Scio Diamond’s (SCIO) Disruptive Technology a True Gem for Investors
By Andrew Klips · Monday, March 5th, 2012

A diamond may generally be thought of for its value as a gemstone, but it is also the world’s most versatile engineering material because of its unparalleled properties and number of industrial and commercial applications. After all, it is the hardest material known to man and has a thermal conductivity (tremendous heat can pass through it without damaging the diamond) that is unmatched by any other known solid. Sure, the gem component of a diamond is sexy, but the stone is so much more to the industrial world. 150 million carats of diamonds are mined each year with De Beers and its now majority shareholder Anglo American plc (LSE: AAL) holding the reigns as industry stalwart for more than 100 years. But, the times are changing as miners like Rio Tinto (NYSE: RIO) and Petra Diamonds, Inc. (LSE:PDL) are steadily cutting into the market share of the De Beers cartel. On a broader perspective, all of the legacy miners are facing threats to lose market share as cultured diamond manufacturing by companies like Scio Diamond Technology Corporation (OTCBB: SCIO) has moved to the forefront of the industry for all that it has to offer.

The Dark Side of Diamond Mining
Because of the high value of a diamond, greed has fueled harvesting for centuries. De Beers, the beast of the market, has been frequently accused of antitrust violations and just eight years ago gave up on a ten-year fight by pleading guilty to charges of colluding with General Electric (NYSE: GE) to fix the price of industrial diamonds.

Diamond smuggling and illegal mining practices swirl through the media surrounding the precious stone. The “Blood Diamonds” of the civil war in the 1990’s and early 2000’s in South Africa garnered worldwide infamy as smuggled diamonds funded military operations of rebels and exposed the prevalence of diamond trafficking for military might. Diamond mining in Zimbabwe is in the news as mandated transparency of diamond mining is being ignored, leading to an investigation of miners hoarding profits for themselves by Finance Minister Tendai Biti.

The list for the dark side of the bright rock goes on and on, including illegal child labor, serious health and safety hazards and environmental damage as diamond mining turns the earth’s crust into Swiss cheese. Some of the largest manmade holes in history were done for the sake of diamonds, like the Mir Mine and Udachnaya Diamond Mine in Russia; “The Big Hole” and nearby Jagersfontein Mine in South Africa; and the Diavik Diamond and Ekati Diamond Mines in Canada. Unlike metal mining, where veins are identified and followed, diamond mining is akin to “finding a needle in a haystack” where massive amounts of earth are devoured in search of a single carat.

An American Solution
In simplistic terms, making a diamond is easy; put pure carbon under enough heat and pressure and it will crystalize into a diamond. That’s the way the Earth has been making them for millions of years. The technology to make real diamonds in a lab has been evolving for decades and is ready to go mainstream to provide an expandable product and solution to the ignominious ways of the diamond industry.

Yes, cultured diamonds are real diamonds. Whereas Moissanite is brilliant and the difference between it and a real diamond cannot be detected by the human eye, it is still basically a piece of glass. Cultured, lab-grown diamonds are made through earth’s natural processes of heating and compressing carbon far more efficiently to expedite and control the process to perfection.

Recognizing the possibilities of the disruptive technology, Stuart Brown, Finance Director at De Beers, told Bloomberg in 2007, “We don’t see synthetic diamonds as a threat, but you cannot ignore it completely.” Two years later the company acknowledged that they could not get diamonds out of the ground fast enough to meet demand.

Competition within the cultured diamond industry is somewhat scarce with Scio Diamonds perched atop the leaders. The company’s technology has been twenty years in the making under the guidance of Dr. Robert Linares of Apollo Diamond in Boston, with Scio buying certain assets of Apollo in April 2011 to commercialize the technology. The Intellectual Property of Scio’s Chemical Vapor Deposition (CVD) technology is protected through 17 issued and 40 pending patents in the U.S. and abroad.

Scio uses reactors and no artificial means or simulants to culture its diamonds in a process that has been proven to control outcomes to manufacture real diamonds of different shapes, sizes and colors to fit the required end product, whether it is a wafer for a semiconductor or a polished gem. Through this revolutionary technology inclusions are controlled, producing a higher quality diamond than most found in nature while still maintaining the identical features of mined diamonds in hardness, thermal conductivity and electron mobility.

How real are they? The Gemological Institute of America (GIA), the world’s foremost authority in gemology, provides a certificate with each diamond produced by Scio, just as they do with mined diamonds. The Institute of Gemology (IGI) and the European Gemological Laboratory (EGL) also rate Scio’s stones.

The diamond industry is once again flourishing as a result of mined diamonds becoming harder to find and demand outpacing supply in the $13 billion dollar industry. There is, of course, the gem factor, but approximately 80 percent of diamond demand is for industrial uses with new technologies poised to increase that figure. For example, laptop computers and mobile phones are plagued with heat dissipation issues that can be resolved by using diamonds in heat sinks and other components to transfer the heat more quickly. Today’s microprocessors have reached terminal velocity as they can’t spin any faster and run any hotter without failing. Diamonds are the answer to these and many more of today’s technology dilemmas.

That’s just a glimpse at possibilities. Other, immediate uses include the de-ionization of water, high power lasers, ultraviolet LEDs and countless defense and energy applications. Advancing these technologies with mined diamonds is simply not economically feasible, but it is through cultured diamonds. Scio has even developed a scalpel with a diamond cutting edge that is unparalleled by any modern scalpel today in form and function.

Scio is knocking down milestones at a frantic pace since acquiring Apollo. New executives and managers have been hired to build upon the $4.5 million in revenue that Apollo had in 2010. The company struck deals to move their lab from Boston to Greenville, South Carolina; a succinct move that garnered Scio huge savings through 85% less power costs. While the production lab moved to SC, the R&D side of Scio moved into a new facility in Hudson, Massachusetts and will be conducting additional research on even larger reactors than the 3 and 6-inch ones that it currently owns.

Distributor deals have been consummated and Scio is working on finalizing a manufacturer agreement with a leading jewelry chain for a line of environmentally friendly diamonds. Additionally, the company expects to make an immediate and high volume splash in medical surgical devices, high thermal conductivity applications (essential to the development of efficient green energy technologies) and water treatment. After building a base in these verticals Scio plans to broaden their scope to capitalize on the almost endless industrial uses for diamond.

The company is debt-free with cash on hand as it nears full-on commercialization and expands revenue from Apollo’s legacy agreements. Scio’s existing reactors are being shipped to the new SC facility and slated for arrival on March 9. “Meanwhile, we continue to build demand for our cultured diamonds as we reach out to distribution and sales prospects, and work to meet their technical specifications,” said Scio CEO Joe Lancia in a recent corporate update.

Much like cultured pearls have moved to complete domination of the industry compared to natural pearls (natural pearls account for less than 1/1000th of a percent of pearl sales today), cultured diamonds possess the same threats to mined diamonds. At worst, cultured diamonds are equal to its natural counterpart, while bringing too many superior qualities to the industry to go overlooked as they are customizable to the end user’s desires at a fraction of the cost. Factor in all of the environmental impacts that can be eliminated and cultured diamonds could be the wave of the future.

For Oppenheimer, diamonds weren’t forever as it bailed from its 40 percent stake in De Beers last year after 80 years of ownership, perhaps signaling where it thinks the mined diamond industry is going. Juxtaposing natural and cultured diamonds reveals an exponential upside for a company like Scio Diamond Technology Corporation in the near term. The diamond industry isn’t going anywhere – in fact it’s going to expand – but where the world gets them from will be the major change.

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