Where do we go from here?

Along with salt and sharp-edged weapons-grade obsidian and chalcedony (flint), coloured gemstones probably have been mined longer than any other mineral commodities known to man. However, it is only over the past couple of decades that they have become of interest to the mining industry at large — first diamonds and then, more recently and to a much lesser extent, coloured gemstones.

In the case of diamonds, this oversight was mostly a function of preconceived notions — in other words, the assumption that if De Beers had not found any in a particular location, then there were none there to be found; today, everybody knows that this is by no means the case. As far as coloured gemstones are concerned, the situation is somewhat more involved. But in eventual hindsight (in however many more years that may take), people will be asking “what took so long?”

I recall one of my mineral deposits professors telling my class that some of the most profitable mining operations in Canada were the gravel pits north of Toronto. I would not expect that this fact has changed much in the past 25 years. Regardless, I am hard-pressed to name any TSX Venture Exchange-listed mining companies, junior or senior, that are actively engaged in the aggregate business or that are ever covered in The Northern Miner. Aggregate may not be “sexy,” but it makes money — lots of money — and exploration for new aggregate resources remains a vital, active and extremely lucrative pursuit. After all, you cannot build a house, a road, an airport, or an office tower without it. Nonetheless, in the mining investment business, it still seems that the unlikely prospect of rapid capital appreciation by virtue of a big discovery of a major metal takes precedence over the much more likely prospect of sustained, long-term capital appreciation and profits through the methodical development and production of a basic mineral commodity. In any other industry, this would be referred to as a speculation rather than an investment, but so be it.

Similar to aggregates, there appear to be several factors that have led to coloured gemstones’ being ignored by the mainstream mining industry. In the first place, most coloured gemstone deposits tend to be relatively small, on the order of hundreds of thousands to a few million tonnes. The value of the recoverable gemstones contained within may be equivalent to one or more million ounces of gold (as is the case with the tanzanite deposits discussed in a previous article in this series; see T.N.M., Sept. 22-28/03). Nonetheless, it seems there is a perception among junior mining company executives that “size matters” and that investors prefer companies exploring for something “big,” even though grade is more often of greater significance in regard to its ultimate value. True, there is an economy-of-scale in large-tonnage, bulk-minable deposits, but this does not diminish the profitability of smaller, more labour-intensive, higher-grade deposits, particularly in some of the third-world countries were wages are lower (and where many of the world’s richest coloured gemstone deposits are found).

Erratic

Second, the distribution of gemstones in any given deposit may be somewhat erratic, which, combined with their coarse unit size, leads to an acute nugget effect, often making it difficult to calculate beyond the equivalent of an indicated mineral resource or prepare a long-term mine plan. Thus, the true value of the deposit may not be fully quantifiable until verified through production (as opposed to after the first drill hole, as many a news release would have us believe). However, this is not dissimilar to many of the high-grade gold and silver deposits around the world that are profitably mined.

Third, the absence of internationally set daily prices and guaranteed markets for virtually all coloured gemstones sets them apart from the commodities typically pursued by the mainstream mining industry, such as gold, silver, copper and nickel, and places them alongside the less typically pursued commodities, such as rare earth metals and industrial minerals, or dimension stone and aggregate, for that matter. It is not practical to attempt to set fixed prices for coloured gemstones, given their price dependence on factors such as the size, colour and clarity of the individual unprocessed (rough) stones, and a market where demand changes with fashion trends and product availability. In turn, this requires that companies mining coloured gemstones have a full-time sales department. However, this in no way diminishes the tremendous profit potential of coloured gemstone deposits. In fact, given the populations and economic growth of countries such as China and India (the same factors purportedly driving the current boom in metal prices), the demand for, and hence prices of, coloured gemstones is undergoing a similar increase — one not anticipated to end any time soon.

So much for the excuses. It’s time for our industry to wake up and seize the opportunity. To those who would offer the lame and well-worn lament “nobody I know has ever made any money in a coloured gemstone deal,” I would say that the same has been said about virtually every commodity at one time or another (and perhaps suggest a career in real estate instead of junior mining investment). Just because one or more companies have been unsuccessful in the past does not suggest that success cannnot be realized in the future, and generally speaking, past failures have usually had more to do with company mismanagement than with the commodity itself.

More attractive

As if coloured gemstones weren’t of sufficient value in their own right, a number of additional factors make them even more attractive as commodities with immediate and long-term significant value. First, most known coloured gemstone deposits are sticking out of the ground and being worked by individuals or small informal groups, utilizing primitive technology and without planning. In other words, similar to deposits in Russia following the fall of the Soviet Union, they are obvious, available and at an advanced stage of exploration/development. It is not a matter of going out and having to explore for them, at least for now and into the foreseeable future.

Second, coloured gemstone deposits occur in distinct and well-documented geologic settings, just like all other mineral deposits. No kidding. They can be targeted, prospected, mapped and sampled, and their geometries delineated. Various standard mining methods, both surface and underground, may be employed to exploit them (with no more security control than at any typical gold or diamond mine). Too, they tend to concentrate in residual (weathered) placers and in mature drainage placers in some parts of the world, enabling low-cost production (even better since only the higher-quality, bigger stones survive the journey, similar to placer diamond deposits).

Higher premium

Third, as the methods of gemstone enhancement and outright synthesis become more common, sophisticated and difficult to detect, the premium paid for authentic, natural, “God-created” gemstones steadily increases. Authenticity cannot be guaranteed by anybody who only purchases gemstones, not even rough stones at the mine site (there are already far too many stories of treated, synthetic or imitation rough being purchased by unsuspecting buyers sure that they could not go wrong if they went to the actual mine itself). However, it can be guaranteed by a company that rests its reputation, and its future business, on the sale of what it mines, and only what it mines. This trend is still at an early stage but is guaranteed to increase in scope and profitability.

Finally, and perhaps most important, is a factor realized by many metal producers today, as well as by numerous gemstone miners — namely that there are significant additional profits to be realized in the downstream processing of mined mineral commodities. In the case of copper, this means manufacturing products such as wire and pipes (a la Phelps Dodge), and in the case of gemstones, it means selling cut and polished stones instead of just the rough. The value of a cut stone can be several orders more than that of a rough stone, even though the cost of cutting and marketing is but a fraction. Why shouldn’t a gemstone mining company lock in these additional profits, as well?

In conclusion, we can say that companies such as tanzanite miner Afgem (AFG on the Johannesburg Stock Exchange) in Tanzania, emerald hunter True North Gems (TGX-V) in Canada, and ruby deposit developer Cluff Resources (CFR on the Australian Stock Exchange) are seizing new opportunities in the mining industry. It remains to be seen if they represent but a passing quirk or the harbinger of an industry rush into what is perhaps the last untapped mineral sector.

— The author is a professional geoscientist and certified gemologist, and is active in all kinds of mineral exploration and development, including metals, diamonds and coloured gemstones.

He may be reached by e-mail at avromeric.howard@utoronto.ca