Diamonds Update

Diamond Industry Copes with Crisis

 

The past 12 months have been witnessed many forms of economic crisis and the diamond industry was no exception.  In past decades when demand for diamonds dropped, De Beers simply stockpiled diamonds to keep supplies and therefore prices stable.  However, in recent years the European Union has forbidden monopolistic activities (like stockpiling) and De Beers now only controls 40% of the diamond market compared to over 80% a few years ago so no longer has full control over diamond production.  As a result, the diamond industry had to implement new strategies to cope with the economic crisis.

The industry’s main tool was stopping production of diamonds.  De Beer’s mines in Botswana, Canada, and Namibia were mostly shut down with only about 10% production in the first quarter of 2009 compared to the same time in 2008.  While production is slowly being brought back online, some companies like Harry Winston Diamond Corporation has decided to cancel winter production at their Diavik Diamond Mine in Canada after a summer shutdown and production returning in the fall.

Rio Tinto shut down its Argyle diamond mine in Australia during the first quarter of this year resulting in a production drop for the country of almost 90%.

Alrosa, the Russian diamond producer, continued to produce diamonds but protected prices by having the Russian government purchase and stockpile the diamonds.

Even with the cuts in production, the dramatic drop in demand results in global polished diamond prices dropping 15.7% from August 2008 to August 2009.  Most of that drop occurred in the November to February period with prices being stable since May.

The past year produced the largest drop in diamond demand in more than 50 years with the most visible fall out being the weekly reports of bankruptcies in the retail and manufacturing sectors of the diamond industry.  Retailers in particular simply could not cut enough costs to compensate for the lack of sales.  Retailers and wholesalers who had made money by leveraging purchases of diamonds as the prices were going up suddenly saw their credit lines cut and interest rates rise at the same time their inventories lost 15% or more in value.

What can the diamond industry expect in the months ahead?  With the US economy slowly coming out of the recession and demand continuing to grow in China and India, demand should become more stable and head back up.  At the same time, many of the large diamond mines are moving from open pit to underground production, which will lower production levels.  The economic crisis has also delayed opening of any new mines so global production of diamonds will soon be outpaced by supply again, which means diamond prices will soon return to their historic 3 to 4 percent annual inflation trends.  However, the that price inflation will likely see considerably short term fluctuations as the industry continues to react to the more chaotic global financial times.

Diamond Laser Inscriptions

Laser inscriptions are messages, usually grading report numbers, inscribed on the girdle of the diamond.  The process uses a very precise laser beam to transform the micro thin layer of diamond from its transparent form to an opaque carbon (graphite) form that is visible under magnification.

Today’s laser inscription technology uses a “cold laser” process that utilizes the short wave length of light and thus has no thermal effect on the diamond.  This safe process will not chip, fracture, or otherwise damage the diamond while providing great control over the precision, contrast and depth of the marking.

Because diamond laser inscriptions can use any text, font, symbols, or artwork, they provide great flexibility for identification and marketing efforts.  The laser inscriptions are so small that they are not visible to the eye.  They are visible using 10x magnification, but are usually more readable with 20x or greater magnification.

The most common use of diamond laser inscriptions is to label the diamond with the certification number for the grading laboratories’ diamond grading reports.  Since laser inscriptions can be applied by anyone with the inscription equipment, there have been some rare cases of fraud.  Usually this can be avoided by simply cross-referencing the inscription number with the grading laboratory’s database.  For the GIA numbers this information is available at http://www.gia.edu/reportcheck/.  If the laser inscription was done prior to or during the inspection at the grading laboratory, the laser inscription is usually indicated on the actual diamond grading report.  Sometimes the laser inscription is applied after the grading report, in which case the certification would not make note of the laser inscription.

The Canadian diamond industry has made use of laser inscriptions to differentiate their diamonds from other sources.  Many of the diamonds mined in Canada are laser inscribed with a marketing trademark, a “Canadian Product” notation, or a unique serial number including a code for the particular mine where the diamond was extracted. 

These laser inscriptions aid in identifying the diamond but are a valuable marketing feature for those diamond shoppers looking for something a little special or requiring a diamond from Canada.

Some branded diamond shapes or retail chains are using the laser inscription to market their diamonds as illustrated by the PrinceCut inscription photo on the right.  For the branded diamond shapes, the laser inscription provides a validation that the diamond is the branded or patented cut.

Another common use for diamond laser inscriptions is to indicate if the diamond displays a Hearts & Arrows pattern.  Since there are no industry wide standards for “grading” the Hearts & Arrows pattern, it is up to the owner of the diamond to determine if the pattern warrants an H&A laser inscription.  It has been our experience that some of the diamonds laser inscribed H&A have marginal Hearts & Arrows patterns while many diamonds displaying beautiful H&A patterns are not laser inscribed.  Grading laboratories do not determine H&A grades and many diamond wholesalers do not even own an H&A scope, let alone examine every round diamond they own so H&A inscriptions are somewhat hit and miss.

Since laser inscriptions can include any text or artwork, they can be used for personal messages.  One diamond cutting company, Trillion Diamond Company, used laser inscription as part of their patented Ten Commandments Diamond®. 

While a personal laser inscription could be a romantic touch to a diamond gift, the personalized message becomes a liability if the diamond ever needs to be sold again.  Not many diamond shoppers want a diamond with someone else’s names and wedding date inscribed on it.  A skilled diamond cutter can polish off the laser inscription but that requires additional time, effort, and expense and has the potential of changing the weight of the diamond.

While diamond laser inscriptions are a nice feature for identifying a diamond and we wish all diamonds were laser inscribed with their certification numbers, most diamonds (especially the bigger, more expensive stones) are not laser inscribed and there are other ways to identify a diamond.  With most diamonds, it is easier to see the unique "fingerprint” of inclusions than it is to read the laser inscription with a 10x loupe and few consumers have high powered microscopes necessary to read the laser inscriptions.

Canadian Diamond Mining Update

With the worldwide production of diamonds on the decline, mining efforts in Canada’s northern regions are continuing at full speed.  The premier Canadian diamond mine is the Diavik mine, located a mere 130 miles south of the Arctic Circle.  The mine is a joint venture of Rio Tinto and Harry Winston Diamond.  Diavik production in 2007 totaled 11.9 million carats, which is about a tenth of worldwide production.  Operations include a 650-foot excavation pit, preliminary work on a second pit, and funds committed to underground operations that will keep the mine productive past 2020.  Diavik Mine’s Kimberlite pipes have proven to be even more diamond rich than initially estimated so the owners continue to invest in future production.

Some of the other Canadian diamond mines are having economic troubles due to an unusually warm winter causing shortages of fuel, equipment and supplies.  These problems were compounded by the rising Canadian dollar, which increased the cost of diamond production relative to diamond sales that are based on the dollar.  Even though diamond prices have increased, the production costs have increased even more, resulting in economic challenges for De Beers’ Snap Lake project.  With construction costs, three times original estimates, De Beers recently took a billion dollar write down in stated value of its Canadian diamond mining operations.

De Beer’ Victor mine in Northern Ontario is planned to begin production later this year but it is facing the same financial pressures as the Snap Lake mine.  The economic troubles were intensified by the Ontario government increasing the value tax on diamond production from 5 percent to 13 percent, resulting in an 8 percent increased burden on mining operating margins.

Early in the permitting process, De Beers’ Gahcho Kue project east of Yellowknife is projected to have economics that are more favorable.  As a result, development efforts are being accelerated to recoup quicker the investments.

Tahera Diamond’s small Jericho mine opened in 2006 in Canada’s Nunavut territory with the financial support of Tiffany & Co.  The warm winter limited the use of the ice road necessary to supply the mines and Tahera was unable to meet financial obligations in January and halted mining operations.  The mining company is now seeking potential buyers for the company.

While not part of Canada, Greenland shares the same geological craton (stable part of the earth’s crust) which has produced the major diamond productions in Canada.  Hudson Resources, an exploration company, is conducting bulk-sampling operations in West Greenland to determine the diamond content of the ore.

Diavik Diamond Mine Development Plan

This week Harry Winston Diamond Corporation announced a new mine development plan for the Diavik Diamond Mine own jointly by Harry Winston (40% ownership) and Rio Tinto (60% ownership).  The plan involves a $218 million investment by Harry Winston and $327 million by Rio Tinto, both over the next two years.

Since the Diavik Diamond Mine started production in 2003, operations have been open pit mining and have produced 35 million carats of diamonds.  The new development plan will facilitate the start of underground operations starting in 2009, which would extend the life of the mine to beyond 2020.  The total estimated reserves for the mine were about 110 million carats, meaning that there are about 80 million carats yet to be mined.

The Diavik Diamond Mine is located 300 kilometers northeast of Yellowknife, capital of Northwest Territories in Canada.  Situated on a 20 square kilometer island in Lac de Gras, the mine employs approximately 725 workers.  The mine extracts ore from three kimberlite pipes, designated A154 North, A154 South, and A418, which contain higher than average content of readily marketable diamonds.  The three pipes are all located beneath the waters of Lac de Gras so operations required construction of a dike to surround each pipe so the water could be removed before mining could begin.  The lake freezes from October to June with an average thickness of 1.5 meters.

The physical plant (processing, maintenance, powerhouse, workers accommodations, etc.) are located on the island with enclosed walkways connecting the major buildings.  All supplies to keep the mine operating must be trucked in over a 600 kilometer long ice road constructed each winter from February to April.  The Diavik Mine requires about 4,500 truckloads a year to maintain the operations year around.

Aber Diamond Is Now Harry Winston Corporation

Aber Diamond Corp. changed its name to Harry Winston Diamond Corp. November 19.  The company, trading on the New York Stock Exchange, is the largest publicly traded diamond company.

The company is a major player at both ends of the diamond supply chain.  The mining operation, with revenues of about $400 million per year, owns 40 percent of the Diavik Diamond Mine in the Northwest Territories of Canada.  This equates to roughly three percent of the world’s rough diamond production.  At the other end of the diamond supply chain, the retail operation with annual revenues of about $300 million, owns 18 Harry Winston stores worldwide including New York, Beverly Hills, Paris, Tokyo, and Hong Kong.  Plans are ongoing for new stores in Beijing and possibly Shanghai and Mumbai to take advantage of the two fastest-growing economies, China and India.

On first look, Harry Winston Diamond Corp. appears to cover the vertical spectrum in the diamond industry but the company still must outsource the cutting and polishing process that is required to transform the mined rough diamonds into the finished gems sold at the retail level.

With the rapidly growing demand for diamonds and the decreasing production from many of the larger, older mines, the quest for diamond mines is very dynamic.  There are many mining companies investing in new exploration and enhanced production techniques in older mines.  Diamond mines have become a scarce and valuable resource drawing the attention of big dollars.  Since developing new diamond-producing mines is a long, expensive process, growth for the Harry Winston mining operation will most likely come from acquisitions of producing facilities or mines close to production.  The most likely scenario for growth would be purchasing the other 60 percent interest in the Diavik Diamond Mine, currently owned by Rio Tinto.

BHP Billiton Sees Supply/Demand Gap Growing

Alberto Calderon, president of BHP Billiton’s Diamond and Specialty Products agrees with De Beers’ projection that the gap between rough diamond supplies and demand for polished diamonds will widen over the next ten years.  The gaps results on the one hand due to the success of De Beers’ marketing efforts, and on the other hand, by the small number of new diamond sources to replace the dwindling diamond production at mature diamond-mining operations.

BHP Billiton, the world’s largest resource company, estimates that supplies of synthetic diamonds will grow to five percent of the world’s market production but that will still not be enough to fill the gap between supply and demand.  BHP Billiton sees synthetic diamonds as being another source of diamond for the world markets in future years but they see plenty of demand for their natural diamond production.  They have an 80% stake in the Ekati diamond mine in Canada and are developing joint ventures in Angola and the Democratic Republic of Congo. 

For the diamond industry, the strategy is to be aggressive on growing demand and supply because as long as demand grows faster than demand, the industry is a big winner.

De Beers Supports Canadian Diamond Cutters

Snap Lake Diamond Mine operations will begin this summer and it is the first diamond mine in Canada and the first outside Africa to be owned by De Beers.  Beginning in 2008, De Beers Canada has agreed to offer 10 percent of its Snap Lake diamonds to cutters and polishers in the Northwest Territories.

De Beers is expressing its support for the growing diamond cutting industry in northern Canada.  It is likely that De Beers will be reserving the larger and more valuable rough diamonds for the local Canadian cutters while the bulk of the diamonds will be released to cutters in countries like India that have lower labor costs.

In keeping with De Beers’ policy of only selling diamonds to its exclusive list of sightholders, the Canadian cutters will be required to only sell diamond to clients who meet the criteria set by De Beers’ sales and marketing company, the Diamond Trading Company.

The start up of diamond mining operations at Snap Lake comes at the same time that De Beers is reducing its purchases of rough diamonds from Alrosa, the giant Russian diamond producer.   Under pressure from the European Commission, De Beers has agreed to reduce purchases of Alrosa production by $100 million in 2007 and $100 million each subsequent year until purchases are zero in 2009.

In addition to Canada, De Beers has also pledged to provide rough diamonds to southern African countries so they can expand their involvement from mining into cutting and polishing and thus enjoy a bigger share of the economic wealth created by diamonds.

2007 Diamond Supply Contraction

De Beers, the world’s largest diamond producer, has notified their clients that the first half of 2007 will have a reduced supply of rough diamonds.

This is a result of several forces in the rough diamond production and marketing arena.  One factor is that 2007 will begin the reduction of De Beers’ purchases of Alrosa rough diamonds as a result of a deal with the European Commission to settle a long-running legal case alleging monopoly.  Under the agreement, De Beers agreed to reduce purchases of Alrosa production by $100 million in 2007 and $100 million each subsequent year until purchases are zero in 2009.  Alrosa is unlikely to replace that level lost sales as they work to ramp up their new marketing efforts so the supply will dwindle.

Another complicating factor is that Botswana, primary source of De Beers’ production, will probably have lower production in 2007. The declining production of older mining operations is an industry trend that will continue for the next decade.  The diamonds in these older mines are more difficult to extract as they most go deeper, so production declines. 

De Beers’ newest mine, Snap Lake Arctic, is projected to start production in October 2007 so will not be contributing to worldwide production during the first part of the year.

The diamond industry is going through many structural changes and change usually means less efficient flow of diamonds.  For example, De Beers has pledged to provide rough diamonds to southern African countries so they can expand their involvement from mining into cutting and polishing and thus enjoy a bigger share of the economic wealth created by diamonds.  These operations will not have the efficiency of current clients and will siphon some of the rough diamond supply away from their current clients.

The bottom line is that worldwide supply will be reduced or at least slowed down in 2007 with the expected result being the firming of prices leading to a longer term trend of price increases.

Diamond Demand and Prices to Increase

For the first seven months of this year, polished diamond prices continued to increase compared to the same months last year but August through October have seen prices fall compared to last year.  Polished diamond prices peaked in the fall of 2005 and the worldwide market has softened since that time.  The lower prices are the result of a slowing global economy (expected to continue to 2007) and high interest rates, which limit retail inventories and reduce consumer purchasing power.  Even though the 2006 retail holiday demand for diamonds is expected to be strong, the high interest rates have kept jewelers’ inventories lean.  The result could be weak sales despite the strong demand.

While polished diamond prices have declined in recent months, prices for rough diamonds have held steady.  This has created intense pressure on diamond cutters and polishers who were already feeling the financial burden of rising interest rates. 

At the recent World Diamond Conference held in Perth, diamond production projections for 2010 are $11.3 billion compared to $12.67 billion estimated for 2005.  In other words, production of diamonds will be down more than 10% from today’s levels.  At the same time, demand projections are growth increases by as much as $5 billion.  The supply shortfall could be as much as $3 billion by 2008 and $6 billion by 2010.  This is the first time in 25 years that world diamond production is on the decline.

With these large supply shortfall projections, prices for rough diamonds are expected to rise significantly by 2008 if not sooner.

With prices expected to be on the rise, what is the diamond industry doing to increase supply? The key to the supply question lies with exploration.  There has been no major diamond deposit discovery for 15 years.  The last big discovery was in 1991 at Point Lake in Canada’s Northwest Territories, which led to the large mines in the area like Ekati.  However, resources at the Ekati mine are expected to be depleted by about 2015 and there are no major finds to replace them.  Diamond mines are very capital intensive and take years to put into operation once the diamond deposits are verified. Unless diamond exploration is accelerated soon, the shortfall projection will become reality.

My advice to diamond shoppers is to enjoy the relatively stable prices we have now.  In the future, we will be talking about 2006 as the good old days of low diamond prices.  Diamond prices in future years will be soaring, especially for larger diamonds.

Jericho Diamond Mine Officially Opens

The $120-million Jericho diamond mine has been operating since January of this year, began commercial production in July and celebrated its official opening this month. 

The open-pit mine, located about 400 kilometers north of Yellowknife.  This is the first diamond mine in Nunavut, the largest and newest of the territories of Canada.  Nunavut was separated officially from the vast Northwest Territories on April 1, 1999.

The Jericho diamond mine is owned by Tahera Diamond Corp and was partially financed by New York based Tiffany & Co. which markets the diamonds produced at the mine.  The mine’s processing facility crushes and sift about 2,000 tons of kimberlite per day to produce about 2,000 carats of diamonds daily.  In June the mine produced a 59-carat diamond worth about $400,000 which raised the hopes for more larger diamond discoveries in the future.

The Jericho mine is Canada’s third producing diamond mine.  The Ekati and Diavik diamond mines are located in the Northwest Territories, near the Nunavut border.  These two mines produced more than $1.7 billion worth of diamonds in 2005, making Canada the world’s third-largest producer of diamonds by value.

The Jericho operation is expected to grow to produce 500,000 carats of diamonds a year with a projected life of eight years.  The open pit is about 300 meters long and 75 meters wide.  While the Jericho mine is about one-eighth the size of the other Canadian diamond mining operations, it proved that smaller operations are economically feasible and quicker to place in production.  There is vast diamond potential in this desolate Arctic region and the Jericho mine demonstrates that smaller projects have a bright future.

In 2007, De Beers Canada Corp. is expected to open its Snap Lake diamond mine located 220 kilometers northeast of Yellowknife.  The projected production at Snap Lake mine is 1.5 million carats per year.