by Travis Johnson, Stock Gumshoe | May 31, 2016 4:48 pm
Some pitches are red-hot, oozing with promise and bursting with unclaimed millions… you can’t help but get sucked in. And that’s what I write about most of the time.
But part of the reason I started Stock Gumshoe nine years ago is that I just like solving puzzles. If you’re going to hint at something but not tell me the whole story, it’s going to drive me a little nuts — I’ll have to dig into it until I figure out what the heck you’re talking about.
And that’s what’s happening today — Jason Stutman[1] doesn’t have a big hype-fest of an ad lined up to promise gazillions of dollars for folks who invest in his synthetic diamond company… but he does lay out the case for diamonds[2], drop some hints about a specific company, and leave us wanting more.
To be clear, he’s not using these hints to directly sell one of his newsletters, and it’s not clear whether he has recommended the stock to his readers or owns it personally.
But there are clues, so your Gumshoe is on ’em.
Stutman’s article from the free Wealth Daily[3] is here if you want to see the whole thing, but here’s a little taste of his “case for diamonds”….
“At ~$65,000 per gram, diamond ranks as the third-most expensive material in the world….
“But diamond, of course, is more than just a pretty stone to admire. It is an incredibly unique super-material, with industrial applications unmatched by any other mineral on earth….
“This unique molecular structure of diamond allows for the following properties:
- Optical: broadband spectral transparency
- Thermal: highest thermal conductivity (of any known material)
- Mechanical: hardest natural material
- Electrical: high charge carrier mobility (it’s a world-class semiconductor)
- Chemical: highest durability
“Together, these properties make diamonds suitable not only for jewelry and industrial machinery but also a wide range of other current and future applications. Diamonds can be used for transparent electrical contact, as electrodes for batteries, as lenses for laser systems, for water[4] purification, and as a wear-resistant coating.”
There are a few examples given for the possible high value of diamonds for commercial use, including quantum computing[5] and thin-film diamond semiconductors[6], and Stutman notes that, as you probably know, it’s now possible to make artificial diamonds that are difficult or impossible (depends who you ask) to identify by eye as different from “organic” diamonds.
Which is all well and good, there have been artificial diamonds for quite some time and synthetic diamond already supplies almost all of the industrial demand for diamond material — including the “high tech” stuff like research into quantum computers, diamond LEDs, thin film diamonds, etc. That’s been an evolution over the last 50-75 years, since the first commercial synthetic diamonds were created in the 1950s under high heat and pressure in a GE lab, so I’m sure the product has gotten better and cheaper in more or less a straight line from then to today… but still, what’s the part Stutman’s keeping from us?
“… the only publicly traded company growing diamonds for industrial and gemstone applications.
“As of today, this firm produces three- to five-carat rough gems (grown in just three to four weeks) that are finished into one- to two-carat stones. These stones are either polished for jewelry or sliced and shaped for industrial applications.
“The firm has strong intellectual protection, holding a total of 36 U.S. and international patents. It grows diamond crystals in a range of colors.
“Its colorless stones are used for jewelry and industrial applications (optical windows, laser scalpels, and electronics). Its pink stones are used for jewelry and precision milling and grinding.”
We’re also told that the company doubled its manufacturing capacity last year, and started marketing pink stones… and that they doubled their quarterly revenue year-over-year.
And…
“Of course, it will take many years before this small startup reaches the status of a gemstone giant like De Beers, but there is no doubt diamond growers like it are the future of the gemstone industry.”
So what is this little company Stutman’s not naming? Not a huge challenge for the Thinkolator, but sometimes it’s best to start off slow after a holiday weekend — the stock is Scio Diamond Technology (SCIO)[7], a minuscule nanocap company (market cap just $15 million) that makes diamonds in South Carolina.
You should not go buy this stock.
I feel like I have to type those words before I go any further.
That’s not necessarily because there’s anything intrinsically wrong with the company (though there probably is), it’s because it’s a $15 million manufacturing & technology company and there’s no earthly reason why a company of this size should be publicly traded… except that institutional and venture investors don’t want to fund it and competitors are not interested in acquiring it at current prices. Which usually means that there’s nothing appealingly scalable about the business, though yes, I’m sure that there are occasional exceptions to the “companies this small don’t make appealing investments” mantra.
Most of the time, if a company this tiny makes it big it’s because of the rapid change in value of an asset or an invention. They’re bought out by a larger firm to get at their technology or their people, which tends to be what happens with tiny tech stocks with good ideas… or they discover or develop something unique (like a new molecule in biotech, or a new vein of gold[8] in the ground) that makes them dramatically more valuable almost overnight without having to expand manufacturing facilities or hire hundreds of people.
Building a company up gradually from this kind of size by improving a manufacturing process and developing a market for your product is far, far more difficult than just snapping your fingers, discovering a new antibiotic or drilling a shockingly good mining prospect[9] or releasing a devastatingly successful new search algorithm, and waiting for the cash offers to come in.
So that’s the preliminary warning that applies to any little company of similar ilk — but what’s going on specifically with Scio Diamond?
Well, it used to be a bit bigger — the market cap peaked around $100 million almost five years ago right after they started trading… so they’ve been around for a while, but have not yet hit commercial success. They reported their first revenue three years ago, and have neither consistently grown that revenue (it has bounced around quite a bit) nor ever generated a gross profit. (Gross profit, for those who don’t know, is the revenue minus the cost of goods — the cash coming in minus the cash they have to expend just to create the specific product that was sold… not counting advertising, administrative costs, selling costs, overhead, etc.)
Here’s now they describe themselves:
“Scio Diamond employs a patent-protected chemical vapor deposition process to produce high-quality, single-crystal near colorless and fancy-colored diamonds for the jewelry market in a controlled laboratory setting. Lab-grown diamonds are chemically, physically and optically identical to “earth-mined” diamonds. Scio’s technology offers the flexibility to produce lab-grown diamonds in size, color and quality combinations that are rare in earth-mined diamonds. Scio also delivers diamond materials for advanced industrial, medical and semiconductor applications.”
The company has been a management mess since going public, and it sounds like it was not all that pretty before that either, according to this account[10] (the details of which I haven’t confirmed) — with lots of turnover on the board and in the executive suite.
The company’s description of its history starts with Apollo Diamond in Boston, founded by Robert Linares (a “pioneer in crystal growing and CVD techniques”) in 1990, but the skip to going public came because, in their timeline, Apollo shut down because they failed to commercialize the technology, and then the assets were acquired by a special purpose investment company called Krossbow, who renamed itself Scio and re-started that effort to commercialize the technology. That article[11] is a couple years old and highlights the tens of millions spent in developing their CVD synthetic diamond process technology, and the failure of the original strategy to bear commercial fruit.
And, of course, that scares me away from the company even more than the small size.
What has been happening with the company since then?
The big hiccup, it appears, was the loss of their major machine tool customer a couple years ago. That appears to have spurred them more vigorously into pursuing the gem market, which is, of course, very different than the industrial market for cutting tools, abrasives and the like. In financial terms that lost business is pretty big in retrospect, since it cut their revenue in half and came at just the time that they were almost generating a gross profit, at peak revenue of $580,000 in the first quarter of 2013… but in absolute terms and relative to what would be required to create a genuinely sustainable business, the revenue was at an inconsequential level even before it dropped.
The stock then shot up 18 months ago, on the strength of some new financing and the focus on fancy colored gemstones and deals with jewelry chains — particularly Helzberg. At the time they said they were “shooting for breakeven”[12] within a couple quarters, and that hasn’t even come close to happening… though it sounds like they believe their delays have been because of the time it takes to build market demand and “sell” the story through retailers. More recently, they also had a temporary setback last Winter, when a water main burst and shut down production for a while (they’re back at full capacity, though presumably their next quarter or so will be even weaker as a result — pending whatever their insurance settlement might be).
Will Scio Diamond be a going concern? I haven’t looked through all their filings, and I don’t have a strong sense of how the synthetic diamond market works, but I would have to do a lot more research before I could accept their claim that they have a uniquely valuable technology or approach or brand, or uniquely valuable patents… and if you don’t have that, and you’re also so small that you have absolutely no clout in the market, then it becomes very difficult to grow into profitability. From some quick skimming around the internet I see no shortage of synthetic diamonds for sale from lots of different manufacturers, with lots of small variations in the claims they make, and I don’t see dollar signs flashing before my eyes.
And, of course, it is very common for newsletter pundits to call attention to tiny little publicly traded microcaps that are active “pure plays” on some growing industry… and then those of us who are obsessed with investing might forget that not every business is publicly traded. Being the only identifiable “synthetic diamond” stock doesn’t mean you’re the only synthetic diamond maker, or even that you’re one of the better ones.
So that’s as far as I go on Scio Diamond Technology … it may well eventually turn into a viable company, but I suspect it’s going to be a really hard slog. Filings indicate[13] that they’re in the process of raising about a million dollars in a share offering, which is good because they were pretty much down to their last few nickels[14] as of December 31, but I don’t know if they were successful or not and that amount of money isn’t likely to get them very far (they were down to $100K at the end of the year, and they’ve lately gone through $500-700K in cash per quarter).
I expect that synthetic diamonds probably will continue to be an important business, and perhaps will grow in importance, but I don’t see any clear indication that it’s going to be a lucrative one for this particular little company anytime soon. And, of course, there’s not a lot of indication that the pricing for synthetic stones will be particularly strong, particularly with the market for natural diamonds being a bit soft (prices have been generally trending down, albeit slightly, over the last five years). Just because you can use machines to create something that seems intrinsically valuable, with a cheap feedstock like plain old carbon, doesn’t mean the business will necessarily work out to be profitable — machines and operators and technicians cost money, as do marketing and business development operations.
With that, I’ll hand it off to you — see anything exciting in their assets or financials that make you think a turnaround is at hand? Like the new(ish) management or their strategy? Let us know with a comment below.
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I thought I read something about this that Debeers already created a tool to determine if the diamond was manufactured or mined and it was successful with this company’s diamonds. Even though they are perfect they are different in some way then mined and hence Debeers makes that claim.
Additionally I recall them stating they would never try and sell the diamonds as mined diamonds even though the quality is equal or better. I believe the technology came from a Russian company regarding what I read so this may not be the same people though it sure sounds exactly the same.
DeBeers also started its own company, Element 6, to make synthetic diamonds — just so they can test and understand them, not for sale as gems.
Good data
Nice read, thanks Travis.
At that size clearly SCIO is not one of the ‘leaders’ in syn diamond manufacturing.
Anyone know who is?
Try Centaurus Diamond
I think they’re still trying to prove their technology — no prototype yet, from what their website indicates, but looks like it’s probably a promoted and naked-shorted stock.
Didn’t the crash occur about the time the Russians discovered a meteorite crater that produced the equivalent of several trillion diamonds? I read that somewhere a couple years back, as those diamonds are perfect for industrial use but not for jewelry.
The Popigai crater (or astrobleme) in Siberia, Russia…created the 100 kilometres (62 mi) diameter crater approximately 35 million years ago…The shock pressures from the impact instantaneously transformed graphite in the ground into diamonds…These diamonds are usually 0.5 to 2 mm (0.020 to 0.079 in) in diameter, though a few exceptional specimens are 10 mm (0.39 in) in size.
They may have industrial uses but are considered unsuitable as gems.
[Wikipedia]
(I just like solving puzzles, too. That’s how I discovered stockgumshoe.com years ago)
Industrial quality type diamonds are dime-a-dozen. In fact the synthetic ones are better for that purpose as they mostly are (or were in the past) in clusters that allows them to be more easily bound in a matrix for grinding/drilling equipment.
Gem-quality synthetic ones cannot easily compete in price with natural ones either. Jewellers have fantastic markups on these things; retail and wholesale prices are very different. If a serious competition were to come about, I’m sure DeBeers would put those outfits quickly against the wall, a la the Saudi’s answer to US fracking.
I agree, I remember reading that DeBeers holds a massive inventory of mined diamonds and limits the quantity on the market to maintain the high prices & the illusion of rarity. If you have ever tried to sell a 2nd hand diamond you will know they don’t hold their initial value well. The whole ‘diamonds are a girls best friend’ and the rule of thumb that you should spend X months of salary on an engagement ring are all marketing campaigns instigated by DeBeers in the 30’s-50’s.
i don’t think this is the Russian company that was bought by an American in Florida and moved there… that technology is a high temp high pressure crucible type of anvil technology. The CVD technology is a different company that has been working on this for years as they started with millimeter thin oval wafers of diamond and have since increased the thickness to more of a gemstone thickness but still not the voluminous shape of the natural cube forms. The Russian now American company from the beginning made more cube shaped crystals but yes they are distinguishable by DeBeers new equipment as synthetically produced. DeBeers went as far as supplying gem authentication and grading houses with their synthetic diamond snooping technology to “protect” their market share… After looking through the search results for synthetic yellow diamonds the company’s name is not jumping out at me.
“You should not go buy this stock.
I feel like I have to type those words before I go any further.”
These comments were so hilarious, I burst out laughing…only because I was poised to push the purchase button on my investment web sight! Thanks for the “heads up” and for cutting though all the smoke and mirrors.
Dr. Robert Linares has a pretty impressive publication record going all the way back to the 1960s in inventing novel chemical compositions for semiconductors, and he pioneered carbon-vapor-deposition techniques for growing diamond, because he wanted to be the first to nail quantum computing as a reality. He was one of the founders of Apollo Diamond, and his original plan was to use gemstone sales to fund his work in developing control methods for substituting specific positions in the crystal lattice enabling novel semiconductor designs supporting quantum computing. And it was Linares, not the Russians, who first patented methods for distinguishing CVD diamond from naturally-occurring mined diamond [see US8134694 priority date 2009]. It’s not clear at this point whether the original plan has been fully abandoned, or whether Linares continues to work on a very difficult project. If he ever succeeds, everything in the world we know will change in profound ways. I’m not saying this is a reason to own this stock at this point in time. But remaining an interested observer could be justified.
Well, this company may not be a ‘pump n dump’ stock, but probably a buy a little and hold to see where it goes. I am a. hobby jeweler. Although I am far from expert, research on diamonds and colored gems is ongoing. I used to think that synthetic diamonds and lab created were one and the same; they are not. A natural diamond has
inclusions. The more perfect it is meeting the ‘4Cs, the more expensive it is. Anything less
will be used for industrial purposes. Diamonds have a specific weight and characteristics.
synthetic diamonds have weight difference . eg CZ cubic zirconia. Lab created diamonds have no difference from there natural counterparts; other than inclusions(less) and that its
created in a lab rather than Mother Earth. When we talk about Moisinite diamonds, these
diamonds come from meteorites from Russia Siberia. I believe these diamonds have the same weight as the natural ones. The process to make a gem quality stone takes a year.
The brilliance is brighter than natural ones , almost ‘star light’
Maybe, a better buy would be in industrial diamond companies specializing in the tech
sectors.
i believe you may have been wrong, this stock went from .10 to .1726. That was 72% gain in one day. The charts never lie the news is the smokescreen.
Wrong as in identified the wrong stock, or wrong to be skeptical?
The chart lies all the time for microcap stocks — those are very easily manipulated and can have sharply rising or falling attention levels thanks to promoters but get little investor interest outside of promotions.
This company (and companies like these, i.e., *public* synthetic diamond manufacturing companies) appears to have the following pros:
– Its sooner to market than future business
– its hard to get into such an information laden and tech laden sub-industry
– it can sell diamonds for jewelry and for other things (as mentioned in this article) like quantum computing/semiconductor fab, and novel not-presently-existing future markets
– its better leveraged than, say, maybe, a private company due to being able to tap into public equity
Regarding typical, more traditional markets (like jewlery-selling), my concerns are the “diamond monopoly” discussions I’ve heard about, where its supply is heavily controlled. Whoever these mysterious (or not so mysterious) powers are, they may have greater power as a supplier to undercut substitutive/disruptive products like synthetics in a traditional way. But, also, such suppliers may influence retailers to not involve themselves with competitive suppliers. Those would be my major concerns regarding the value chain.
From a demand perspective, the preconcieved ideas/connotations about synthetics (negatively cheap, negatively fake, negatively not natural, etc.) negative marketing against synthetics, and strong positive marketing for the value of natural diamonds, can affect the “inherent value” of synthetics and, thus, the demand for such.
That’s my two-cents.