“The Mysterious Secret of Canada’s East Island Volcano”

by Travis Johnson, Stock Gumshoe | May 15, 2014 2:25 pm

Checking out the pitch for Unconventional Wealth's "Best Way to Cash In on the Global Diamond Grab"

The folks at Unconventional Wealth do make an effort to be, well, unconventional — over the years they’ve been pretty aggressive at pitching alternative investment ideas like stamps and other collectibles, but they also do pick the odd stock now and then.

And, of course, tease us about it until we feel compelled to find some answers. That’s really why your friendly neighborhood Stock Gumshoe sniffs through all these teaser pitches — because I don’t like not knowing stuff. The fact that the reality always turns out to be a bit less magical than the teased hype, meaning we can sometimes help folks to check their emotions at the door a little bit and make slower, more thoughtful investing decisions… well, that’s just a bonus.

This time around, it’s one of my favorite kind of teaser pitches — an Indiana Jones story about a surprising discovery in a remote corner of the world. Only this particular Indiana Jones apparently has a thing for strippers.

Here’s a taste of the pitch:

“On a tiny island 136 miles south of the Arctic Circle sits a mysterious $6.9 BILLION treasure.

“It’s called the East Island.

“And it’s so remote that you can reach it only by a single road built out of ice and crossing frozen lakes.

“But on this frozen island is a strange volcano that could fund your dream retirement… with more than enough money to leave a generous nest egg for your children or grandchildren….”

Sounds mysterious, right?

“The asset hidden inside this volcano is the ultimate symbol of affluence.

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“It can be traced back thousands of years to its use as a religious icon in ancient India.

“Kings and queens have worn them.

“Even more countless millions of people have lusted over them.

“This resource can be found only in those few places where the geological characteristics are absolutely perfect.

“Consequently, they are rare. Extremely rare. And the world is running out of them… quickly.

“I’m talking about diamonds.

“And in addition to their use as jewelry and collectibles, diamonds have several industrial uses for which there is no substitute.”

So he’s talking about diamonds… and about the relatively recent discovery of diamond-bearing kimberlite formations in northern Canada that has led to the growth of a North American diamond industry.

“it’s 1,000 times RARER than gold!

“And getting scarcer with each passing day…

“In fact, it’s one of the last great remaining deposits of this resource on the entire planet.

“Yet 99% of investors don’t have the slightest clue about the existence of this mysterious volcano in Northern Canada.”

Why diamonds? Well, they are periodically pitched as investment vehicles — because they’re extremely compact and largely untraceable and not necessarily manipulated as a financial instrument the way gold and silver are, and because there hasn’t yet been a new wave of the uber-wealthy to emerge that hasn’t wanted to impress us with its sparkly stuff (essentially, the same “shiny and traditional store of value” argument that’s made about gold … it has always been considered valuable by people, and that will continue).

Of course, diamonds have been manipulated just about every way you can imagine, too — starting with the De Beers cartel and the incredible marketing machine that turned diamond rings into the only possible way to create a loving marriage… and artificial diamonds are now impossible to distinguish from natural ones by most jewelers without specialized (De Beers-backed) equipment… to say nothing of the more recent issues with “blood diamonds” and “conflict diamonds” that fund wars (formerly in Angola and Sierra Leone, more recently in Ivory Coast, DR Congo and Liberia, etc) that may give Canadian diamond miners some edge.

So how does Ryan Coles think we should invest in diamonds? A miner. We finally get a to a few more clues about these northern mines to help us get a bit more specific for you…

“The rich spend a fortune to own diamonds. They’ve got to search for them, insure them, store them, secure and protect them.

“But the investment I’m talking about requires none of that.

“In fact, you can get started on this diamond investment with around $14… and never pay one thin dime in insurance or storage fees!

“And you can get all the details on how to grab your share of this booming $70 BILLION market in my newest report, ‘How an Ancient Volcano in Canada Could Build You a Legacy of Wealth.'”

And the hero of our story? That’s Chuck Fipke, Coles describes him here:

“How a Rogue Geologist Discovered a Diamond Treasure Trove in the Arctic

“Canada is the world’s third-largest producer of diamonds.

“But 22 years ago, there was no such thing as a Canadian diamond – as far as anyone knew….

“But all that changed thanks to a short, absentminded Canadian geologist named Chuck Fipke.

“He stutters when he talks. He frequently loses his glasses and his keys, shows up late to appointments, and has a history of spending obscene amounts of money in strip joints….

“After eight years of exploring the vast frozen land, and nearly down to his last dollar, he found a promising site a few hundred miles outside the Arctic Circle. It was a barren world of lakes and rock.

“And it was at this site that Fipke discovered the first Canadian diamonds ever. His stake in the diamond mine that was built there is worth $1 BILLION!

“Fipke’s discovery sparked the largest diamond rush in Canadian history.”

That was quite a few years ago, but it’s still a fun story — there was a profile of Kipke in Wired magazine[1] five or six years ago that is probably the copywriter’s source on this stuff, should you wish to read up a bit more on him.

And is this mine that he discovered connected to the stock Unconventional Wealth thinks you should buy? Here are some more details from the ad:

“This ancient volcano in Canada holds one of richest diamond deposits in the entire world. And it’s been developed into one of the world’s richest diamond mines.

“The mine is so remote that the only time it is accessible by truck is in the dead of winter… when a 375-mile-long ice road crossing frozen lakes is open to traffic for just eight weeks.”

This is, in case you’re wondering, the road made famous by the “reality TV” show Ice Road Truckers back in 2007 and 2008. It serves mostly the diamond mines of the Northwest Territories, though there are certainly other ice roads in Canada and Alaska (and I think the show moved on to other locations after the first season).

There are a number of large miners operating in the area, along with some junior explorers looking for more diamonds (and gold). But specifically which stock is being teased? Some clues for you:

“I want to bring your attention to a small mining company that has a major ownership stake in this $6.9 billion deposit….

“… the mine recently underwent a major expansion, a move that will add up to 22 years to its mine life!

“This small miner recently acquired an 80% ownership stake in another one of Canada’s richest diamond mines.

“The same mine that was built from Fipke’s first discovery of diamonds in Canada….

“… these mines are capable of yielding as many as 10 million carats per year! That’s roughly $1.3 billion worth of diamonds.

“… it has a direct line to sell the diamonds in high-end jewelry stores around the world.

“In other words, there is no middleman to take a cut of the profits!”

And one more, final clue:

“This company currently trades for around $14 a share. But I don’t expect it to remain low for long…

“In a recent two-year span, shares of this company rose a whopping 780%.”

So who is it? This is Dominion Diamond (DDC), which is now roughly a $1 billion company that primarily owns shares of two diamond mines in Canada, Ekati[2] and Diavik[3], and markets certified natural Canadian diamonds under the CanadaMark program. They own 40% of Diavik, which is the biggest diamond mine in Canada and is operated by Rio Tinto, and a varying (but majority) percentage in the different sections of Ekati, which was the first diamond mine in Canada and the one discovered by Fipke.

Dominion Diamond was formerly known as Harry Winston, but changed its name in recent years when it bought out BHP Billiton’s controlling stake in the Ekati mine (despite Fipke’s objections) and sold its Harry Winston luxury jewelry and watch business to Swatch… so now it’s really just a diamond producer and wholesaler. These mines are not currently projected to be very long-lived, neither has reserves to get them out ten years from here, but mining companies don’t always invest in proving up reserves before they have to and they do have a substantial amount of exploration territory where there might be lucrative new diamond-bearing kimberlite formations.

Dominion is expected by analysts to grow revenue to almost $900 million this year, and to book earnings of 45 cents per share before the revenue dips (but earnings grow a bit) next year. They have fallen short of analyst estimates most quarters, which is perhaps part of the reason that their shares have been fairly flat in recent years (and down quite a bit over the last couple months). DDC shares did indeed post that 700% gain from the very bottom of the financial crisis to their peak around $17 several years ago, but for the most part they’ve been bouncing around in a $10-15 range for five years.

If diamond prices do surge, you could certainly see these guys do quite well with their substantial current production — but if prices remain where they are and production stays kind of flat or even down a bit, it’s going to be hard for them to grow without spending a lot of money to expand and explore. They have plenty of cash right now, about $200 million (they made more from selling Harry Winston than they had to invest in buying control of Ekati), but they’re operating in a very expensive part of the world — from a glance at the annual numbers for their last year, which may well have been anomalous for all I know, it looks like their net profit margin for the actual operating business was down around 1% before taxes (they made a lot of money, $5 a share in reported profit, but that must have all been from selling Harry Winston).

So I don’t know whether they’ll make their projected 45-50 cents in earnings this year or not — that would give them a forward PE ratio of about 20 based on the current $12 share price (analysts are predicting 55 cents next year, though the range of estimates is very wide). I also have no idea what the value of natural Canadian diamonds will be in a decade, or where diamond prices are headed… though there’s also the very real climate concern, since in bad years (ie, warm years) the ice roads don’t remain passable for the full two months and the mines have to use planes more, driving costs up and sometimes delaying projects. There was an optimistic article posted on them by the StreetAuthority[4] folks last month, and you can see their annual results here, including a brief summary of their expansion plans and their view of the diamond market[5], and last conference call transcript here[6].

Oh, and And then, well, you can make up your own mind. Want to own shares of Dominion Diamond? Let us know with a comment below.

P.S. You might remember that our mining columnist, Myron, was talking up diamonds last year as well — if you want to refresh your memory he was interested in VMS Ventures and Lucara, you can see that article here[7] and his followup note from January here[8].


Endnotes:
  1. profile of Kipke in Wired magazine: http://archive.wired.com/science/planetearth/magazine/16-12/ff_diamonds?currentPage=all
  2. Ekati: http://www.ddcorp.ca/operations/ekati-mine
  3. Diavik: http://www.ddcorp.ca/operations/diavik-mine
  4. optimistic article posted on them by the StreetAuthority: http://finance.yahoo.com/news/undervalued-miner-could-perfect-portfolio-150000794.html
  5. annual results here, including a brief summary of their expansion plans and their view of the diamond market: http://finance.yahoo.com/news/dominion-diamond-corporation-reports-fiscal-080700568.html
  6. conference call transcript here: http://seekingalpha.com/article/2124773-dominion-diamond-corporation-ceo-discusses-f4q2014-results-earnings-call-transcript
  7. see that article here: http://www.stockgumshoe.com/2013/05/microblog-thoughts-from-myron-diamonds-prospects-and-meteors/
  8. followup note from January here: http://www.stockgumshoe.com/2014/01/microblog-thoughts-from-myron-focus-on-permian-basin-gold/

Source URL: https://www.stockgumshoe.com/reviews/safe-haven-investor/the-mysterious-secret-of-canadas-east-island-volcano/


  1. Avatar
    vivian lewis
    May 15 2014, 04:40:30 pm

    well they are a girl’s best friend. I was warned by a fund manager recently not to think too highly of gold; he expects that biological extraction of the yellow metal from sea water (using specially bred single cell organisms that surround the told) is also coming in the next decade. I am skeptical by nature about diamonds whose valuation has been more manipulated and teased than even that of gold. Which is not to say that I don’t wear both. Look at my picture on http://www.global-investing.com, my website, where I display my wealth with jewelry (all from inheritance and not on my stock picking prowess, by the way.)
    Now a really serious technical issue: if you are looking for diamonds in the icy north of Canada how to you tell the carbon ice from the water ice? Don’t they both glitter in the midnight sun?

  2. 31 |
    Avatar
    John Empsall
    May 15 2014, 05:16:48 pm

    The diamond industry is small and secretive, which makes this a very tricky and risky investment. I suspect these mines will operate for many years. It’s very difficult to prove up reserves – think of the nugget effect but much worse.

    • 853
      Avatar
      David B.
      May 15 2014, 05:24:47 pm

      Volcanoes spew and my first thought is that Unconventional Wealth is also spewing with this pump and it’s not wealth that is spewing forth. Perhaps they will prove me to be wrong. In any case, Pass!

      • Avatar
        quincy adams
        May 15 2014, 06:16:47 pm

        A little more global warming and that 8-week window for the ice road may dwindle to about 8 hours. Anyone for “Joe and the Doomed Diamond Volcano”?

        • Avatar
          RSanders
          May 16 2014, 12:42:12 pm

          Actually, we’re already flattened-out at current temperatures and looking into a Solar reduction cycle, so that 8-week window is more likely to expand to 12-weeks.
          *Yes, I know, facts fly directly in the face of the current fad of “Global-Warming/Climate-Change” hyping and calls for huge Carbon taxation to fund….whatever it is that globalist control freaks are trying to fund other than Al Gore’s back pocket.
          Look for less farming in northern Canada, and longer ice roads in the next decade.
          Until the next Global Warming Cycle starts again.
          sheesh – we used to just call it “weather.” Ah, the old days.

          • 12380 |
            Travis Johnson, Stock Gumshoe
            Travis Johnson, Stock Gumshoe
            May 16 2014, 01:12:33 pm

            Global warming is a clear long-term trend, and extremely worrisome for lots of reasons, but that may be a hundred year problem in terms of outcomes. When it comes to this kind of specific investment the more immediate possible risk is that over the next 10-20 years there may well be some years that are warmer that wreak havoc with these roads in different parts of the world and raise their costs. I think the Canadian ice roads had trouble staying open in 1998 and 2006 or 2007, for example — and for a miner, you can’t “catch up” by having the road stay open longer the following year if it cools. They’ve thought about opening an Arctic port up north of the mines, too, so perhaps that will happen eventually, but that’s a huge investment.

          • Avatar
            Alex
            May 20 2014, 10:57:34 am

            Quick! Get ready to defend yourself from the climate nuts. They hate data and facts because it’s directly at odds with their entire narrative. Nevermind the fact global temps haven’t moved for 20 years and Antartic Sea Ice has hit record….HIGHS. Let’s all get worried about the globe warming because…reasons!

  3. Avatar
    Solyom
    May 15 2014, 07:40:49 pm

    DDC is interesting. If one looks at the chart, buying puts seem the best course (or shorting ; if one has enough guts) but I calculate its book value to be about 15.50 per share with 5.6 eps and a growth rate of 2.9%. My “black box” DCF calculator for Fair Value is about 68 per share.
    Interesting yes. Worth a little mad money maybe. Putting it on the watch list : yes. A buy ? Not for me.

    • 12380 |
      Travis Johnson, Stock Gumshoe
      Travis Johnson, Stock Gumshoe
      May 15 2014, 09:34:09 pm

      Careful, the big EPS of $5+ for the last year was mostly due to the reorg (selling Harry Winston, buying another mine). Core earnings are much lower.

  4. Avatar
    Thomas Lepere
    May 15 2014, 07:53:59 pm

    Diamonds appear to be a glamorous investment medium to gamble on. If the individual diamonds sell for a medium to high profit, there is ample opportunity for the investor to share in the company’s profit if the company will be fair in sharing some substantial portion of their profits. Initially, the investor must be willing to risk that the company will be persistently fair in sharing their profit and establishes such practice over a long term of investment. At its share price, as an investor, am I willing to gamble on the “sharing performance” of Dominion Diamond (DDC)? I’ll chance the company to determine if my investment will be worthwhile and profitable.

    Diamonds are a mysterious, yet a desirable investment to be associated with. However, unless a person is invested for a particularly long period of time and is making a modest profit on their investment, who knows whether or not the investment will be worth it? Investors are particularly attracted to such an investment choice because of the individual value that particular diamonds command in todays markets, thinking the diamond company will be generous in sharing the profits that they will make selling certain diamonds. Until there is an established and proven track record, the investor is forced to gamble initially on the diamond company. If their diamond investing which may appear glamorous, it must be profitable too for the investor. Given the high profile of diamond sales and the opportunity for potential profits s an investor I am willing to try

  5. 14 |
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    Karel Doruyter
    May 17 2014, 04:37:45 pm

    I love the looks and idea of diamonds. Bought some Stornaway stock 4 years ago and have been trying to recoup at least 50% of my investment. I’ll watch DDC closely but warily !!

  6. Avatar
    shredder007
    May 18 2014, 07:47:24 am

    I’m cured of diamond speculation
    SGF.to – need $2B to put that into production and it’s in Sask…can get pizza delivered to mine site
    Anything connected to Fipke…stay away from. MTX.v, CD.v – both have done share consolidation and are way down $$. He still owns a whack of diamond claims but likes OPM (Other Peoples Money) to explore with. Angola turned out to be a huge bust.
    Indicator minerals…run away from. He’s a “one hit wonder”, has a kimberlite in N Ont that might get bulk sampled….missed permitting for this winter’s ice road season + a whack of First Nation issues.
    I’m down a Corvette there…..Ring of Fire that’s a lot more like Ring of Losses

  7. 737 |
    Avatar
    Frenchy
    May 18 2014, 02:23:09 pm

    I just fail to see the catalyst here or even how the stock will appreciate. I certainly do not see another 780% gain from recent s/p. The risk/reward is just not there for me. I’ll pass–Thanks Travis.

  8. Avatar
    fedwatcher
    May 19 2014, 12:04:47 am

    Diamonds are NOT AN INVESTMENT. Diamonds are a way of moving wealth as they can be hidden easily. But as an investment they face a ceiling as technology now exists to make them and their current high prices are due to the Diamond Cartel led by DeBeers.

    However it is useful to track diamond prices as they represent FEAR. The 0.01% do not need diamonds and have their wealth distributed in many tax havens and own most politicians.

    Diamond prices are an indicator of the fear felt by the top 1% minus the top 0.01% and the top 0.05%. The top 1% minus the top 0.5% are just highly paid professionals who are servants of the top 0.01%.

  9. Avatar
    Joan in Houston
    May 19 2014, 06:09:54 pm

    I have ZERO interest in investing in diamonds in any way, or shape, or form. Diamonds are not fungible, as is gold, or as is silver. Each diamond must be examined and critiqued on an individual basis. Diamond is NOT a chemical or mineral appearing upon the periodic table of elements. Diamond jewelry has an enourmous spread between the seller and the buyer. Buyer beware!!! ((Plus any number of gemstones and jewels are so very much more attractive!!)) Joan in Houston//5-19-2014

  10. Avatar
    D H B
    May 20 2014, 01:49:29 pm

    In case anyone is wondering what is being said at the mine itself, here you go.
    There are never-ending rumours flying around here, tough to sort out fact from fiction but the one constant that has some proof to it is Jay Pipe. The geologists have found a kimberlite formation that is revealing some amazing drill samples, exploratory drilling has been going on all winter and indications are that this is big. Speculation is touting it as one of the largest and richest formations ever found, which isn’t really far fetched as the Panda Pit ,where the camp is, was an enormous source of wealth for Fipke and BHP. So Jay is real and waiting for someone to harvest it, the catch is that it is in the middle of Lac Sauvage. A dike needs to be built and the lake pumped out before the overburden can be stripped away and the ore mined. This has been done before so its not a showstopper by any means but there are so many steps and environmental pinnacles to overcome that production is minimum 4-5 years away.

    Power needs to be run out to operate pumps etc., clean rock needs to be brought in for the dike and haul road. Interestingly enough, there are acids in granite which when busted up can leach out and cause some environmental havoc. There is another formation named Lynx, which is close to Jay, that will need to be developed first to get the clean rock for the road and dike. The Misery pit has lots of very close rock but it has the acids in it whereas Lynx is clean. The general feeling around here is that nobody is going to buy DDC shares until this is a little closer to looking productive. Interesting table talk right now though.

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