Today we look at one of Canada’s most intriguing penny stocks. Mountain Province Diamonds holds 49% of the Gahcho Kue diamond mine, which is currently being built in the Northwest Territories. The partnership of DeBeers Canada with this junior Canadian diamond stock gives the project special interest. It also raises the possibility of a takeover.

A member of Pat McKeough’s Inner Circle who owns Mountain Province wished to know whether to continue to hold the stock or sell it. In response, Pat McKeough examines the ownership structure of the companies behind the project, the mine’s production prospects and how they affect the speculative appeal of Mountain Province.

Plus, today we have a bonus report on how diamonds are formed, their value and uses, and their discovery and development in Canada. The first deposits in Canada were found less than 25 years ago, and Gahcho Kue will join five Canadian diamond mines already in operation.

Mountain Province Diamonds (symbol MPV on Toronto; www.mountainprovince.com) is a junior Canadian diamond stock that holds 49% of the Gahcho Kue joint venture in Canada’s Northwest Territories. De Beers Canada owns the other 51%.

Gahcho Kue consists of a cluster of four kimberlites (see below for more on these rock formations), three of which have a combined probable mineral reserve of 35.4 million tonnes grading 1.57 carats per tonne, for a total diamond content of 49 million carats.

The partners are now building Gahcho Kue, which will be the Northwest Territories’ fourth diamond mine. The $1.0-billion project is now over 62% complete and is scheduled for completion by the end of 2016; it’s forecast to produce 4.3 million carats annually over 12 years.

Penny stocks: Mountain Province’s right to market rough diamond production raises possibility of takeover by DeBeers

De Beers Canada’s involvement in Gahcho Kue is a significant plus for Mountain Province, both in raising funds and for technical support. De Beers Canada is a subsidiary of De Beers, the world’s biggest diamond producer.

Mining giant Anglo American took full control of De Beers in 2012, after it bought a 40% stake from South Africa’s Oppenheimer family for $5.2 billion. It then increased its interest to 85%. The government of Botswana, where De Beers’ biggest diamond mines are located, owns the remaining 15%.

De Beers once produced about 90% of the world’s diamonds by number of carats. Its output is now about 35% of the world total, but the company remains a major factor in global diamond production, and Anglo American’s new majority ownership will give it the financial strength to pursue big projects like Gahcho Kue.

As well, De Beers may choose to take 100% control of the project. This is made more likely by the fact that Mountain Province has the right to market its share of Gahcho Kue’s rough diamond production, and De Beers continually aims to boost its share of global diamond marketing.

Mountain Province’s near-term production prospects give it speculative appeal. The chance of a takeover adds to that appeal.

Inner Circle recommendation: HOLD for highly aggressive investors

Bonus Report: 

The Great Canadian Diamond Discovery

Diamonds are the transparent form of pure carbon, and their dense crystal structure makes them the hardest substance known.

Aside from jewellery, they’re widely used for machining plastic, glass and metal. Diamonds’ resistance to wear makes them essential for automated processes that produce many copies of the same product, while their hardness makes them useful as an abrasive and grinding material. They’re also used in knives, scalpels for precise surgery and dental drills.

In September 1991, explorers discovered the first economic diamond-bearing kimberlite deposit in Canada, located in the Lac De Gras area in the Northwest Territories, after over a decade of searching. Kimberlites are cone-shaped pipes comprised of a mixture of magma (molten rock) and rock that is carried by volcanic activity to the surface of the earth from depths greater than 150 kilometers. Diamonds form at those depths, under a mix of extreme pressure and high temperatures. Kimberlites may also pick up diamonds along the way—sometimes in quantities large enough to justify a mine.

Charles Fipke led the way

Kimberlites are small—generally with a surface area of less than 12 hectares—which makes them difficult to find. However, along with diamonds, the molten rock of the kimberlite also picks up other minerals, which diamond explorers call kimberlitic indicator minerals, as it rises to the surface. The team that found the first kimberlites in Canada, led by Charles Fipke, knew it would be next to impossible to directly locate a small kimberlite pipe. However, they reasoned that they could find the pipes by tracking trails of kimberlitic indicator minerals (which are more plentiful than diamonds in kimberlite) leading away from the pipes.

Over the last 1.5 million years or so, a series of glacial ice sheets has eroded the surface of Canada. As part of that erosion, the glaciers scraped the surface of the kimberlite pipes and dispersed the indicator minerals from the pipes over hundreds or even thousands of kilometres in what have proven to be traceable patterns. The indicator minerals can survive long-distance transportation and are resistant to weathering.

Other exploration methods can aid in the discovery of kimberlite. For example, the pipes can present a different magnetic signature than the surrounding rock, and that magnetic signature often has a distinctive circular pattern.

Hard to find … but hugely profitable

Still, the discovery process is far from perfect. While the minerals’ presence indicates the existence of kimberlite, the ancient ebb and flow of glaciers makes it hard to trace which glacial advance transported the indicator minerals. As well, not all kimberlites contain diamonds, and only a few of the ones that do will hold commercial quantities.

Once a kimberlite is found, tons of rock are collected from the top of the pipe and processed. Extracting kimberlite material to check for diamonds from the ground is difficult because kimberlite wears down faster than most surrounding rock; over time, this creates depressions over the kimberlite pipes. These then fill up with water or glacial debris, making it difficult to reach the kimberlite.

If diamonds are found, further drilling and analysis is necessary to give more details about the extent of the deposit and information about its diamond content.

So far, five diamond mines have opened in Canada: the Ekati mine in the Northwest Territories, which developed from Charles Fipke’s discovery; the Diavik mine in the Northwest Territories; the Jericho mine in Nunavut; the Snap Lake mine in the Northwest Territories (owned by DeBeers Canada); and the Victor mine in northern Ontario (also owned by DeBeers).

Investing in diamond-exploration stocks is risky. It’s a long way between the exploration phase and commercial production, when they begin to produce diamonds for sale and start making money. As well, there’s often a long time lag between news of progress toward a mine, and share prices can drift down in the meantime.

However, finding diamonds in mineable quantities can be hugely profitable. For example, the $700-million Ekati mine started up in 1998 and is generating over $500 million a year in revenue; it has an expected life of more than 20 years.