A World of Mining Special – Part 1 of 2
This is a story about Eira Thomas, dubbed the “Queen of Diamonds” for her role leading the geologists who discovered the kimberlite pipes that became the Diavik diamond mine. Diavik, Canada’s second diamond mine, produced 1.9 million carats of the sparkling stones in the fourth quarter of 2012, up 19% from a year earlier.
Eira, the daughter of Welsh immigrant and Aber Resources founder David Grenville “Gren” Thomas, followed in her father’s footsteps both figuratively and literally. A geologist before she became an executive, Eira cut quite a figure in a mining industry dominated by men. The mud on her boots came before the earrings adorned with diamonds mined from the deposit she discovered.
Later came the falling-out at Aber Resources, the cofounding of her own diamond exploration company, an audacious takeover of a Quebec diamond project – where our paths crossed – and a return to the diamond exploration game.
But first, a bit of background.
I discovered the stock market at about the same time Ashton Mining of Canada was discovering kimberlite pipes in northern Quebec. Ashton was 51% owned by Rio Tinto – this becomes important later – and was advancing its Renard diamond project. Ashton owned half of Renard, and SOQUEM – an economic development arm of the Quebec government – owned the other half. (Ashton also owned a DMS (dense media separation) lab in North Vancouver.)
My interest in the markets and in Ashton coincided with the emergence of Canada as a player in the global diamond industry. Armed with a discount brokerage account and a new passion, I delved into researching Canada’s nascent diamond industry.
At the time, most diamonds were being dug out of mines in Africa, Russia and Australia, and De Beers had a stranglehold on the industry that extended from mining to trading and retail channels.
But there were changes in the wind. Ekati, Canada’s first diamond mine, had opened in 1998 in Northwest Territories. The second, nearby Diavik, began production in 2003 on ground Gren Thomas had staked in the early 1990s during one of the greatest staking rushes in Canadian history.
De Beers was shut out of both operations – Ekati was 80% owned by BHP Billiton (co-discoverers Chuck Fipke and Stewart Blusson owned 10% each) and Diavik was a joint venture between Rio Tinto (60%) and Aber (Harry Winston).
Harry Winston, now Dominion Diamond (DDC), just completed the acquisition of BHP’s 80% Ekati stake and is also eyeing 100% ownership of Diavik.
Canada’s diamond pioneers were gems themselves, characters who became spectacularly rich as a result of their discoveries. Gren Thomas built a West Vancouver pub, the Red Lion, modelled after his favourite Welsh watering hole (Eira met her future husband at the Red Lion). As for Fipke, this Wired feature offers a fascinating, hilarious snapshot into the “rogue geologist’s” world.
Diamond pioneers like Fipke, Gren Thomas and his daughter Eira overcame a harsh winter climate and significant skepticism on their path to transforming an industry. As Fipke put it, “When I came up and proposed finding diamond mines in Canada, it was like somebody coming up to you and saying: I’m going to walk on Mars,’ you know it was just b.s. – that was how it was perceived.” (Diamonds in Canada)
By the early 2000s, Canada had become a major player. Significantly, Canadian diamonds were “clean” diamonds, a distinction that carried cachet in an industry characterized by “blood diamonds” that arrived on jewelry store shelves after passing through the hands of African warlords. (By 2009, Canada was the world’s second largest producer by value – behind only Russia – and produced about 17% of the world’s diamonds, according to Natural Resources Canada.)
ROCK AND ROLL
Ashton Mining was one of a handful of development-stage diamond exploration companies in Canada. Ashton spent the early 2000s discovering kimberlites – the ancient volcanic rock formations that host diamonds – on its Foxtrot property in Quebec, expanding mineral bodies and defining a resource. Diamond grades from samples were on an upward curve.
I did my research, then bought the story and the stock. I reasoned that Ashton’s 50/50 partner virtually removed any geopolitical risk – Quebec was annually topping the Fraser Institute’s global ranking of mining-friendly jurisdictions – and believed that Renard had a good chance of becoming one of Canada’s next diamond mines. On the demand side, China’s GDP was growing at 10% a year – churning out a steady supply of new luxury-conscious millionaires – and the U.S. economy was also humming.
Ashton’s time-consuming delineation of the mineral resource was occasionally punctuated by exciting news that spiked the stock. On June 26, 2003, Ashton announced the discovery of a diamond embedded in drill core. On March 22, 2005, the company trumpeted 5.66-carat and 1.17-carat diamonds discovered two kilometres west of the main Renard pipes.
The stock had a few good runs in the early 2000s — at one point, climbing to the $7 level, as I recall — before succumbing to the kind of gravity with which junior mining investors today are all too familiar.
But on July 24, 2006 is when things got really interesting.
A BOLD GAMBIT
That’s when Eira Thomas’s Stornoway Diamonds (SWY) launched a $119-million hostile takeover bid for Ashton Mining of Canada. (The three-way takeover included junior Contact Diamond, a willing partner.)
Eira had cofounded Stornoway with Catherine McLeod-Seltzer in the late 1990s and combined with Northern Empire Minerals in 2003, giving the company a portfolio of exploration projects in Nunavut and the Otish Mountains (near Ashton’s properties). She remained on the Aber board of directors until 2006.
Stornoway had a high share count but the stock had scaled heights of $2.50 in 2004 before settling at the $1.20 level at the time of the 2006 hostile bid (share prices before a 1:4 rollback in February 2011).
Before the hostile bid, Thomas had obtained a lock-up agreement with Rio Tinto for their 51.7% of Ashton Mining’s shares.
The news release touted “significant benefits and opportunities” for shareholders of the $200-million-plus market cap of the combined company. The takeover offered $1.25 cash per Ashton share or one Stornoway share for one Ashton share.
Ashton president Robert Boyd described the offer as “stingy,” and the company challenged the Rio lock-up agreement, citing a $2-million benefit to Rio Tinto if the takeover failed – money that was not available to minority shareholders.
Ashton’s minority shareholders were not amused. As it turned out, only those who took the money and ran limited their losses.
The takeover dragged on through the rest of the year and was finally completed on Jan. 16, 2007, but not before the battle continued in the courtroom. Dissenting Ashton shareholder Matthew Bingham petitioned B.C. Supreme Court to overturn the takeover – citing the rights of minority shareholders – but the judge ruled in favour of Stornoway.
Eira Thomas had won her prize, but the cost had been high, and there was some love lost for the Queen of Diamonds.
A ROCKY MARRIAGE
Stornoway continued to advance multiple projects but Renard was clearly the focus. A series of flow-through and bought-deal financings kept the company afloat as the share count soared and the stock dropped. I dumped my shares. The stock was already sliding when the 2008 financial crisis steepened the slope.
In January 2009, Eira took an executive chairman position and was replaced as CEO by Contact’s Matt Manson, with whom she’d worked at Aber. About a year later, Stornoway bought the other half of the Renard deposit by issuing common and non-voting convertible shares to SOQUEM, which agreed to a $100-million credit line. SOQUEM now owns about 25% of Stornoway’s outstanding shares and would own a 37% stake upon conversion of the non-voting shares. Agnico-Eagle owns another 10.5% of outstanding shares (it owned 30% of Contact Diamond).
The hostile takeover of Ashton ushered in a period of shareholder destruction that saw Ashton/Stornoway stock drop from $1.25 in August 2006 to lows of 6 cents at the end of 2008. The 1:4 rollback in 2011 reduced the share count but not the pain. Stornoway shares closed Thursday at 64 cents – or 16 cents pre-rollback.
I learned several expensive but valuable lessons from my Ashton experience. Don’t fall in love with a stock. Re-evaluate when something fundamental about the story changes. Cutting losses is usually preferable to averaging down.
As for Eira, on August 2, 2011 she resigned as director and chairman of Stornoway “to pursue other interests.”
The mother of two stepped back from the world of mining but didn’t leave the corporate fray altogether – she remained on the boards of oilsands giant Suncor Energy (SU) and Lucara Diamond (LUC), the Lukas Lundin-backed company producing diamonds in Africa.
Starting with a directorship announced in the fall, however, Eira Thomas signalled that she’s back on the Canadian junior mining scene in a big way. In September, she joined the board of Dundee Precious Metals (DPM), the Ned Goodman-backed mining and prospect-generating vehicle.
A coffee call followed in February, when she was named president and CEO of Kaminak Gold (KAM), which is advancing its Coffee Gold deposit in Yukon’s White Gold district. She also bought up three-quarters of a $1-million private placement on Feb. 20, purchasing 560,000 shares at $1.34.
In December, Kaminak announced an NI 43-101 maiden resource of 3.2 million ounces of gold in the inferred category (64 million tonnes grading 1.56 g/t) for its Coffee project. The company has launched an $11-million work program that includes further drilling, metallurgical work and the initiation of a preliminary economic assessment.
Like other juniors navigating the current TSX Venture wasteland, Kaminak is feeling the pinch. With the stock trading at a buck, near 52-week lows, Kaminak’s market cap has dropped to about $85 million.
But with $16-million on the balance sheet and drill targets that should expand the resource, Kaminak looks positioned to ride out the storm.
Two weeks after she was appointed Kaminak president and CEO, Eira Thomas resigned as a director of Strongbow Exploration (SBW), a base-metals exploration company run by Gren Thomas.
But the Queen of Diamonds is also back on the diamond hunt in a different TSX Venture vehicle with her prospecting father. In a little-reported deal announced March 14, Stornoway has optioned an 80% interest in three non-core exploration properties – Qilalugaq, Pikoo and Timiskaming – to a numbered company controlled by Eira Thomas (Stornoway can earn back in up to a 40% interest in each project). The projects are located in Nunavut, northern Saskatchewan and on the Ontario/Quebec border.
Eira, in turn, is assigning the three option agreements to North Arrow Minerals (NAR) for $20,000 and 500,000 transferrable share purchase warrants. North Arrow is a Gren Thomas-helmed junior with gold and diamond exploration projects in the Canadian North (including a Lac de Gras joint venture with Dominion Diamond within 10 kilometres from Diavik). North Arrow just did a 10-for-1 share consolidation and is trading at 22 cents for 7.4 million shares, giving it a market cap of about $1.6 million. Gren Thomas owns 42% of shares.
DIAMONDS IN QUEBEC
As for Stornoway, the company continues to make progress on its advanced-stage Renard diamond project in partnership with the Quebec government and the local Cree. On Jan. 28, Stornoway announced an optimization study that improved on the capex of a 2011 mine feasibility study. Initial capex is now $752 million and Renard’s after-tax NPV, at a 7% discount rate, is $391 million with a 16.3% internal rate of return, after taxes and mining duties, for an initial 11-year mine life.
The costs of building a mine in Canada’s north are high and so are the risks of Stornoway’s “go-it-alone” model. A recent news release, for example, announced that spring work has begun on the all-season road Stornoway is helping to fund. The cost of Stornoway’s 97-km portion of the road alone is an estimated $77 million and it’s being funded by a credit facility.
Its most recent news release touted the high quality of the diamonds in their Renard 65 pipe, the richest one. Stornoway makes for an interesting speculation – it’s at an advanced stage but the stock is priced for the end of the world. Diamond grades are lower at Stornoway than at Canada’s other diamond mines – including De Beers’ mines Snap Lake (Northwest Territories) and Victor (Ontario) – but there’s a ton of exploration upside at and around Renard.
Once bitten, twice shy: I do not own shares of Stornoway (or any other company mentioned).