However, apart from Ashton’s pitched battle takeover between Rio and Anglo, when it comes to investing in Australian diamond exploration companies (even if they are exploring in Southern Africa), diamonds have been too hard, the investment returns have been woeful. Even Ashton was underperforming before it was taken over. We have seen at least two diamond investment “rushes” in Australia, that have mostly resulted in the destruction of shareholder wealth.

Diamond companies can be subdivided into 3 targets, namely : Hard Rock or Elluvial from the weathered removal of existing pipes, Alluvial (from the erosion of such pipes by rivers) and deposited in river sediments, and Marine (deposited on-shore beaches or on the sea-floor) after the rivers have entered the sea. The “rushes” have usually involved companies chasing one or more of the three targets.

Although diamonds themselves are commonly classified according to clarity and colour, from an investment viewpoint the factors are the average grade (measured in carats per hundred tones, usually denominated as cpht – where the rule is the higher the double-or-more-digit figure is the better), and the average US$/ct price that can be achieved for a parcel from that grade. The average price of a parcel of diamonds can from a pipe or area varies according to how many large stones are in the parcel (less than 0.15ct are usually discarded), whether they are coloured (colours are more valuable than white), and what proportion or percentage of the diamonds are of “gem” (clear, capable of being used in jewellery) quality.

If the average price and the grade is economic, then the mine can become profitable. However, finding an economic diamond deposit is more difficult. The discovery and sales of a few parcels or the odd spectacular diamond does not guarantee success. The first diamond boom (and bust) was about 10 years’ ago where its peak was marked by the first diamond conference (in Perth) that followed a gold conference.

When one of the presenters stated that the usual way to collect samples was to sit under a shady tree than run to an old river bed, take a sample often in 45 degree centigrade heat for a maximum of half-an-hour and run back to sit under the tree to recover, delegates realized that diamond explorers and finding diamonds was different.

At that conference, delegates learnt that the typical A$2-3m IPO raising was unlikely to be sufficient to find diamonds. It was a case of first locate the diamond region using gangue mineral indicators, ideally pyrope garnets, then find the pipe (which was usually worse than a needle in a haystack), then find if the pipe was economic. The upside was that once an economic pipe is found, then they usually occur in clusters and are often linked by economic dykes.

Part of the peak was marked by a stock called Cambridge Gulf which had spectacular projections made as to what share price it could attain, their were even wild stock exchange releases. The plan was to suck diamonds beneath the mud and clay from the Joseph Bonaparte Gulf off the WA/NT coastal boundary. There were known to be a few sharks in the region and a divers cage was constructed and placed beneath a boat, but attracted too much attention from the sharks in a reputedly short period of time so that theory was abandoned.

The Gulf itself has a high tidal flow of at least 3m and suffers from the odd cyclone which were added difficulties. However, a diamond recovery vessel was shipped from South Africa where it had been used offshore and theoretically located in Cambridge Gulf’s concession. The stock price surged when it reported the discovery of diamonds….and subsequently sank…. when it was found that the company had not flushed the tanks before use and the diamonds were in fact South African.

It highlighted a characteristic of diamonds, namely that by microscopically examining their internal structure, it is possible to determine what diamond pipe they have come from. The Cambridge Gulf diamonds had been effectively internally stamped “SA” when they were formed.

The latest “rush” or diamond boom has been over the 2001/2002 period with the bust occurring in 2002/2003 as illustrated in Table 1 which shows share prices as at 1 January 2002 for a number of diamond stocks that were in existence at that time or floated within that year. The table also shows the high and low that were attained from 1 January 2001 to 9 May 2003. The table shows the stocks that we remember and is not comprehensive.

Table 1. A Number of Diamond Stocks (January 2001 to May 2003)

The worst performer in this period has clearly been Majestic, which in its heyday walked the streets of Sydney with a sizable Cape yellow diamond and accompanying bodyguard, alas the diamond was later disputed as to who actually produced it.

A number of the new diamond stocks such as Dwyka and County followed alluvial diamond targets. A former De Beers employee once recently told us (about a year after we had analysed and reported on Dwyka) that they had found that the distribution of diamonds in alluvials is virtually impossible to predict, because it is so random and erratic. What occurs in one part or area cannot be taken as an indication of the whole and projections based on drilling an area simply cannot be made. Dwyka is currently in the process of closing and selling its South African alluvial diamond properties which although they generated revenue, were not as profitable as anticipated, and are now focusing on India.

Dwyka has illustrated along with Kimberley, that although diamonds can be found, can they be found in sufficient quantities and have such a quality as to be economically profitable to justify the cost of their extraction and repay any capex required.

Almost all of the stocks in Table 1 have lower share prices since the beginning of this year (January 2003) except for Tawana which is unchanged. Tawana actually staged a recent rebound from a 40c low on 17 March 2003 (which it fell to when De Beers failed to take up its option on Flinders Island commenting that “while there may still be un-located diamondiferous primary sources on the island, it is unlikely that they will be of potential commercial interest to De Beers”) to 75c on 16 April 2003.

The rebound was based on a significant potential alluvial diamond discovery 7km long by 2km wide which was found using BHPB’s Falcon system only 6km away from De Beers’ Finsch diamond mine at Kimberley in South Africa, and is in the process of being drilled. An economic diamond discovery may still be made on Flinders Island, it is just that De Beers were only interested if they had the potential to be worth more than US$500m.

Apart from Tawana, from an Australian investors’ viewpoint, so far, diamonds have been too hard.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, who has a Proper Authority with State One Equities, and with his associates, has held interests in some of the stocks in this article, This e-mail address is being protected from spambots. You need JavaScript enabled to view it . The opinions expressed in this article should not be taken as investment advice, but are based on observations by the author. The author does not warrant the accuracy or completeness of any information and is not liable for any loss or damage suffered through any reliance on its contents.