Everybody watched gold skyrocket after the US started printing more money than they could afford. Then the poor man’s gold, silver followed even faster. What’s next you might ask, when the world recovers from a recession, the last thing to pick up are luxury items. Lately, I have been watching consumer spending rise across the world and with it the price of Diamonds. Diamond prices will continue to pickup (already more valuable than pre 2008 recession lows) as the world economy continues to grow. After all diamonds are a girl’s best friend (sorry couldn’t help myself), but what you might be asking yourself now is how do I invest in them and which companies are either overvalued or undervalued? I prefer Canadian companies, especially those companies with projects in Canada. The companies with the greatest potential and relatively low risk are these companies (listed from lowest risk to highest): Harry Winston (for comparison sakes), Stornoway, Lucara, Shore Gold, and Peregrine.
Harry Winston (TSE:HW) (NYSE:HWD) is a 40% minority partner in Diavik Diamond Mine. On December 31, 2009, the Diavik Mine had 27.5 million carats of proven reserves and 32.2 million carats of probable reserves for nearly 60 million carats of total proven and probable reserves (Harry Winston has a 40% interest). Harry Winston has a market capitalization of 1.4 billion, giving it a value of 58.33$/carat, mind you Harry Winston has retail division included into its market cap you could argue has very big or very small part of its valuation, I would say no more than a few 100 million. This gives us a good starting point for company valuations.
Stornoway (TSE:SWY) (PINK:SWYDF) in my mind has the least possible risk, but might not have the highest possible return of the bunch. They have a large amount of projects in their portfolio, but only their Renard Project strikes me as the best of the bunch. With 41.3 million carats of both indicated and inferred mineral resource, gives Stornoway with a market cap of 214 million, a value of 5.18$/carat. There are countless other reasons I like this project like the Quebec government owns part of the company, the Quebec government is building a road to the mine, and Rio Tinto and the Lundin family are also minority share holders.
Lucara Diamond Corp (CVE:LUC) (PINK:LUCRF) also makes my list although they have a small mineral resource of 15 million carats, I have been read the deposit holds a large amount of multi-carat diamonds, which fetch high valuations. Lucara is a Canadian listed company, but all of their projects are in the southern part of Africa. The company has a large market cap of 435 million. This gives the company a value of 29$/carat, probably close to fair value, but let me remind you diamonds are valued higher than the highs before the 2008 recession!
Shore Gold (TSE:SGF) (PINK:SHGDF) made the list, but I am not sure if this company wants to be a gold miner or a diamond miner. Shore is sitting on a huge deposit of 46.7 million carats at their Star property, relatively low grade, profitable and mineable none the less! Shore is perfect example of a company that was beaten down after the recession and never bouncing back to fair value, right now Shore has a market cap of 180 million and a value of 3.85$/carat. The main reason for Shore being so low on the list is their main partner Newmont (a gold miner) has essential walked away from financing the project and their 33% share of the deposit will continue to be diluted.
The last company on the list is Peregrine Diamonds Limited TSE:PGD, had to be added to the list especially when they have surface sampling of over 1 cpt, yes that is carats per tonne not carats per 100 tonnes(cpht)! There is also the possibility of the discovery of metals on their property. Their main partner is BHP, but I was shocked to read they are not really interested in helping Peregrine advance the project.
On a side note, a highly speculative Canadian diamond explorer Metalex Ventures Ltd. TSXV: MTX, run and partially owned by the eccentric, but highly successful Charles Fipke (the man who discover BHP’s Ekati Diamond Mine). Is actively hunting for diamonds in and near the ring of fire, it is likely he will find diamonds, but the question is whether or not they will be mineable.
Hope this helps!