De Beers bid for Ashton Mining viewed as harbinger of change

While De Beers Consolidated Mines’ (DBRSY-Q) successful $5-per-share bid for Winspear Diamonds signalled a desperate wish to secure Canadian diamond production, its bid for Australia’s Ashton Mining signals the beginning of a massive overhaul of the marketing strategy De Beers has carefully cultivated for the past century, predicts bottom-fish tracker John Kaiser.

Kaiser says De Beers has hinted that it wants to dismantle the Central Selling Organization (CSO), resolve its antitrust problems with the United States and exploit the De Beers name by marketing its own distinct brand of diamonds to the luxury goods market.

The CSO’s stranglehold on the diamond market has been weakened during the past two decades by independent mine production from Australia and Russia, as well as alluvial production from Africa. The discovery of diamonds in Canada’s North, largely to the benefit of Rio Tinto (rtp-n) and Broken Hill Proprietary (bhp-n), has added to the CSO’s woes.

During the past two years, a negative campaign has arisen over “blood diamonds,” or “conflict diamonds,” which are smuggled out of war-torn countries like Liberia, Sierra Leone and Angola, and used to fund civil wars. De Beers has called for political moves against the illicit trade.

Kaiser believes that, in the near future, there will be two kinds of diamonds: good diamonds whose origin can be certified; and tainted diamonds of uncertain origin. Countries like Canada and Australia offer a stable source of politically clean diamonds.

“By nailing down a supply of bedrock diamonds, whose origin can be certified, and branding them as De Beers diamonds, De Beers will be in a strong position to invade the vertical diamond market,” says Kaiser in a research report. “Instead of dominating 75% of the US$6-billion annual rough diamond trade, De Beers is going to abandon a large chunk of the rough diamond trade and go after the annual US$50 billion diamond-cutting, polishing and resale industry. De Beers will become that market by establishing a vertical system whereby its employees mine diamonds, cut and polish them and retail them through De Beers outlets.”

Kaiser says De Beers may turn out to be the best buy of all the diamond companies. It is currently trading at US$26.94 within a 52-week trading range of US$31.75-18.19.

He says the future of the Canadian diamond market may rest in the hands of Rio Tinto and BHP. Rio Tinto, which owns 59.7% of the Argyle diamond mine in Australia and 60% of the Diavik project in the Northwest Territories, recently topped De Beers’ bid for Ashton. BHP owns 51% of Ekati, Canada’s first diamond mine.

Kaiser says the two companies must establish a joint certification system for bedrock-sourced diamonds as an alternative to De Beers-branded diamonds — to make sure the marketing system has the critical mass to compete with De Beers, Rio Tinto and BHP must step up their diamond searches and their development plans.

He believes that, if De Beers emerges as a diamond supplier with no serious competition, it could mean the death of exploration juniors. On the other hand, if the rest of the diamond industry bankrolls the search for bedrock diamonds, it could mean a higher profile for the juniors.

Kaiser views an eventual merger between Dia Met Minerals (DMM-T) and Aber Diamond (ABZ-T) as a natural. Aber holds a 40% interest in the Diavik project and a 32.2% interest in Snap Lake, while Dia Met has a 29% interest in Ekati. “If Dia Met can unify its share structure into a single class, put the Fipke soap opera behind it and come up with a growth strategy, we should see the stock develop a higher profile and better stock prices that would give Dia Met the basis to make a bid for Aber,” he says. Dia Met A shares are trading at $18.20 within a 52-week range of $23.75-14.25.

Aber is as vulnerable to a hostile takeover bid by De Beers as was Winspear, says Kaiser. Aber has to fund its 40% share of Diavik’s high capital costs, opening itself up for further dilution. Aber is sitting at $11.55 in a 52-week range of $13.20-7.10.

Mountain Province Mining (MPV-T) hasn’t fared too well in the market as of late. It is trading at the bottom end of a 52-week range of $2.60-0.55. The prevailing view of the market is that, by chasing after Winspear and Ashton, De Beers has downgraded the Kennady Lake project, where it can earn a 60% interest. Mountain Province is carried to a 36% interest. Kaiser is confident that De Beers will eventually put the project into production.

He expects that Mountain Province will soon lose its NASDAQ listing for trading below US$1 for too long. This may trigger a liquidation by American institutions. “I believe the upcoming softness in the Mountain Province market represents an excellent bottom-fishing opportunity,” he says.

A second wave of diamond exploration is starting in Canada’s Far North, building on a 10-year learning curve. “Assuming the diamond industry does not wilt in the face of the De Beers branding gambit, the market is likely to develop a strong interest in the quest for new Canadian diamond pipes,” he says. “As the bottom-fishing strategy dictates, buy when the timing is still uncertain and the majority remains skeptical.”

Kaiser, who has been an ardent supporter of GGL Diamond (GGL-V) (formerly Gerle Gold) since 1996, continues to recommend the junior, which is trading in a 52-week range of 36-10 and presently sits at 27. The company recently completed a private placement of 750,000 units at 20 with an offshore investment entity. GGL also raised cash through the exercise of about 1.2 million warrants at 20. At the end of August, the company completed a private placement of 1.1 million units at 25 and 900,000 flow-through shares at 25 for proceeds of $500,000.

“GGL’s share structure is now primed to allow a powerful response to any significant news. Market-moving news flow could start as early as October,” says Kaiser. “I am upgrading GGL to a medium-priority bottom-fish buy in the 29-20 range.”

Monopros has been carrying out further till sampling on the LA 1-25 claims, south of Kennady Lake, to better define indicator mineral trains. The project is a 60-40 joint venture between Monopros and GGL.

GGL also conducted sampling work and geophysics on its 100%-owned claims in the Lac de Gras area and on the TCG claims 30 km south of Kennady Lake. Further sampling work and geophysical surveys are planned for this fall on the Dessert and Fishback claims, southwest and northwest of Yellowknife (they were formerly held by the Slave Diamond Syndicate), and, weather permitting, on the Murray claims near GMD Resource’s (GMD-V) Royce Group project, where Monopros is busy conducting till sampling.

The De Beers exploration subsidiary can earn a 51% interest in the Royce property by spending $16 million on exploration. Kaiser likes the Royce project, but regards GMD as a low-priority bottom-fish because management is acting mainly in a custodian role while De Beers operates the program. “GMD needs a diamond pipe discovery for the stock to come alive; the earliest that could happen is next summer, if De Beers drills a pipe next winter,” Kaiser says. GMD is trading at 30 in a 52-week range of 85-19.

“I like GGL because it is actively involved in generating new 100%-owned prospects in the Northwest Territories,” he says.

Other juniors he is keeping is eye on are Randy Turner’s Diamondex Resources (DSP-V), Navigator Exploration (NVR-V) and Ashton Mining of Canada (ACA-T). “Diamondex management has been distracted by Winspear and has restricted its work to several optioned claim blocks; Navigator is a passive participant in its N.W.T. plays, which include the non-Diavik diamond portfolio of Aber; and the future of Ashton’s N.W.T. initiative is uncertain in the wake of the De Beers bid for Ashton Australia,” he cautions.

Diamondex sits at $2.05 in a 52-week range of $2.60-0.52, Navigator is trading at 79 in 52-week range of $1.20-0.25 and Ashton Canada is at 77 in 52-week trading range of $1.50-0.50.