Market Place; A Fund's Risky Bet on Labrador Mining

With the stock market setting record highs regularly, one of the year's biggest surprises is the performance of the Robertson Stephens Contrarian Fund, which is supposed to do well when the stock market is not.

Nevertheless, the fund has gained more than 17 percent this year, most of it in the last month. That is barely behind this year's 18 percent rise in the Standard & Poor's 500 stock index, despite the fact that the Contrarian Fund owns stock in no technology companies, no medical or drug companies nor any other of the market's hottest-performing sectors.

The Contrarian Fund does own, however, more than 2.8 million shares of Diamond Fields Resources, a Canadian mining company that apparently has struck pay dirt in a large deposit of nickel, copper and cobalt in Labrador, Newfoundland. Since announcing the discovery last November, Diamond Fields' shares, traded on the Toronto Stock Exchange, have soared more than 1,200 percent, to $54.625 (Canadian) from about $4 in early November.

But investors who hope to cash in on the company's mineral discovery or the Contrarian Fund's performance should be wary of several potential pitfalls. Because of the big gain in the stock of Diamond Fields, the shares now account for more than 20 percent of the mutual fund's net assets. That is a big bet for any mutual fund, most of which rarely put more than a few percent of total assets in any one stock. But it is an especially huge bet on a company with no revenues, no earnings and a rather thinly traded stock.

Diamond Fields Resources has attracted remarkable attention not only because of the apparent quality of the mining discovery. The company's co-chairman and largest shareholder, Robert M. Friedland, is a well-known Canadian stock promoter, some of whose previous projects left outside investors holding the bag.

In fact, the Contrarian Fund itself got hurt last year by another of Mr. Friedland's companies, Vengold Inc. The value of the fund's 2.1 million shares of Vengold stock plummeted last summer when the prospects for the company's Venezuelan gold mine failed to meet initial projections. Another company related to Mr. Friedland, Galactic Resources Ltd., collapsed in late 1992, a couple of years after the Environmental Protection Agency began an investigation of the company's environmentally unfriendly mining practices in Colorado.

The Contrarian Fund's bet on Vengold was a significant contributor to its dismal performance last year, when it lost 5.5 percent of its value, making it a bad performer in a bad year for stock funds, even though as a contrarian fund its purpose was to do better.

The Contrarian Fund came closer to its stated purpose in the first quarter of this year. Its heavy investments in precious metals, real estate and oil and gas companies, as well as misguided bets that stocks of technology companies and other high fliers would fall, held the Contrarian Fund to a mere 1.2 percent gain -- far behind the 9.6 percent return of the S.& P. 500.

But a frenzy of speculation surrounding the latest venture of Diamond Fields Resources has brought the Contrarian Fund's net asset value roaring back -- albeit only to its peak of a year ago, when Vengold shares were soaring.

The prospects of Diamond Fields appear to be better than Vengold's, based on preliminary mining data analyzed so far. The newly discovered nickel deposits, near Voisey Bay on Canada's Atlantic coast, could yield more than 30 million metric tons of high-grade nickel, copper and cobalt, according to Ken Andrews, director of the mineral lands division of the Newfoundland and Labrador Department of Natural Resources. Reflecting that potential, the Teck Corporation, a large Canadian mining company, bought three million Diamond Fields shares for $108 million (Canadian) last month. The Canadian dollar is worth 73.6 cents in United States currency.

But several obstacles are likely to delay construction and commercialization of a mine for several years, Mr. Andrews said. The area to be developed lies in the annual migration routes of caribou, ducks and geese, is home to several endangered species, including the harlequin duck, and serves large populations of birds of prey.

In addition, two groups of native inhabitants, the Labrador Inuit Association and the Innu Nation, claim the area as part of their native lands, containing sacred burial sites.

Environmental assessments and negotiations with the Eskimo and Indian tribes must be completed before any mining begins -- and then, mining activities will have to be scheduled around the fierce winter, which freezes the region solid for six months of every year. Edward L. Mercaldo, executive vice president of Diamond Fields Resources, said that while the project at Voisey Bay would likely use open-pit mining methods, it had hired an environmental consultant to advise it. And the company is in discussions with the native inhabitants, he said, about the project's potential impact on them.

Diamond Fields Resources is in talks with several companies about a joint venture for long-term development of the site but it has yet to sign up a partner. Investors in Diamond Fields Resources do not appear to be concerned by any of those potential impediments. The recent run-up in the price of the company's 26.8 million shares has pushed their market value to $1.5 billion. But as of of Dec. 31, Diamond Fields Resources had a net worth of only $30.2 million.

And while the Contrarian Fund is sitting on huge paper profits in its Diamond Fields shares -- which it bought for $5 to $6 (Canadian) apiece -- the fund has shown no inclination to cash in even a part of its investment. If it does, its sale order could unhinge the stock, which does not trade in large volumes and therefore is subject to big price swings. In addition, there is not much stock available to trade, because company insiders and Robertson Stephens together control more than half the shares. Paul Stephens, manager of the Contrarian Fund, declined to comment about the fund's holding.

But clearly the fund wants to warn shareholders about its precarious position: Since April 27, every Contrarian Fund prospectus sent out by Robertson Stephens carries a special sticker noting that its Diamond Fields Resources investment accounts for more than 20 percent of the value of the fund. "As a result," the warning states, "a decline in the stock price of Diamond Fields Resources would have a significant adverse effect on the net asset value of the fund." In other words, caveat emptor.

Graph showing net asset value of the Robertson Stephens Contrarian Fund from Sept. '93-April '95. (Source: Datastream)