We’re number three

“Talk to me Harry Winston/And tell me all about it.” — Leo Robin and Jule Steyn, in Gentlemen Prefer Blondes.

This won’t be news to most of us.

The Canadian government’s statistical office has officially reported that Canada is now the world’s third-largest diamond producer, after Botswana and Russia. Canadian mines produced 4.2 million carats in the first half of 2003, a pace that will bring the country into the same league as South Africa and Angola.

Year-end figures are not out yet, but BHP Billiton’s Ekati mine will have produced about 6 million carats, and is an operation coming into maturity. The new kid, Diavik, was slated to produce 3.7 million carats by the end of 2003, as it ramps up to an ultimate annual production of 8 million carats.

All this may not be surprising, but it is both encouraging and enlightening. Encouraging, because it shows a “mature” mining industry can find new life in new commodities, and in new exploration ideas. Enlightening, because the way there holds some useful lessons for economic strategists, as well as for the mining industry itself.

Let’s first be encouraged, because the diamond hunt came along after the commodities boom of the late 1970s and the recession of the early 1980s, a business cycle that hurt exploration like none since the Dirty Thirties. The flow-through share system had fostered (some might say “manufactured”) a small boom in the mid-1980s, but it was the diamond hunt that got people interested in mineral exploration again in the 1990s.

Let’s now be enlightened. A mythology is developing that the diamond industry in the Northwest Territories had its origins in a crazy geologist’s crazy idea; that nobody had ever thought of the Archean block north of Yellowknife as diamond country. In the mythology, the explorationists that were behind the discovery, Charles Fipke and Stewart Blusson, had latched on to a way-out geological theory, while the world dismissed the idea of diamonds in Canada. It’s probably much fairer and more accurate to say the two used some fairly straightforward geological thinking, well-supported by the state of “academic” geology at the time. Their real edge lay in some very innovative ideas in exploration technology, and in a willingness to get their hands dirty trying those ideas out.

The ideas weren’t poorly supported; Falconbridge and Superior Oil, for example, had bankrolled work by the two in the early 1980s, before packing up their diamond hunt and leaving Fipke to start up Dia Met Minerals. (It was no coincidence that it was Fipke and Blusson’s principal contact at Superior, Hugo Dummett, who later sold the management of BHP on a joint venture with Dia Met.)

But in the end it was Fipke’s Dia Met that raised the money that found Ekati, and sparked the rush that led to all the other diamond discoveries in Canada.

So there is something to the idea that the mining industry’s business cycle, which so frequently governs what companies will budget and explore for, can be tough on exploration ideas, even though there may be plenty of technical support for them. So respecting the principle of financial discipline, but perhaps planning out to a slightly longer time horizon, might benefit larger companies by keeping them in a game that will ultimately prove profitable.

On the other hand, the lesson of the diamond hunt may be that junior exploration companies will generally have the upper hand in making money off a new exploration idea, simply because the guy with the idea keeps control of the financing. Juniors have always claimed they make the big discoveries; over the past few decades, that boast has started to become a whole lot truer.

Another point: Chuck Fipke and Stew Blusson did their work in the absence of direct government subsidy, of the “strategic” kind often proposed for high-technology sectors and other industry. Yet the brew of circumstances that industrial-policy gurus look for was there: a technological advantage (Fipke’s ideas on kimberlite indicator minerals), a market in tight supply, and a product (diamonds) to which considerable value can be added.

Yet the prospectors succeeded without access to public capital, largely because the system still allows prospectors to make a big score out of an idea that works out. Secure land tenure — regarded as a given in Canada, but not something you can count on in many other countries — meant Fipke and Blusson had the power to negotiate with a large company that wanted in, and could cut a good deal. (Try that in several other diamond-producing countries.)

We can certainly draw the conclusion that a credible legal environment did more to make Fipke and Blusson’s diamond hunt a success than any policy-driven system that tries to pick industrial winners and losers in advance.

Yet that doesn’t mean the discoverers of Ekati didn’t have plenty of help from government, in ways that really did benefit the project. One way government helped was by gathering high-quality scientific data and making them available to the general public.

So perhaps this is the lesson: provide good basic information, secure property rights, and an economic environment that lets guys with good ideas make money, and you get Ekati. Dish out cash because you think you’ve identified the Next Big Thing, and you get Telidon.

Robin and Steyn said it right: “get the ice, or else, no dice.”