Railroad, mining company set stage for diamond fight

KELSEY LAKE — It isn’t the Gold Rush or the Johnson County Range Wars, but a lot of the elements of those fabled Old West disputes are the same. There are railroad tycoons and landowners, settlers and prospectors, even accusations of claim jumping.

But this time, the squabble isn’t over gold or livestock. It’s about diamonds.

And in true 20th-century fashion, the dispute will be settled not by gunfights or family feuds but by city lawyers in tasseled loafers arguing their clients’ case in U.S. District Court in Denver.

On Jan. 22, the Union Pacific Land Resources Corp. filed civil suit against Diamond Company N.L. of Fort Collins and its parent company, Redaurum of Canada, a Toronto-based diamond-exploration firm with active mines in South Africa, Zimbabwe — and Kelsey Lake.

Union Pacific claims a mineral interest and trespass on a patch of land that straddles what is known as the Stateline district. Northeast Colorado and southeast Wyoming share Kelsey Lake, with the mine in question operating on the Colorado side in Larimer County.

“Diamond Co. and Redaurum will contest this claim vigorously,´ said John Henderson, lead attorney for the defendants’ Boulder-based legal firm, Vranesh and Raisch.

Last year, fledgling Diamond Co., headed by Colorado State University geology graduate Howard Coopersmith, unearthed a 28.3-carat gem-quality rough diamond at Kelsey Lake, near the hamlet of Virginia Dale.

Dubbed the Colorado Diamond, the stone was the fifth-largest rough diamond ever found in North America. The polished gem, weighing 5.4 carats, garnered $87,000 when sold to an anonymous buyer last October in New York.

Another 218 carats of Kelsey Lake diamonds were sold along with the rough Colorado Diamond. The sale of another 1,928 carats of Kelsey Lake diamonds is being finalized.

“I think the timing of the filing of the suit has quite a bit to do with the discovery of the diamonds,´ said Coopersmith, Diamond Co.’s president and Redaurum’s North American manager. “We expect to find more and larger diamonds at Kelsey Lake.” Redaurum estimates a 15-year life span for the Kelsey Lake mine.

In 1995, Redaurum acquired controlling interest in Diamond Co., paying the Canadian equivalent of about $2.3 million to acquire 75 percent of the stock issued by Colorado Diamond Corp. Diamond Co. is a wholly owned subsidiary of Colorado Diamond Corp.

Diamond Co. and Redaurum leased mining rights, and they believe mineral rights, to the land on which Kelsey Lake mine sits from the private landowner. Title to the land has been held privately since it was first sold by Union Pacific to Jenny Wallace in 1896.

But Union Pacific contends that it sold only title to the land, not to its mineral rights, including precious gemstones. The company is claiming mineral trespass, seeking the diamonds being mined at Kelsey Lake, the mine and its equipment and compensation for the alleged trespass.

Attorney Henderson would not comment on the defense’s legal strategy. Attorney’s for Union Pacific could not be reached for comment.

The dispute has deep roots. Though it frequently sold land to private parties, Union Pacific believes it retained mineral rights by exercising a form of legal reservation common at the turn of the century.

But in a 1959 case, the Colorado Supreme Court ruled in a similar dispute that such a form of mineral reservation was terminated once the land passed from the initial grantee to subsequent buyers.

“It was essentially a case involving a defective form of reservation that was used by Union Pacific,” Henderson said. “They forgot to reserve the mineral estate.”

Henderson believes this latest suit is an attempt to challenge the Colorado Supreme Court’s 1959 decision.

“They have never loved that decision,” he said.

The outcome of the case could reach farther than Kelsey Lake. Union Pacific still claims mineral reservations similar to the one being claimed at Kelsey Lake on other unique, possibly mineral-bearing lands.

The legal wrangling dodges what might be the truly interesting question: Why would anyone be mining for diamonds in Colorado and Wyoming in the first place?

“I guess the only thing that could prompt someone,” Coopersmith said in a deadpan, “is that diamonds are here.” Coopersmith believed in the area’s diamond-bearing potential while still a CSU grad student, making his first diamond discoveries there a decade ago.

The geology of the Stateline district, including Kelsey Lake, is rich in deposits of a rare type of rock called kimberlite.

Both diamonds and kimberlite were formed at a similar time on the geologic time scale, at least 350 million years ago.

Find kimberlites, and you are fairly certain of finding diamonds nearby, said Dan Hausel, senior economic geologist for the Wyoming Geologic Survey.

Hausel believes that diamond mining could become a major industry in the region over the next half-century, especially in kimberlite-rich Wyoming, and perhaps in eastern Colorado and Montana as well.

“If you look at the geology of Wyoming,” Hausel said, “one place in the world where you see a lot of similarities is South Africa.

Which is to say there may be more than gold in them thar hills.