Canadian Diamond Stocks Shine Following Gem Find

DIAMONDS are a speculator's best friend.

Excitement about a diamond discovery in the Canadian Arctic has brought riches - at least on paper - to stock market players years before there is the possibility of getting any real return.

One stock, Southern Era, listed on the Toronto Stock Exchange has risen 24,900 percent in price this year.

The market valuation of the entire find is roughly $1.6 billion (Canadian; US$1.25 billion).

"The shares of many of the companies [involved in the diamond find] are regarded as highly speculative," warns a report in December from RBC Dominion Securities, Canada's largest brokerage house. The firm says share prices could be volatile.

Take Dia Met Minerals Ltd., for example: a tiny company which has become a tiny rich company as its share prices have rocketed from 35 cents to $60 and back down to the low $40s. The high of $60 was hit two weeks ago when shares of Dia Met Minerals shot up $25 in one day. Not many samples to go on

So far the only thing Dia Met has produced are some good samples of diamonds. Five hundred diamonds found in restricted core and surface samples included 22.5 percent over 0.5 mm diameter and the rest micro diamonds of smaller diameter.

But a fully working diamond mine is still many years and half a billion dollars of development away.

"We're very encouraged but it's got a long way to go," says Jim Eccott, the chairman of the company and one of the investors from the small town of Kelowna, British Columbia, who were in at the start.

"I'd say 70 percent of our investors are from the Kelowna area," Mr. Eccott says. "Most of them bought in between 35 cents and $1. Almost none have sold. They're all believers."

The man who has made them believe is Chuck Fipke, the geologist who over the past decade has staked 850,000 acres (1,350 square miles) - just 100 square miles larger than Rhode Island. But the actual diamond discovery is in a 50-acre site, 210 miles northeast of Yellowknife, the capital of the Northwest Territories. Isolated `caribou pasture'

This is far north, way beyond the point where trees grow. It is known as caribou pasture, worthless land that would be difficult to develop into a mining site.

All material would have to be flown in during the summer or hauled over an ice-road in winter.

What Dia Met has, apart from diamonds, is a partner, BHP-Utah Mines, a subsidiary of Broken Hill Pty. Co. Ltd., the giant Australian-based mining company. The more work BHP does, the bigger a share it earns in Dia Met's discovery. If the mine goes to full production, Dia Met will only have 29 percent.

Some analysts say that is enough. Roger Chaplin, a mining analyst with Credit Lyonnais Laing and based in London, wrote a positive report on the diamond discovery in October.

"The Lac de Gras camp will be developed into a major diamond producer, rivaling Botswana and South Africa," he wrote. "There could be enough material for two mines there, each worth about $2 billion."

Could such a diamond discovery mean a glut that would lower diamond prices even further than they have fallen during the recession? Few mines in this class

"There are only five or six diamond mines in the world which are in this class," Mr. Chaplin says. "By my calculations they could still make money even if the price of diamonds were to fall by 25 or 30 percent."

Nonetheless, Chaplain does use such cautionary phrases as "speculative companies" in his report.

If subsequent development indicates that there are inadequate reserves of diamond-bearing rock, the find will likely become near worthless.

There is also concern about increased world diamond production from Russia, Angola, Zaire, and now maybe Canada.

There are skeptics.

"This has all the signs of a typical Canadian mining promotion," says a Toronto broker, who asked not to be named. "For the little evidence they have the price is awfully high."