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Ice on Fire
Feb 2, 2005 2:39 PM
By Vinod Kuriyan
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In 1999, when Canada’s first diamond mine — BHP Billiton’s Ekati — registered its first full year of production, the country’s contribution to world diamond production was just 5.3 percent, or $7 billion. When Rio Tinto’s Diavik Diamond Mine went into production in 2003, Canada weighed in with 11.2 million carats, or 7.5 percent of the total world production of 144 million carats — $1.24 billion or 12.5 percent by value of the world total of $9.4 billion. This made Canada the world’s third-largest producer of diamonds behind Botswana and Russia and surpassing South Africa and Angola. In 2006, when the Jericho Diamond Project in Nunavut is scheduled to begin full production, the Canadian contribution to the world total is projected at 11.6 percent of the estimated $10.5 billion. In 2007, when the De Beers Snap Lake Diamond Project goes into production, Canadian diamonds will account for 13.9 percent of the world’s production, which is estimated to be close to $11 billion.
Major Influence
Having arrived on the scene at the very end of the twentieth century, Canada is now a major influence on the world diamond stage and will continue to be so for at least the first part of the twenty-first century. In a world where the demand for diamonds far exceeds supply, mining companies are scrambling to find new diamond mines. Although they are all exploring in many parts of the world — central, western and southern Africa, Russia, Ukraine, Finland, Paraguay, Venezuela, Brazil, Australia, India and China — nowhere have they seen as much promise as in Canada. Apart from the Northwest Territories (NWT) — where the Ekati, Diavik and Snap Lake mines are located — diamond exploration is underway in about 60 locations across Canada.
In addition to the many possibilities, Canada has also fundamentally altered the world diamond scenario — suddenly diamond mining is no longer the prerogative of the big companies. Dozens of small mining outfits have staked claims that have yielded some of the most promising of the literally hundreds of kimberlite pipes that have been discovered in Canada and proven to be diamond bearing. Any one of these kimberlites may turn out to be the big discovery of tomorrow. At the very least, the appearance of a dozen small but significant new mines would undermine the De Beers “sightholding” system.
Canada also has the potential to completely change the profile of the world diamond industry, which has been able to reach mass markets due, in part, to the huge volume of relatively cheap diamonds — $13 per carat on average — that are produced by Australia’s Argyle Mine. With an output of around 30 million carats a year, Argyle spawned a giant, low-cost cutting industry in India that employed over 1 million people at its peak. It also made diamond jewelry affordable to almost every segment of society in consuming countries. But the giant Argyle Mine has reached the end of its open-cast production life and its management has to make a decision on whether or not to shut the mine down or take it underground in 2008 at enormous expense. Rio Tinto, the mine’s owner, estimates that it could cost about $600 million to make the transition. However, even if the mine continues production underground, Argyle will not produce the 25 million to 30 million carats a year it has historically produced. If all the major new diamond finds of the future take place in Canada, diamonds could well be priced completely out of the current mass market. Canadian diamonds sell on average at $111 a carat — eight-and-a-half times the cost of run-of-the-mine Argyle rough.
This would also impact the entire diamond-processing pipeline. Rio Tinto, who owns 60 percent of Diavik, will see a huge change in its product mix as the Argyle Mine wanes. According to Nigel Jones, Rio Tinto’s general manager, marketing, “Canadian production currently accounts for about half of Rio Tinto’s diamond production by value, but less than 20 percent by volume. In five years’ time this proportion will grow, primarily because production from the Argyle Mine will decline over time.”
Given its recent profitability problems, De Beers, too, might see a change in the profile of its rough output if it discovers more diamonds in Canada and takes a hard look at whether or not to keep some of its South African operations running. Lynette Hori, spokesperson for the De Beers Group External Affairs Division, however, clarifies: “De Beers has seven operations in South Africa. At current exchange rate levels, five of these operations are unprofitable, while only the Venetia Mine is presently cash-flow positive. The Finsch Mine is profitable; however, with the large capital projects underway it is not cash-flow positive. Overall, De Beers Consolidated Mines as an entity is profitable and is the second-largest contributor of carats in the De Beers Group.”
Downstream Impact
But the increasing influence of Canadian diamonds will also impact the downstream activities of the mining majors. Rio Tinto, which runs the Indo Argyle Diamond Council (IADC) — an initiative that was launched to help those Indian diamond firms processing Argyle rough develop jewelry design and quality manufacturing skills to the level necessary to sell successfully in the consuming markets like the U.S. — will be presented with a completely different set of parameters. But Jones is optimistic, “We hope that Argyle will continue to be a significant part of our rough supply. We also believe the IADC will continue to play a commercially useful role in improving U.S. retailers’ awareness and acceptance of India as a competent supplier of well-made and competitively priced diamond jewelry.”
But if the jewelry of tomorrow has an ever-diminishing component of low-cost diamonds, won’t there be changes in consumer buying and, therefore, in the way jewelry is sold? What would the impact be on the diamond engagement ring? Terry Janes, BHP Billiton vice president marketing, diamonds, replies to these questions with, “My crystal ball is foggy and I simply do not know.”
Rio Tinto’s Jones, however, feels that other forces are also shaping the market at present. “There are bound to be changes in the distribution channels of jewelry to the consumer. In recent years, we have seen the emergence of internet retailers and discount stores as competitive forces in the trade. New models will arise in the future, which is the nature of all competitive markets.” Jones is optimistic about the diamond engagement ring, “The custom of giving a diamond engagement ring is well entrenched in the Western markets and I do not see any threats to this in the medium term.”
As of press time, De Beers, which has been instrumental in promoting the diamond engagement ring worldwide, did not respond to the question.
Canada’s Brand
The advent of Canadian diamonds has also brought with it the sociopolitical pressures for a “beneficiation” drive — the development of a local cutting and polishing industry in Canada in order to provide more jobs and increase value addition. Some of these cutting and polishing ventures have floundered because they were not cost-effective. However, many are still in operation. BHP Billiton has taken the process to the very end and has developed the “CanadaMarkTM” brand of diamonds that are mined in Canada and sold through select retailers. The brand conveys the message that the diamond is natural and untreated, originates from mines located in Canada’s pristine arctic region, has been tracked from mine to customer to ensure its integrity, provides the assurance of ethical standards throughout the supply chain and has a unique number laser inscribed on the girdle that is also recorded in a central registry.
Rio Tinto — while not branding its diamonds — sells the output of its various mines separately. As Jones explains: “It is Rio Tinto’s policy to sell all production from Argyle, to Diavik, to Murowa (in Zimbabwe) as separate product streams. Diavik goods are therefore invoiced as having Canadian origin. Selling in separate product streams provides the customer and ultimately the consumer with the reassurance that these are natural diamonds mined from a known, reputable source in a socially responsible manner with limited environmental impact. Not only do they know the country of origin, but also the individual mine.”
Whatever the future holds, Canada’s diamonds have already carved a unique niche for themselves in the worldwide industry and it looks like Canadian diamonds will be in the forefront for some time to come.
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Tags:
Angola, Argyle, Australia, BHP Billiton, China, De Beers, Diavik, India, Jewelry, Manufacturing, Mining Companies, Polishing, Production, Rio Tinto, Russia, South Africa, Zimbabwe
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