Dec '11/Jan '12

Diamonds

Selling dreams

By D. Zlotnikov

When it comes to things one digs out of the ground, diamonds are unique. They are not valued for their importance to the growing electric vehicle industry or their usefulness in steel production. People in the market for a diamond are not just buying a diamond – they are shopping for a dream.

But do people still shop for dreams in difficult economic times? The answer is both yes and no. According to Tom Ormsby, director of external and corporate affairs at De Beers Canada, diamond sales slowed to a crawl when the financial crisis first hit. Also, the current turmoil in the Eurozone was expected to have a similar effect on the world’s largest diamond market – the United States. “But the pleasant surprise has been that for the diamond industry, the U.S. has shown stronger than expected diamond demand at the retail level as compared to what many thought might have been the outcome based on the 2008 to 2009 example, when the economy started to wobble,” he says.

The dream is also catching on in new places, says Julie Lassonde, executive chairman and CEO of Shear Diamonds, a junior working on restarting the Jericho Mine in Nunavut. Recently back from Antwerp, Belgium, she says the shift is immediately obvious. “You could see it,” she explains, “just the number of Indian and Chinese purchasers in Antwerp. India is coming on very strongly on the heels of China.” And China alone is making a huge splash in the markets, she adds.

“There are some 130 million carats of diamonds produced worldwide. Of these, only 25 million carats are gemstone quality. So for China to be suddenly vastly interested in diamonds, a lot of diamonds will have to be produced to meet that demand.”

Lassonde’s position is supported by the price fluctuations in the market – as much as 40 per cent from January to August of this year, she says. “We’ve always known there’d be growth coming from places like China and India, and we’ve seen those be much of the growth catalysts in late 2010 and in 2011,” agrees Ormsby, although he feels that the United States will still remain the top diamond consumer for some years to come.

There is no disagreement on the main point, however. There is plenty of demand for the high-quality diamonds for which Canada is becoming known.

Expanding sector

Ormsby says that while Canadian operations contribute only five per cent of the total carats produced by De Beers, they punch well above their weight in terms of value, due to the quality of the diamonds. “The revenue is more like eight to nine per cent of the De Beers total,” he explains.

De Beers is aiming to further capitalize on this premium with aggressive expansion plans: advanced exploration on key diamond-bearing pipes at Victor in Ontario, ramping up to full production at the Snap Lake Mine and permitting underway at the Gahcho Kué project, both in the Northwest Territories. Victor, which has a life-of-mine average of 600,000 carats per year, has produced over 800,000 carats each of the last two years. While at full capacity, Snap Lake is expected to produce 1.5 million carats per year. Gahcho Kué, though, is the big deal: If all goes according to plan, says Ormsby, the project should be producing up to 4.5 million carats per year, taking De Beers Canada past the six million-carat mark (and Canada from 10.7 million to over 15 million carats).

In November, Stornoway Diamonds moved one step closer to securing its place among Canadian diamond producers with the release of the feasibility study for its Renard project in central Quebec. The study outlines an open pit and underground operation that would average 1.7 million carats over an 11-year mine life. The project has an estimated initial cost of $802 million.

No illusions

The downside of Canadian diamond operations is their relative expense. Lassonde says the Jericho Mine – with a capacity of 375,000 carats per year – is probably the smallest size at which one could operate at a profit. The challenges, she explains, stem largely from the combination of extreme remoteness of most diamond finds and the extreme weather conditions in which the mines must operate.

Recently, BHP Billiton announced it was considering the sale of its diamond portfolio, which includes a mine and exploration property in the Northwest Territories. The company explained in a news release that its “strategy is to invest in large, long life, upstream and expandable assets while remaining a simple and scalable organization. EKATI is a world-class operation, and Chidliak is a promising exploration opportunity, but many years of extensive exploration suggest there are few options to develop new diamond mines that are consistent with this approach.”

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