INVESTMENT COMMENTARY — Dia Met gets nod for strong financial performance

Having completed the transition from explorer to producer, Dia Met Minerals (DMM-T) is getting attention from mining analysts for the strong performance of the Ekati diamond mine in the Northwest Territories.

Dia Met holds a 29% stake in Canada’s first diamond mine, which is operated by 51%-owner BHP Diamonds, a unit of Australia’s Broken Hill Proprietary (BHP-N). John Lydall and Kerry Smith, analysts with National Bank Financial, recently visited the operation, which is now producing at a steady rate of about 250,000 carats per month.

Based on the mine’s strong financial performance, the analysts issued a “focus buy” recommendation for Dia Met, which currently trades at about $25 for B shares and $22.75 for A shares. The company has 8.4 million shares outstanding (10.6 million fully diluted). The A shares are lesser voting shares that trade at a discount to the B shares, which are multi-voting and have a larger float.

“We do not believe that the current share price reflects the very strong cash flow and earnings that Dia Met is likely to report over the next few years,” the analysts note in a research report.

In late September, Dia Met reported earnings of 45 cents per share for the first six months of this year (15 cents per share in the first quarter and 30 cents per share in the second).

“These excellent results have been achieved before sales of diamonds reach a stable level,” Lydall and Smith note. They expect stable production of 250,000 carats per month to be achieved in the 1999 third quarter.

“During our visit to the Ekati mine, we were very impressed with the operations and have no doubt that costs at the mine will continue to fall as operating efficiencies are realized,” they add. “High operating margins are being achieved. Average sales value per carat during the first 6-month period was US$163 per carat. At the same time, mining operating costs were US$69 per carat.”

The quarterly results reflect higher-than-anticipated prices for diamonds from the Panda pipe, the first of several kimberlites to be mined. The feasibility study projected a value of US$130 per carat, compared with an average of US$163 per carat recorded in the first half of this year.

Panda will be in production for an estimated five years, and will be followed by mining of the Misery and Koala pipes. Exploration and bulk sampling is continuing on numerous other pipes within the joint venture’s land package.

Dia Met expects to repay its share of Ekati’s capital costs (an estimated $238 million) within three years of its first payment, which was made earlier this year.