MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — Persistence pays off for Aber: diamond analyst

Being second in the great Canadian diamond race has certain advantages, says David James, mining analyst for Canaccord Capital. In a research report on Aber Resources (ABZ-T), James notes that the company’s Diavik joint venture will “benefit greatly from the excellent work” done by BHP Diamonds at the neighboring Ekati mine in the Northwest Territories.

Trailblazer BHP and partner Dia Met Minerals (DMM-T) plan to open Ekati officially this fall. It will be the largest mine in the Territories, and the first diamond mine in Canada. James expects Aber’s 40%-owned Diavik Diamond Mines will have a less rocky road to production than BHP, which had to convince both the public and politicians that mining could take place without compromising the environment and aboriginal rights.

Aber and partner Rio Tinto hope to complete a final feasibility study for Diavik later this year, which will be followed by a production decision.

Production could begin in late 2001.

James describes Aber as “one of the world’s few investment-grade diamond stocks,” and says he has little doubt Diavik will make the company “an important, highly profitable, and independent diamond producer early in the new century.”

Now trading at just over $12 (down from its 52-week high of $20.50), Aber has 45.5 million shares outstanding (48 million fully diluted). James rates the company a buy, with a medium-to-long-term target of $30-40 per share as the project approaches production.

“How quickly this could be seen, naturally, is almost wholly a function of the money flow back into resource stocks,” James cautions. “The Asian financial crisis has contributed to the brutal levels of mining share prices, but in stocks with outstanding fundamentals, we see this general malaise as an excellent buying opportunity.”

The report includes an excellent discussion on Aber’s evolution as an emerging diamond producer, which James witnessed first-hand. There was a learning curve, to be sure (BHP and Dia Met had a better handle on both the geochemical and geopysical signatures of the pipes likely to be diamondiferous), but Aber and its partner learned fast. They also learned valuable lessons from the fiasco known as Tli Kwi Cho — a highly touted pipe that failed to live up to early expectations.

Aber and its partner continued working at Lac de Gras even after the Tli Kwi Cho disaster, and after most other juniors headed off to Voisey’s Bay or Indonesia. That persistence paid off when several diamond-bearing kimberlites were found, dramatically boosting the economics of the Diavik project. Exploration is ongoing, and could turn up still more pleasant surprises.

Now in the feasibility stage, Diavik has minable reserves totalling 26.7 million tonnes grading 3.88 carats per tonne, with an average carat value of US$56. By comparison, Ekati has 65.9 million tonnes grading 1.09 carats per tonne, with an average value of US$84 per carat.

Capital costs at Diavik are estimated at $875 million, with a mine life projected in the 16-to-22-year range. Payback would be less than two years.

The mine plans at both Diavik and Ekati involve the mining of several pipes, as most kimberlites in the region are small, relative to pipes traditionally exploited elsewhere in the world.

Aber can market its share of Diavik stones independently, which has given rise to speculation that a major (perhaps Rio Tinto or De Beers) might want to acquire the company. James notes that, with Aber trading below his projected net present value, “the company looks like an enticing takeover target.” However he concedes that this was his expectation years earlier and that “we are still waiting.”