogrib language and refers to the way the
deposit -- two kimberlites side by side -- looks on images made
by airplane-borne magnetometers, devices that measure small
differences in Earth's magnetic field. Kimberlites have different
magnetic properties than the surrounding granite.
Rio Tinto investigated the deposit in the early 1990s and
didn't find enough diamonds to make a mine pay off. Friedland
says Rio Tinto didn't test the heart of the best kimberlite and
missed good concentrations. He's drilling in new spots and has
already pulled up a 1.85-carat stone valued at as much as $2,063,
which works out to $1,115 a carat compared with an average of $80
to $90 a carat at Diavik.
`Caught the Bug'
Friedland, a native of Hingham, Massachusetts, south of
Boston, became interested in mining when he went out to
McMinnville, Oregon, in the 1980s to work on his brother Robert's
tree farm for the summer. Together, they explored an abandoned
gold mine on the property and found quartz flecked with the
yellow metal. ``We caught the bug,'' Friedland says.
Robert, who's 14 years older, learned everything he could
about mining. Eric graduated from prep school at Milton Academy
in Milton, Massachusetts, and went to the Colorado School of
Mines in Golden, Colorado. ``It's the Harvard of mining,'' Eric
says.
In 1988, Robert and Eric started Fairbanks Gold Ltd. and
discovered a gold deposit in Alaska on a claim called Fort Knox.
They sold the company to Amax Gold Inc. -- now part of Kinross
Gold Corp. in Toronto -- for $150 million in 1992.
Venezuela, Africa
Next, Robert and some partners started a company called
Diamond Fields Resources Inc. and began hunting in eastern
Canada. Instead of diamonds, they discovered the world's biggest
nickel-copper-cobalt deposit at Voisey's Bay, Newfoundland. They
sold it to Toronto-based Inco Ltd. for $3.3 billion. Robert's
take was $440 million in cash and stock. Eric was a shareholder.
He declined to reveal his profit.
Eric took over a Vancouver company called Carson Gold Corp.
in 1993, looked for gold in Venezuela for a few years and then
bought diamond properties in Sierra Leone and in Angola during a
lull in a bloody civil war between the government and Unita, a
political faction led by Jonas Savimbi.
In 1996, Friedland changed the name of Carson to
DiamondWorks Ltd. In 1998, in Angola, the company found a 233-
carat stone, more than half the size of a golf ball.
Angola Tragedy
Soon, DiamondWorks was selling $4.4 million of diamonds a
quarter. Then, in November 1998, as many as 150 men, some wearing
Unita uniforms and armed with AK-47s, attacked DiamondWorks'
Yetwene mine, killing eight people and kidnapping 10.
DiamondWorks, now called Energem Resources Inc., closed the mine.
Many of the abducted workers were never found.
The death toll would have been higher if DiamondWorks hadn't
hired Executive Outcomes, a private military company, to protect
the mine, Friedland says.
Friedland says he wanted to stay in diamond exploration, but
not in Africa. He formed Peregrine in 2002. His office is in
Vancouver's Yaletown district, overlooking Rodney's Oyster House.
As with many diamond startups, the atmosphere at Peregrine
is casual. Friedland, who's 6 feet 2 inches tall, wears a golf
shirt to work. A border collie mix named Jordie wanders the
halls.
The story of Tli Kwi Cho, Friedland's latest gambit, begins
about 4 billion years ago, when a 360,000-square-mile (932,400-
square-kilometer) chunk of Earth's crust called the Slave Craton
formed in what is now northern Canada. Cratons are solid down to
125 miles (201 kilometers), a depth at which most rock becomes
hot and pliable.
Eiffel Tower
The pressure needed to make a diamond is equivalent to that
of the Eiffel Tower resting on a 5-inch plate, according to the
American Museum of Natural History in New York. Such pressure
exists in the cratons. Temperatures are right, too, at a
relatively cool 2,282 degrees Fahrenheit. Much hotter, and
diamonds turn into graphite.
A University of Wisconsin geology professor named W.H. Hobbs
was the first to suggest that Canada could be a source of
diamonds. In 1899, he wrote that stones found around the Great
Lakes may have arrived there in Ice Age glaciers.
No one bothered to look very hard until 1960, when De Beers
became intrigued by the country's geology, says Kevin Krajick,
author of ``Barren Lands: An Epic Search for Diamonds in the
North American Arctic'' (W.H. Freeman, 2001).
Trail of Minerals
Geologists Blusson and Fipke caught up with De Beers in the
1980s in the Northwest Territories. The pair found a trail of
minerals that often appear along with diamonds -- dark red
garnets, lustrous black ilmenites and green chrome diopsides --
and followed it to a lake called Lac de Gras, 180 miles northeast
of Yellowknife.
To raise money, they formed Dia Met Minerals Ltd. In August
1990, Fipke and Blusson struck a deal whereby Broken Hill
Proprietary Co., now BHP Billiton, agreed to spend $500 million
in return for 51 percent of anything they found. BHP drilled an
exploratory hole. On Nov. 7, 1991, they put out a press release
announcing the discovery of a kimberlite and 81 small diamonds.
Some, they said, were gem quality.
In a matter of months, companies that had once specialized
in gold or uranium were grabbing land around Lac de Gras. In the
Northwest Territories, where most land is administered by the
federal government, mining companies get mineral rights in two
ways. One is by driving stakes at the four corners of a claim and
every 1,500 feet in a rectangle no larger than about 4 square
miles. The explorer must inform the mining recorder in
Yellowknife so it can verify the claim.
Staking Frenzy
Once the land is acquired, an explorer has 10 years to probe
the area, spending at least C$2 an acre per year. The second way
is to go to the mining recorder in December and take out a
prospecting permit.
Though this method is cheaper because there's no need to
rent a helicopter, an explorer doesn't automatically get the
mineral rights to specific parcels, just the exclusive right to
explore and stake them. A previously staked claim trumps an
application for a prospecting permit.
Blusson and Fipke's discovery sparked a staking frenzy.
Companies with no mining experience got into the business. Even
Vancouver-based Slumber-Magic Adjustable Bed Co. had diamond
property.
Yellowknife boomed. Brian Weir, 66, a local geologist whose
firm, Northern Geophysics Ltd., staked ground for miners, was
never busier. He spent C$30,000 a day renting floatplanes. One
year, his helicopter bill was C$700,000.
Slave Craton
By 1994, 80 percent of the Slave Craton was staked,
according to the Geological Survey of Canada. Weir's teams staked
a million acres for De Beers after Fipke and Blusson announced
their find.
Then he got a call from Adolf Petancic, a German miner who
owned a company called Dentonia Resources Ltd. in Vancouver.
Petancic and his partners -- Kettle River Resources Ltd. of
Greenwood, British Columbia, and Horseshoe Gold Mining Inc. of
Vancouver -- wanted diamond-hunting ground, too. Weir staked
240,000 acres just south of Fipke's claims.
Rio Tinto, through its Kennecott Canada Inc. subsidiary,
approached Petancic and offered to explore the property in
exchange for a majority stake, a common practice. He agreed, and
Kennecott started drilling, located the kimberlites and pulled up
54 diamonds.
Shares of the three small companies rallied on April 16,
1993, when Kennecott made the results public. Dentonia shares
jumped C$2.85, or 154 percent, to C$4.70 on the day of the
announcement. ``Everyone thought this was going to be an absolute
home run,'' Friedland says.
Digging a Tunnel
In late 1993, Kennecott wanted to do further drilling on the
site and needed a rig capable of bringing up more than a thousand
metric tons of rock to crush and look for diamonds, says Doyle,
the Kennecott geologist who later assisted on the Diavik
discovery.
With none available in northern Canada, Kennecott took the
unorthodox step of digging a tunnel. The Tli Kwi Cho kimberlites
proved especially soft. The 8-foot by 8-foot tunnel, supported by
timbers, became too dangerous. ``You could hear everything
creaking,'' Doyle recalls.
By April 1994, the ice road to Yellowknife was melting, and
Kennecott needed to get the tons of rock back to town. The team
left with what they had. Back in Yellowknife, Kennecott crushed
the rock and sifted out the diamonds. Petancic waited.
In August 1994, Kennecott called a meeting in its Vancouver
office and told the partners that the stones were mostly small.
Fewer than one-third of the bigger ones were gem quality. The
best of two samples showed a grade of 0.359 carat per metric ton
of ore, not enough to cover the cost of mining.
`A Disaster'
The companies disclosed their findings in a press release on
Aug. 5. Shares of Dentonia, Kettle River and Horseshoe plunged.
Dentonia shares plummeted C$5.23, or 80 percent, to C$1.27 in one
day. Horseshoe tumbled 83 percent.
In the days following, investors dumped shares of companies
looking for diamonds almost anywhere in Canada. In all, the
country's budding diamond sector lost about C$1 billion of market
capitalization in less than a week. ``It was a disaster,''
Petancic says.
In 2002, the same year Friedland founded Peregrine, BHP
Billiton agreed to assess readings of Tli Chi Kwo it had taken
the previous year from the air with a machine called a gravity
gradiometer. The device is used to detect differences in rock
density by measuring the gravitational field. Less dense rocks
like kimberlite have a weaker field.
`Flying Falcon'
The U.S. military and Lockheed Martin Corp. developed the
technology to help nuclear submarines navigate without using
sonar, which can reveal a sub's position to enemies. Lockheed and
BHP Billiton collaborated on a gradiometer, called Falcon, that
could be carried by an airplane.
In exchange for ``flying Falcon,'' BHP Billiton got a 38.5
percent share in Tli Kwi Cho. The company decided to focus on
properties elsewhere and offered to sell its stake to partners.
Peregrine is well known at BHP Billiton because Friedland has
exclusive rights to use one of the Falcon systems in the
Americas. BHP Billiton also owns 14 percent of Peregrine.
Friedland read up on the deposit and concluded that
Kennecott had never reached the center of the kimberlite with its
tunnel, thus missing the part of the deposit most likely to
contain greater concentrations of diamonds. In April 2004, he
paid an undisclosed amount for BHP Billiton's stake and raised
C$5 million to drill more holes.
In February, Peregrine shipped a drill over the ice road to
Tli Kwi Cho. By April, the crew had extracted 150 metric tons of
kimberlite from six holes, each 14 inches in diameter.
Next Big Thing?
In June, Friedland announced the results: The sample
returned 1,806 diamonds, 21 of which were bigger than half a
carat. Two were clean, white and bigger than 1 carat, the company
said in a press release on June 14. Overall, the drill holes
showed a grade of 0.98 carats per metric ton of ore, almost three
times what Kennecott got in 1994.
Shares of Dentonia jumped 7 Canadian cents, or 47 percent,
to 22 cents on the TSX Venture Exchange on the day of the
release. Kettle River rose 14 cents, or 35 percent, to 54 cents.
Horseshoe Gold gained 9 cents, or 36 percent, to 34 cents. Each
company owns 6.67 percent of Tli Kwi Cho.
Kaiser says Tli Kwi Cho may be the next big thing in
Canadian diamonds, worth as much as $1 billion to a big mining
company looking for a new project. If that's the case, shares of
Dentonia, Kettle River and Horseshoe Gold may each surge five- or
10-fold, Kaiser wrote to investors on June 20.
Diehards
On Aug. 29, Friedland announced that the stones Peregrine
pulled from five of six holes at Tli Kwi Cho were worth an
average of $58.54 to $77.77 a carat, enough to warrant a bigger
sample.
He hopes to pull 3,000 metric tons of kimberlite out of Tli
Kwi Cho by situating a drill directly on top of the lake. That
means waiting for the ice to thicken, probably in February, when
the sun will peek over the southern horizon for just a few hours.
After that, Friedland, his backers and the rest of the
diehards camped on the tundra will be one step closer to knowing
whether their quest to snap Canada's decade-long diamond dry
spell will reward them -- and their investors -- with gems under
the ice or whether their ambitions will crumble like the
kimberlite rock they've been probing for so long.
--Editors: Roche, Henkoff, Jahncke
Story illustration: For a graph of trading in shares of Aber
Diamond Corp., Canada's No. 1 diamond company by market
value, against the S&P/Toronto Stock Exchange Composite
Index, see {ABZ CN <Equity> COMP D <GO>}. For more about Canada
and diamond mining, see {TNI GEM CANADA <GO>}.
See {BBDP 6542814 <GO>} for Eric Friedland's Bloomberg bio.
See {MAG <GO>} for more Bloomberg Markets stories.
To contact the reporters on this story:
Anthony Effinger in Portland, Oregon at (1)(503) 471-1358 or
aeffinger@bloomberg.net;
Christopher Donville in Vancouver (1)(604) 331-1310 or
cjdonville@bloomberg.net
To contact the editor responsible for this story:
Ron Henkoff in New York at (1) (212) 318-2347 or
rhenkoff@bloomberg.net
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Content-ID: <2960_2499_1128341644_625@inet3-p286>
De Beers, Peregrine Hunt for Diamonds in the Canadian Arctic
2005-09-29 02:11 (New York)
By Anthony Effinger and Christopher Donville
Sept. 29 (Bloomberg) -- South of the Arctic Circle in
Canada's Northwest Territories, 11 tents stand on the tundra.
Twin Otter floatplanes fly in pancake mix, fruit and steaks for
16 men and women living among the caribou and grizzly bears.
Most important is diesel fuel for the drill that clatters
around the clock, pulling greenish rock from 700 feet (213
meters) under the lakeshore. The rig sits atop a kimberlite, a
carrot-shaped plug of hardened magma that geologist Eric
Friedland is betting brought up lots of diamonds when it shot
through a crack in the Canadian granite 70 million years ago.
Friedland's Peregrine Diamonds Ltd. and some 60 other
companies -- De Beers, the world's largest diamond seller, among
them -- are spending millions of dollars probing the Arctic in a
race to replicate two massive strikes in the early 1990s. Those
mines turned struggling geologists into millionaires and made
Canada the third-largest producer of uncut diamonds in an $11
billion-a-year global market.
New fortunes have been elusive. Building a mine in the far
north can cost $1 billion, so diamond-bearing kimberlites --
called ``pipes'' in the trade -- must be either huge or laden
with stones. ``It's a very, very rare beast,'' says Friedland,
41.
Historically, such pipes have turned up every 10 years or
so, says Buddy Doyle, head of exploration at Vancouver-based
Arctic Star Diamond Corp. ``We're due,'' he says.
India and China
Whoever makes the next big find will enjoy soaring prices
and eager buyers, especially in India and China, where newly
prosperous grooms are purchasing diamonds for their brides.
Johannesburg-based De Beers boosted prices 14 percent for uncut,
unpolished stones in 2004. A polished, 1-carat, flawless white
diamond now sells for $15,000, up from $12,000 in 2002, according
to Antwerp, Belgium-based PolishedPrices.com.
``Prices are rising, and supply has never been tighter,''
says James Passin, 33, manager of the $360 million Firebird
Global Fund in New York. ``It's easy to be bullish on diamonds.''
Passin invested $1 million from his hedge fund in closely
held Peregrine 18 months ago, wagering that Friedland would beat
the industry's long odds and find a rich deposit. Only 15 percent
of the 7,000 kimberlites discovered worldwide bear diamonds, says
Bruce Kjarsgaard, a minerals research scientist at the Geological
Survey of Canada in Ottawa. Fewer than 1 percent have yielded
enough stones to merit a mine.
Proving that a kimberlite is worth exploiting takes years.
``Diamond exploration is one of the riskiest businesses on
earth,'' Passin says.
Ekati and Diavik
Canada, where many of the kimberlites are in the remote
Arctic, is a case in point. After four decades of exploration,
the country has two mines, Ekati and Diavik, 20 miles apart in
the Northwest Territories. Geologists Chuck Fipke and Stewart
Blusson discovered Ekati in 1991 and own 20 percent of it.
Melbourne-based BHP Billiton Ltd., the world's biggest mining
company, owns the rest.
Three years later, Doyle and then 26-year-old geologist Eira
Thomas unearthed Diavik. Toronto-based Aber Diamond Corp., the
once tiny company that Eira's father, Grenville Thomas, started
in Vancouver, owns 40 percent. The rest belongs to London-based
Rio Tinto Group, the world's No. 3 miner.
Together, the two mines produce about 11.5 million carats a
year, or about 13 percent of the world's total by dollar value.
Three new mines, scheduled to open by 2008, are expected to
produce 2.5 million carats a year, or just one-fifth of the haul
coming out of Ekati and Diavik.
`Monster Score'
``There hasn't been a monster score in a long time,'' says
John Kaiser, a Moraga, California-based analyst who has a Web
site about stocks called Kaiser Bottom-Fish Online, which many in
the diamond industry consider required reading.
Doyle, Friedland, Thomas and others are banking on ending
the dry spell. Stornoway Diamond Corp., Eira Thomas's latest
venture, is looking for stones above the Arctic Circle on the
Melville Peninsula in the territory of Nunavut.
Thomas has rewarded investors before. Shares of Aber traded
at 35 Canadian cents when Grenville Thomas started hunting
diamonds in 1991. Eira joined the company in late 1991 after
getting a bachelor's degree in geology from the University of
Toronto. She became a project geologist at Aber in 1993 and led a
team that discovered Diavik a year later. Today, Aber's shares
trade at C$41.18, a 118-fold return.
Both Eira and Gren, as he's known around Vancouver, left
Aber to go back to exploring. Eira remains on Aber's board. As of
January, she owned 26,500 shares, according to regulatory
filings, that were worth about C$1 million on Sept. 28. As of
April, Gren owned 334,233 shares, worth about C$13.8 million on
Sept. 28.
Diamond Earrings
Stornoway shares haven't proved as lucrative. They fell 43
percent in the year ended on Sept. 28, when they traded at C$1.08
on the Toronto Stock Exchange.
``We don't bill Stornoway as a six-month investment,''
Thomas says in her Vancouver office. In each ear, she wears a
sparkling, white, almost-2-carat diamond from Diavik.
The world has run short of diamonds twice in the past 300
years. Both times, a new source emerged to sate demand. Brazilian
gold miners found diamonds in their pans in 1725 as the rivers of
India -- an ancient source -- stopped giving up large numbers.
When Brazil ran out in the 1860s, farmers in South Africa started
picking up the gems in their fields.
Now, many of South Africa's mines are past their prime. Only
two of De Beers's seven mines there turn a profit. In August, the
closely held company shut its underground mine in Kimberley --
the town where the first kimberlites were discovered. The biggest
mine in the world, the Argyle in northern Australia, may close in
2007.
Gaping Pit
``The market needs more stones,'' Friedland says.
These days, some of the best ones are coming from a gaping
pit just 14 miles northwest of Friedland's camp: the Diavik mine.
Among the richest in the world, Diavik produces about $600
million of stones a year.
Dump trucks three stories tall rumble down a spiral road to
the bottom of the hole, where loaders fill them with kimberlite.
The trucks shuttle the rock to the mill, where it's crushed and
whisked by conveyor to a secure room of X-ray machines, which
make the diamonds fluoresce.
Even in a rich mine like Diavik, diamonds are scarce. The
ore coming out of Diavik's best kimberlite averages 4.6 carats
per metric ton (2,205 pounds) compared with 1 carat for all of
the world's mines. One carat is equal to one-fifth of a gram. At
Diavik, that works out to less than 1 gram of diamonds per metric
ton of ore.
Around the Clock
The key to making money is volume. The dump trucks run
around the clock all year long. Each day, about 5,500 metric tons
of ore come into the mill in 25 dump-truck loads. A pile of
diamonds that would fit easily into a hard hat goes out.
Many of Canada's best kimberlites are in the tundra, where
costs are high compared with southern Africa. There are no roads
except in winter, when engineers build one over the frozen lakes
from Yellowknife, the capital of the Northwest Territories. By
then, temperatures can drop to minus 40 degrees Fahrenheit (minus
40 degrees Celsius), cold enough to freeze flesh in seconds.
Summer brings mosquitoes, black flies and bears. An electric
fence has kept grizzlies out of Friedland's camp so far. A
wolverine, a ferocious carnivore that lives on the tundra,
surprised the camp cook by the refrigerator one morning.
Hazard for Investors
There are hazards for investors, too. Most of Canada's
diamond miners are small companies based in Vancouver. Many
raised their first cash on the now-defunct Vancouver Stock
Exchange, which merged with another regional exchange and
ultimately was absorbed by the Toronto Stock Exchange. The
Vancouver exchange suffered repeated instances of fraud by
companies touting fortunes, often in mining.
Canada's biggest mining fraud took place at a company traded
on the Toronto Stock Exchange. Bre-X Minerals Ltd. collapsed in
1997 after investors learned that the company's Busang gold
discovery in Indonesia, thought to be among the world's largest,
was a hoax. The news wiped out $4 billion of value in the
Calgary, Alberta-based company and weighed on Canadian mining for
years.
Sketchy companies persist in the diamond industry. CMKM
Diamonds Inc., a Las Vegas-based company looking for diamonds in
the Canadian province of Saskatchewan, is one of them, Bottom-
Fish's Kaiser says. CMKM says it has mineral rights in an area
known for kimberlites. Urban Casavant, a former prison guard,
started CMKM in 2002. He made his wife, Carolyn, a vice
president, and his son Wesley, then 22, corporate treasurer,
according to the U.S. Securities and Exchange Commission.
Billions of Shares
In July, SEC administrative law judge Brenda Murray revoked
CMKM's securities registration for failing to file financial
reports, starting with its 2002 annual report. The company
claimed an exemption at the time, saying in a July 2003 filing
that it had just 300 shareholders, which freed it from the filing
requirements.
Murray rejected the claim, saying in her ruling that CMKM
either knew it had more shareholders or was reckless in not
knowing. As of December 2004, CMKM had 778 billion shares
outstanding. More than 2 billion CMKM shares traded on some days,
Murray wrote.
CMKM shares, which trade on so-called pink sheets and not on
a major exchange, rose to 2.35 U.S. cents a share in December
2002. They have since fallen to one one-hundredth of a cent.
``They printed paper and sold it,'' Kaiser says. ``As far as I
can tell, they found nothing.''
Robert Maheu, a former FBI agent and aide to deceased
billionaire recluse Howard Hughes, joined CMKM's board as co-
chairman in January. Maheu, now a private investigator based in
Las Vegas, declined to comment.
Dog's Balls
CMKM's lawyer, Don Stoecklein, says the company is appealing
the SEC's ruling on revoking its stock registration. The agency
sought the action while CMKM still had time to catch up on its
filings, he says.
Friedland, meantime, is drilling for riches in the heart of
what has been the most disappointing diamond property in Canadian
history: an ore body called Tli Kwi Cho. The name means dog's
balls in the local Dogrib language and refers to the way the
deposit -- two kimberlites side by side -- looks on images made
by airplane-borne magnetometers, devices that measure small
differences in Earth's magnetic field. Kimberlites have different
magnetic properties than the surrounding granite.
Rio Tinto investigated the deposit in the early 1990s and
didn't find enough diamonds to make a mine pay off. Friedland
says Rio Tinto didn't test the heart of the best kimberlite and
missed good concentrations. He's drilling in new spots and has
already pulled up a 1.85-carat stone valued at as much as $2,063,
which works out to $1,115 a carat compared with an average of $80
to $90 a carat at Diavik.
`Caught the Bug'
Friedland, a native of Hingham, Massachusetts, south of
Boston, became interested in mining when he went out to
McMinnville, Oregon, in the 1980s to work on his brother Robert's
tree farm for the summer. Together, they explored an abandoned
gold mine on the property and found quartz flecked with the
yellow metal. ``We caught the bug,'' Friedland says.
Robert, who's 14 years older, learned everything he could
about mining. Eric graduated from prep school at Milton Academy
in Milton, Massachusetts, and went to the Colorado School of
Mines in Golden, Colorado. ``It's the Harvard of mining,'' Eric
says.
In 1988, Robert and Eric started Fairbanks Gold Ltd. and
discovered a gold deposit in Alaska on a claim called Fort Knox.
They sold the company to Amax Gold Inc. -- now part of Kinross
Gold Corp. in Toronto -- for $150 million in 1992.
Venezuela, Africa
Next, Robert and some partners started a company called
Diamond Fields Resources Inc. and began hunting in eastern
Canada. Instead of diamonds, they discovered the world's biggest
nickel-copper-cobalt deposit at Voisey's Bay, Newfoundland. They
sold it to Toronto-based Inco Ltd. for $3.3 billion. Robert's
take was $440 million in cash and stock. Eric was a shareholder.
He declined to reveal his profit.
Eric took over a Vancouver company called Carson Gold Corp.
in 1993, looked for gold in Venezuela for a few years and then
bought diamond properties in Sierra Leone and in Angola during a
lull in a bloody civil war between the government and Unita, a
political faction led by Jonas Savimbi.
In 1996, Friedland changed the name of Carson to
DiamondWorks Ltd. In 1998, in Angola, the company found a 233-
carat stone, more than half the size of a golf ball.
Angola Tragedy
Soon, DiamondWorks was selling $4.4 million of diamonds a
quarter. Then, in November 1998, as many as 150 men, some wearing
Unita uniforms and armed with AK-47s, attacked DiamondWorks'
Yetwene mine, killing eight people and kidnapping 10.
DiamondWorks, now called Energem Resources Inc., closed the mine.
Many of the abducted workers were never found.
The death toll would have been higher if DiamondWorks hadn't
hired Executive Outcomes, a private military company, to protect
the mine, Friedland says.
Friedland says he wanted to stay in diamond exploration, but
not in Africa. He formed Peregrine in 2002. His office is in
Vancouver's Yaletown district, overlooking Rodney's Oyster House.
As with many diamond startups, the atmosphere at Peregrine
is casual. Friedland, who's 6 feet 2 inches tall, wears a golf
shirt to work. A border collie mix named Jordie wanders the
halls.
The story of Tli Kwi Cho, Friedland's latest gambit, begins
about 4 billion years ago, when a 360,000-square-mile (932,400-
square-kilometer) chunk of Earth's crust called the Slave Craton
formed in what is now northern Canada. Cratons are solid down to
125 miles (201 kilometers), a depth at which most rock becomes
hot and pliable.
Eiffel Tower
The pressure needed to make a diamond is equivalent to that
of the Eiffel Tower resting on a 5-inch plate, according to the
American Museum of Natural History in New York. Such pressure
exists in the cratons. Temperatures are right, too, at a
relatively cool 2,282 degrees Fahrenheit. Much hotter, and
diamonds turn into graphite.
A University of Wisconsin geology professor named W.H. Hobbs
was the first to suggest that Canada could be a source of
diamonds. In 1899, he wrote that stones found around the Great
Lakes may have arrived there in Ice Age glaciers.
No one bothered to look very hard until 1960, when De Beers
became intrigued by the country's geology, says Kevin Krajick,
author of ``Barren Lands: An Epic Search for Diamonds in the
North American Arctic'' (W.H. Freeman, 2001).
Trail of Minerals
Geologists Blusson and Fipke caught up with De Beers in the
1980s in the Northwest Territories. The pair found a trail of
minerals that often appear along with diamonds -- dark red
garnets, lustrous black ilmenites and green chrome diopsides --
and followed it to a lake called Lac de Gras, 180 miles northeast
of Yellowknife.
To raise money, they formed Dia Met Minerals Ltd. In August
1990, Fipke and Blusson struck a deal whereby Broken Hill
Proprietary Co., now BHP Billiton, agreed to spend $500 million
in return for 51 percent of anything they found. BHP drilled an
exploratory hole. On Nov. 7, 1991, they put out a press release
announcing the discovery of a kimberlite and 81 small diamonds.
Some, they said, were gem quality.
In a matter of months, companies that had once specialized
in gold or uranium were grabbing land around Lac de Gras. In the
Northwest Territories, where most land is administered by the
federal government, mining companies get mineral rights in two
ways. One is by driving stakes at the four corners of a claim and
every 1,500 feet in a rectangle no larger than about 4 square
miles. The explorer must inform the mining recorder in
Yellowknife so it can verify the claim.
Staking Frenzy
Once the land is acquired, an explorer has 10 years to probe
the area, spending at least C$2 an acre per year. The second way
is to go to the mining recorder in December and take out a
prospecting permit.
Though this method is cheaper because there's no need to
rent a helicopter, an explorer doesn't automatically get the
mineral rights to specific parcels, just the exclusive right to
explore and stake them. A previously staked claim trumps an
application for a prospecting permit.
Blusson and Fipke's discovery sparked a staking frenzy.
Companies with no mining experience got into the business. Even
Vancouver-based Slumber-Magic Adjustable Bed Co. had diamond
property.
Yellowknife boomed. Brian Weir, 66, a local geologist whose
firm, Northern Geophysics Ltd., staked ground for miners, was
never busier. He spent C$30,000 a day renting floatplanes. One
year, his helicopter bill was C$700,000.
Slave Craton
By 1994, 80 percent of the Slave Craton was staked,
according to the Geological Survey of Canada. Weir's teams staked
a million acres for De Beers after Fipke and Blusson announced
their find.
Then he got a call from Adolf Petancic, a German miner who
owned a company called Dentonia Resources Ltd. in Vancouver.
Petancic and his partners -- Kettle River Resources Ltd. of
Greenwood, British Columbia, and Horseshoe Gold Mining Inc. of
Vancouver -- wanted diamond-hunting ground, too. Weir staked
240,000 acres just south of Fipke's claims.
Rio Tinto, through its Kennecott Canada Inc. subsidiary,
approached Petancic and offered to explore the property in
exchange for a majority stake, a common practice. He agreed, and
Kennecott started drilling, located the kimberlites and pulled up
54 diamonds.
Shares of the three small companies rallied on April 16,
1993, when Kennecott made the results public. Dentonia shares
jumped C$2.85, or 154 percent, to C$4.70 on the day of the
announcement. ``Everyone thought this was going to be an absolute
home run,'' Friedland says.
Digging a Tunnel
In late 1993, Kennecott wanted to do further drilling on the
site and needed a rig capable of bringing up more than a thousand
metric tons of rock to crush and look for diamonds, says Doyle,
the Kennecott geologist who later assisted on the Diavik
discovery.
With none available in northern Canada, Kennecott took the
unorthodox step of digging a tunnel. The Tli Kwi Cho kimberlites
proved especially soft. The 8-foot by 8-foot tunnel, supported by
timbers, became too dangerous. ``You could hear everything
creaking,'' Doyle recalls.
By April 1994, the ice road to Yellowknife was melting, and
Kennecott needed to get the tons of rock back to town. The team
left with what they had. Back in Yellowknife, Kennecott crushed
the rock and sifted out the diamonds. Petancic waited.
In August 1994, Kennecott called a meeting in its Vancouver
office and told the partners that the stones were mostly small.
Fewer than one-third of the bigger ones were gem quality. The
best of two samples showed a grade of 0.359 carat per metric ton
of ore, not enough to cover the cost of mining.
`A Disaster'
The companies disclosed their findings in a press release on
Aug. 5. Shares of Dentonia, Kettle River and Horseshoe plunged.
Dentonia shares plummeted C$5.23, or 80 percent, to C$1.27 in one
day. Horseshoe tumbled 83 percent.
In the days following, investors dumped shares of companies
looking for diamonds almost anywhere in Canada. In all, the
country's budding diamond sector lost about C$1 billion of market
capitalization in less than a week. ``It was a disaster,''
Petancic says.
In 2002, the same year Friedland founded Peregrine, BHP
Billiton agreed to assess readings of Tli Chi Kwo it had taken
the previous year from the air with a machine called a gravity
gradiometer. The device is used to detect differences in rock
density by measuring the gravitational field. Less dense rocks
like kimberlite have a weaker field.
`Flying Falcon'
The U.S. military and Lockheed Martin Corp. developed the
technology to help nuclear submarines navigate without using
sonar, which can reveal a sub's position to enemies. Lockheed and
BHP Billiton collaborated on a gradiometer, called Falcon, that
could be carried by an airplane.
In exchange for ``flying Falcon,'' BHP Billiton got a 38.5
percent share in Tli Kwi Cho. The company decided to focus on
properties elsewhere and offered to sell its stake to partners.
Peregrine is well known at BHP Billiton because Friedland has
exclusive rights to use one of the Falcon systems in the
Americas. BHP Billiton also owns 14 percent of Peregrine.
Friedland read up on the deposit and concluded that
Kennecott had never reached the center of the kimberlite with its
tunnel, thus missing the part of the deposit most likely to
contain greater concentrations of diamonds. In April 2004, he
paid an undisclosed amount for BHP Billiton's stake and raised
C$5 million to drill more holes.
In February, Peregrine shipped a drill over the ice road to
Tli Kwi Cho. By April, the crew had extracted 150 metric tons of
kimberlite from six holes, each 14 inches in diameter.
Next Big Thing?
In June, Friedland announced the results: The sample
returned 1,806 diamonds, 21 of which were bigger than half a
carat. Two were clean, white and bigger than 1 carat, the company
said in a press release on June 14. Overall, the drill holes
showed a grade of 0.98 carats per metric ton of ore, almost three
times what Kennecott got in 1994.
Shares of Dentonia jumped 7 Canadian cents, or 47 percent,
to 22 cents on the TSX Venture Exchange on the day of the
release. Kettle River rose 14 cents, or 35 percent, to 54 cents.
Horseshoe Gold gained 9 cents, or 36 percent, to 34 cents. Each
company owns 6.67 percent of Tli Kwi Cho.
Kaiser says Tli Kwi Cho may be the next big thing in
Canadian diamonds, worth as much as $1 billion to a big mining
company looking for a new project. If that's the case, shares of
Dentonia, Kettle River and Horseshoe Gold may each surge five- or
10-fold, Kaiser wrote to investors on June 20.
Diehards
On Aug. 29, Friedland announced that the stones Peregrine
pulled from five of six holes at Tli Kwi Cho were worth an
average of $58.54 to $77.77 a carat, enough to warrant a bigger
sample.
He hopes to pull 3,000 metric tons of kimberlite out of Tli
Kwi Cho by situating a drill directly on top of the lake. That
means waiting for the ice to thicken, probably in February, when
the sun will peek over the southern horizon for just a few hours.
After that, Friedland, his backers and the rest of the
diehards camped on the tundra will be one step closer to knowing
whether their quest to snap Canada's decade-long diamond dry
spell will reward them -- and their investors -- with gems under
the ice or whether their ambitions will crumble like the
kimberlite rock they've been probing for so long.
--Editors: Roche, Henkoff, Jahncke
Story illustration: For a graph of trading in shares of Aber
Diamond Corp., Canada's No. 1 diamond company by market
value, against the S&P/Toronto Stock Exchange Composite
Index, see {ABZ CN <Equity> COMP D <GO>}. For more about Canada
and diamond mining, see {TNI GEM CANADA <GO>}.
See {BBDP 6542814 <GO>} for Eric Friedland's Bloomberg bio.
See {MAG <GO>} for more Bloomberg Markets stories.
To contact the reporters on this story:
Anthony Effinger in Portland, Oregon at (1)(503) 471-1358 or
aeffinger@bloomberg.net;
Christopher Donville in Vancouver (1)(604) 331-1310 or
cjdonville@bloomberg.net
To contact the editor responsible for this story:
Ron Henkoff in New York at (1) (212) 318-2347 or
rhenkoff@bloomberg.net
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