LETTERS TO THE EDITOR — Investing in diamond stocks not for

Sitting here in London, I have been intrigued by the amazingly ill-informed correspondence you have carried on the diamond exploration projects in the Northwest Territories.

Most of the arguments seem to have been centred on whether or not the massive market capitalization attributed to Dia Met Minerals is reasonable. Unfortunately, at this stage of an exploration cycle, the evidence on which to base a conclusion is distinctly lacking. Investors are therefore forced to rely on a mixture of rumor and what minimal information they are able to obtain from company releases and news reports.

Furthermore, some of the major companies involved in the Lac de Gras stampede seem to be withholding information in order, so they say, to play down the rumor machine; but it is having entirely the opposite effect. Some of your previous correspondents may appear to be arguing from supposed knowledge, but on a closer reading of the text, they have very little.

This lack of information also makes it impossible to evaluate accurately the companies involved, as there is no basis on which to forecast any future production or profits. As a result, the use of a 40% cost-of-capital in a net present value (NPV) calculation is a prime example of the spurious accuracy which computers can generate.

The discount rate used in NPV calculations should only allow for the cost of the investor’s capital, in order to provide a maximum valuation of a company which guarantees that an investor gets his money back with no loss of interest. Any purchase below this value should provide scope for profit and an investor has to take into account what level of profit (and hence what discount to NPV) is required.

However, as a strong believer in the free market, I consider that if there is someone willing to pay a price, then that price is entirely justified and can be the only true valuation of a company at this stage of the Lac de Gras exploration cycle.

While it may be the case that the abundance of companies involved in the area means the amount of money available has to be spread ever more thinly and relative valuations will continue to change, the absolute value put on the area may not materially alter.

There remains the risk of exploration, and those who caution that share prices will fall are more likely than not to be correct. However, those who take their advice are bound to miss out on the spectacular profits which can be made from a true success (that is, when the absolute valuation becomes concentrated in only one or two stocks).

Mining stocks are not for widows and orphans, and exploration stocks even less so, as these investors are unable to pick a stock with the required degree of safety and security. Furthermore, they are unable to acquire a representative portfolio of stocks across an area and diversify their risk this way. This, surely, is the real conclusion which should be drawn from your previous letters, and it should not put off the professional investor. Charles Kernot

Mining Analyst

Credit Lyonnais Laing

London, England