LETTERS TO THE EDITOR — Assessing the value of Dia Met’s

The discovery in the Northwest Territories of rich diamond-bearing kimberlite, including three deposits that hold abundant precious gem-quality stones in commercially exciting numbers, has led to the biggest mineral exploration rush in the history of North America.

With at least three large potential diamond mines with preliminary bulk-sampling results comparable to the very richest mines in the world, Dia Met Minerals has recently seen its stock price fall off sharply. Just what are its shares worth?

Critics quoted in your paper suggest that Dia Met has a market capitalization (10.9 million shares @ $40-65 per share) of $435-710 million, and this may be too high in comparison with De Beers which is $6-12 billion. Such apple-and-orange comparisons underplay the potential cash flow of diamond mines, several of the wealthiest of which can be bountiful beyond belief. De Beers’ Jwangeng and Orapa mines (in Botswana) post cash flow of around $1 billion. Rather than asset and marketing business evaluations, at this time the way to examine Dia Met’s share price is to evaluate its capacity for earnings.

Napkin analysis of a single diamond mine based on the best deposit results of Dia Met’s bulk samples illustrates its potential revenue per share. A 10-million-tonne-per-year mine grading 1.25 carats per tonne with a value per carat of $120 (based on 31% gems) and a mining cost of $15 per tonne could produce after-tax (40%) profits for Dia Met of about US$235 million or US$21.36 per share. With a price-earnings multiple of the most conservative figure of 11, this equals a net appraised value estimate of US$235, or C$287. Dia Met might be called a speculative stock until a mine (or mines) is proven feasible in every aspect, and especially value per carat of diamonds mined. On the discount side, a mine is several years away; on the premium side, more than one mine may prove feasible. Nonetheless, analysis based on earnings power demonstrates that Dia Met’s stock price certainly has room to climb before giving credence to detractors’ anxieties that, at its present much lower levels, it might be overinflated.

(Editor’s note: The author observes that he is not unbiased in that he holds a large share position in Dia Met Minerals. He retired as an officer and director of the company in June, 1993, and his views are not necessarily the official views of the company.)

Wayne Fipke

Kelowna, B.C.