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Canadian Diamonds

Nov 23, 2012 3:00 AM   By Avi Krawitz
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RAPAPORT... Arguably, the Canadian diamond industry’s best years have passed. While its flagship ‎Diavik and Ekati mines are aging, the mines being developed are not of the same scale ‎or value. But they are among the more attractive new diamond projects out there and ‎Canada remains a relatively unexplored diamond frontier compared with other countries.‎

The industry therefore continues to look at Canada with promise.  ‎

‎“We know there is diminishing supply but there are new mines coming on stream and ‎there are people exploring all the time,” said Filip Zimerman, interim chairman of the ‎Diamond Manufacturers Association of Canada (DMAC). “We forget that just 25 years ‎ago no one believed there were any diamonds in Canada. So we’re optimistic and believe ‎there is an untapped potential not only in mining but in developing a manufacturing sector ‎here.”   ‎

Harry Winston, a Canada-based company, is emerging as the country’s main rough ‎supplier after agreeing last week to buy the Ekati mine from BHP Billiton for $500 million, ‎supplementing its 40 percent share in Diavik’s production. In addition, Rio Tinto’s future is ‎still unclear after announcing earlier this year that it was reassessing its diamond ‎business. Rumors are abounding regarding its options, especially for its 60 percent stake ‎in Diavik. ‎

Many are expecting the prospective new owners will try to squeeze the most out of both ‎mines helping to maintain Canada’s position in the market.     ‎

A relative newcomer to the industry, Canada ranks as the fourth largest diamond ‎producer by volume and the third largest by value behind Botswana and Russia. In 2011, ‎the country’s production fell 9 percent year on year to 10.795 million carats while its peak ‎production was at 17 million carats in 2007, according to Kimberley Process (KP) data (see graph below). ‎Since then, production has faded both due to weak market conditions and the diminishing ‎lives at Ekati and Diavik, which together account for about 80 percent of the country’s ‎total diamond output.    ‎


Based on Kimberley Process data.

Des Kilalea, an analyst at RBC Capital markets, estimates that the two new mines ‎coming on stream – the Renard project, owned by Stornoway Diamonds, and the ‎Gahcho Kué joint venture of Mountain Province and De Beers – will combine to add ‎about 5 million carats a year when they launch in the next few years. “No other country ‎boasts anything like that so there’s still a lot of life left in Canada,” Kilalea stressed. ‎

But other development projects are further away from production, while other mines ‎have yielded less encouraging results. ‎
‎  ‎
The Existing Mines

Besides Ekati and Diavik, Canada hosts the De Beers Snap Lake and Victor mines, ‎which Kilalea notes have not been very economical, particularly Snap Lake. In 2009, De ‎Beers incurred a $696 million impairment cost on its Canadian assets, about a year after ‎launching production at the two mines. De Beers Canada’s production fell 5 percent to ‎‎1.66 million carats in 2011. Other mines have had even less success with Shear ‎Diamonds suspending operations at Jericho, which is the northern-most of the country’s ‎mines and remains difficult to operate, especially in weak market conditions.   ‎

Therefore, Ekati and Diavik continue to present the industry with the greatest value ‎forecasts, despite their short remaining lifespans. Many in the industry are hoping a ‎prospective change of ownership, and seeming consolidation of the industry, will unleash ‎some latent potential at both mines.   ‎

Harry Winston estimates that the current Ekati mine plan calls for another seven years of ‎production, during which the production mix is expected to vary as operations shift ‎between the four existing open pits and the underground operation. ‎

More importantly, Harry Winston notes there are additional resources around Ekati that ‎could become economical with increased diamond prices. Part of the Ekati deal includes ‎‎$100 million for BHP Billiton’s 58.8 percent stake in a “Buffer Zone” area that contains ‎numerous kimberlite pipes with development and exploration potential, located next to the ‎core mining area. Kilalea notes that at least one of those seems economical. ‎

Diavik, meanwhile, has just completed an $800 million transition to underground mining (pictured: courtesy www.diavik.ca), ‎which is expected to sustain production beyond 2020. Further development will depend ‎on future ownership and rumors surfaced this week that Rio Tinto is planning to spin off ‎its diamond unit, which includes the Argyle mine in Australia and Murowa in Zimbabwe, ‎through a listing on the London Stock Exchange (LSE) while maintaining 40 percent ‎ownership in the new company. A spokesperson for Rio Tinto declined to comment on ‎market speculation. ‎

Harry Winston’s Ekati purchase may support such a rumor as many expected it to buy ‎out the rest of Diavik rather than Ekati. Simultaneously there have also been whispers ‎that Harry Winston is considering selling its retail division to help finance and strengthen ‎its mining position. Harry Winston declined a request for an interview due to its quiet ‎period before its third quarter results are published on December 6.  ‎

Next Generation of Mines

Exploration companies are watching Rio Tinto developments with interest. ‎

Tom Peregoodoff, vice president of business development at Peregrine Diamonds, ‎explains that the optimal solution to extracting value at its DO-27 kimberlite, which carries ‎a 18.2 million carat resource, would be to track it to the nearby Diavik mine. ‎

‎“I think you’ll see some new resources that were marginal before brought into the ‎‎development plan,” he said. “‎That’s why we are watching developments at both Ekati and ‎Diavik very closely because we believe there is opportunity to get some real synergies ‎with those mines under new management. ‎

‎“They’re going to want to keep those operations open for as long as they can and 18.2 ‎million carats is a nice sweetener for someone,” Peregoodoff added. He noted that ‎Peregrine would consider any option to monetize the asset, whether that involves a sell-‎off or forming a joint venture to operate a prospective mine. Harry Winston is also ‎carrying out exploration around Diavik, independent of its joint venture with Rio Tinto. ‎

Still, most in the industry are looking at other projects for the next generation of mines. ‎

Stornoway Diamonds’ Renard project is expected to launch in 2015 before ramping up to ‎production of around 1.6 million carats a year through its 11-year expected life. Similarly, ‎Gahcho Kué is expected to come on stream in 2015/16 with an 11-year life, producing ‎about 4.5 million carats a year. Shore Gold projects a 2017 start to its Star & Orion ‎projects, which it says contains 34.4 million carats of diamonds and has a 20-year life.‎

Still the Next Frontier

Peregrine’s management is hoping the success of these mines will rejuvenate investor ‎interest in exploration programs, especially for the very early stage “greenfield” ‎programs, such as its Chidliak project. Brooke Clements, the company’s president, notes ‎that while there was a significant amount of investment in exploration in the late nineties ‎and early 2000’s, due to the successes that were achieved at Ekati and Diavik, funding ‎has dropped more recently.‎

He attributes the decline to the slow news flow from the exploration sector and to the ‎generally tighter availability of equity. The company therefore recognizes the value in its ‎recent funding of CAD 10 million from Newstar Securities SRL, a company owned by ‎Robert Friedland, and Dundee Corporation. Peregrine also recently closed a CAD 2.5 ‎million option agreement with De Beers to enter a partnership agreement at Chidliak (pictured: courtesy of Peregrine Diamonds), ‎where Clements reports that the company has discovered 61 kimberlites, ‎seven of which exhibit economic diamond mining potential. He notes that partnering with ‎a larger company helps alleviate the inherent risk in exploration.  ‎

While Kilalea expects that the amount of money spent on exploration may shrink with the ‎BHP Billiton and a possible Rio Tinto exits, he adds that Canada is still seeing a relatively ‎large proportion of investment dollars in exploration. ‎

‎“The present downturn is making it difficult for explorers to find the money,” he said. “But ‎it’s also true that Canada is the least explored of the diamond regions because it’s quite ‎difficult to carry out the exploration and proving of kimberlite there.” ‎

Adding Canadian Value

Canada’s diamond manufacturing sector is banking on the long-term success of these ‎projects and is encouraged by the fact that Canadian companies are playing a bigger role ‎in mining. ‎

‎“Harry Winston is beneficial to us because it’s basically a Canada-based company,” said ‎DMAC’s Zimerman, who is also a founding director of the recently established Diamond ‎Bourse of Canada (DBC). “The larger companies are less inclined to deal with smaller ‎Canadian diamond manufacturers.”‎

Most of Canada’s rough diamonds are exported and Zimerman indicated that the biggest ‎challenge facing DMAC is procuring enough rough to grow the [diamond manufacturing] industry. While DMAC ‎has just four members employing approximately 50 people, Zimerman estimates there is ‎potential to grow that to 5,000 employees. ‎

‎“Not enough rough stays in Canada,” Zimerman explained. “We think there is a made-in-‎Canada solution that would benefit us in the long term.” ‎

He stresses, however, that it will require closer cooperation with the mining sector and ‎acknowledges that part of DMAC’s task involves convincing others that adding value ‎would benefit everyone.‎

Currently, De Beers sells 10 percent of its Canadian production to two local sightholders, ‎while the remainder is sent to Botswana to be mixed with its other production and ‎distributed to its global clients. Rio Tinto sells its goods to select clients and partly through ‎its auctions, while BHP Billiton has sold it’s rough by open tender in Antwerp, and Harry ‎Winston sells mainly to contracted clients. The Canadian Diamond Bourse, which was ‎established in 2010 and currently has over 100 members, does not facilitate rough trading ‎or tenders. ‎

By procuring more local diamonds for manufacturing, DMAC believes it will gain a ‎competitive advantage over other centers through the country’s strong brand. “The ‎Canadian diamond industry truly has a unique product in that it has the cleanest, most ‎ethically sourced goods, adhering to the highest environmental standards,” Zimerman ‎said. “And we’re close to the U.S., the largest diamond market in the world.”‎

Furthermore, unlike most other diamond producing countries, the Canadian government ‎does not own a stake in its mines. But neither does it have a legislated beneficiation ‎policy. ‎

Zimerman explains that the jurisdiction over natural resources is based on the local ‎territories, which bodes well for the exploration community. ‎

‎“We’re trying very hard to develop an inter-provincial national policy toward Canadian ‎resources,” he notes. “But because of the nature in which Canada conducts its business, ‎it does not have a policy of trying to maximize value [further along the supply chain]. ‎Rather, its focus is on trying to open its doors to anyone wanting to explore.”‎

That’s encouraging for a global diamond industry desperate for new sources of rough, ‎and for those concerned about Canada’s diminishing supply. While the country may be ‎making a final push at Ekati and Diavik, it is still considered the burgeoning new-comer ‎when it comes to diamond mining. And even if it does not expect to replicate the heady ‎early days of finding diamonds, it seems there are yet to be explored opportunities in ‎Canada. ‎

The writer can be contacted at avi@diamonds.net.

Follow Avi on Twitter: @AviKrawitz

This article is an excerpt from a market report that is sent to Rapaport members on a weekly basis. To subscribe, go to www.rapnet.com or contact your local Rapaport office.


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Tags: Avi Krawitz, Canada Diamonds BHP Billiton Rio Tinto Harry Winston Peregrine Diamonds De Beers Ekati Diavi
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Nov 30, 2012 7:03PM    By Ross Fruin
Awesome write up, Avi. I thought I was up to date on Canadian diamonds but you just blew my mind. It's great to see this industry still flourishing in Canada. Hopefully they continue to be a major player in the industry which should (to some extent) help to further reduce the amount of conflict diamonds being mined (maybe a pipe dream, i know.) Anyways thanks for sharing. Here is a cool infographic on the top as well... http://www.seattlediamonds.com/files/8513/5353/8100/Canadian_Diamonds_Infographic.jpg
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