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.

De Beers Role Has Changed

In discussions with clients the past few weeks, I have spent considerable time discussing the changes in the diamond industry, especially the role of De Beers.  The topic typically comes up when the diamond shopper makes a comment about De Beers owning vast supplies of rough diamonds and keeping diamond prices artificially high.

It becomes obvious that the average consumer is basing their perceptions of the diamond industry on stories that are now decades old.  Those of us who work in the industry every day are well aware that the industry has seen dramatic changes.

For about 100 years, De Beers operated a near monopoly by either mining or buying as much as 70% of the world’s rough diamond supply.  They did use their stockpiles of diamond to control the supply and thus the price of diamonds, keeping the industry stable during times of widely fluctuating demand and production.  A byproduct of the tight De Beers control was that they ensured the bulk of the profit left the country where the diamonds were mined as quickly as the diamonds were moved to London for sorting and marketing.

In the last decade, De Beers has dramatically changed their business model under the direction of Gareth Penny, the current managing director.  Today, De Beers only manages the diamonds it mines, which totals about 40% of worldwide production.  That means other companies market 60% of the world’s rough diamonds.  The vast stockpiles of diamonds are long gone with only enough diamonds kept to keep the pipeline of diamonds moving fluidly.

One of the other big changes is in how De Beers and the rest of the diamond industry are attempting to improve the lives of the miners and compatriots in the countries where the diamonds are mined.  There is no better example of this change than in Botswana.  The mines have long been operated as a equal partnership between De Beers and the government of Botswana but now the country is getting even more benefits.  De Beers has moved its diamond sorting operation from London to Gaborone, the capital of Botswana.  The new facility will employ 500 Botswana workers and generate another 2,500 support and related job, including 16 cutting and polishing factories built around the new sorting plant that will process about 22% of the world’s production.

The economic growth and governmental stability of Botswana have not gone unnoticed by other diamond producing countries, especially in Africa.  The De Beers/Botswana model is likely to be implemented in other countries and is expected to continue the ongoing positive change within the diamond industry.

Letseng Diamond Mine Expands Production

Gem Diamond, who owns 70% of Letseng along with the Government of the Kingdom of Lesotho, reported an 81% increase in annual diamond sale in 2007 with $152 million compared to $83.9 million in 2006.  Because of the productive operations last year, Gem Diamonds is doubling production this year when it starts its second plant in June.  The new plant will process ore when it begins mining the main kimberlite pipe adjacent to the satellite pipe, which has been the source of some of the largest diamonds discovered in the world.

Letseng is renowned for its large white diamond finds and the large diamonds provide about 80% of mine revenues.  With approximately 85% of Letseng production being gem quality diamonds, an exceptional 14-20% of those stones are over 10.8 carats.  No other diamond mine can match the large-stone production of Letseng.  As a result, Gem Diamonds is investing in facilities to take advantage of the unquenchable world thirst for large diamonds and enable them to exploit the 25-30 years of mine life provided by development of the main pipe.

Some past posts related to Letseng Diamond Mine:

Letseng Mine Produces 18th Largest Diamond

493-Carat Diamond Name "Letseng Legacy"

Graff Jewellers Purchases 493-Carat Letseng Legacy Diamond

Four Giant Diamonds Discovered at Letseng Mine

215-Carat Diamond Sold

Lesotho Promise: Largest Diamond Found This Century

Diamond Mining Activity in Lesotho

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.

Diamond Fraud at Crater of Diamonds

I always enjoy hearing about diamond discovers at Crater of Diamonds State Park in Murfreesboro, Arkansas, the only diamond mine in the world where the public can keep the diamonds they find.

However, the most recent article I read was a took some of the shine from a place that has pleased thousands of adults and children who have spend hours searching for the elusive diamond they could take home and show their friends.  The investigative article “Arkansas Diamond Fraud” reports on the diamond sales by Eric Blake (see my previous blog article on Eric Blake).

Eric Blake and his family visited Crater of Diamonds in October 2007 and supposedly discovered a large number of diamonds.  He then created a webpage and sold diamonds he advertised as being from the Arkansas State Park.  He also sold diamonds on eBay that were reported to be from the Arkansas “public” diamond mine.  However, investigative research uncovered the fact that Eric Blake had purchased diamonds from India prior to his trip to Crater of Diamonds.  Descriptions and photos of the diamonds ordered from India matched the weights and photos of diamonds supposedly “found” at Crater of Diamonds.

You might wonder why someone would buy diamonds in India and claim they came from Arkansas.  The answer is simple, greed.  Because of the rarity and uniqueness of diamonds from Crater of Diamonds, shoppers are willing to pay a price premium for the diamonds found in the United States.  The Arkansas diamonds are often uniquely formed crystals that often look like drops of glass, unlike the flat, cube or octahedron surfaces typically found in most diamond mines.  However, there are some sources around the world, like the Panna Mines in India, which produce diamond crystal similar in appearance to the crystals found in Arkansas.  Since the diamonds from India are more abundant than those from Arkansas and do not have the celebrity status of diamonds found at Crater of Diamonds, the price of Indian diamonds can be less than a tenth the price of diamonds from Arkansas.  With a ten-fold profit margin, “planting” Indian diamonds in Arkansas was a profitable diamond scam.

While I am sure that the justice system and angry victims will take care of Eric Blake, but I do have concern for all the future visitors to Crater of Diamonds.  I hope their fun and enjoyment is not diminished by one person’s diamond scam.  For all those people who have found or purchased authentic diamonds from Crater of Diamonds, they should take comfort in the fact that they really to have unique and valuable diamonds.  Crater of Diamonds State Park remains a treasure chest of diamonds waiting to be discovered.

Energy Outages Putting Pressure on Diamond Prices

For several years now, the demand for diamonds has exceeded the supply and that trend is going to be continuing for the next several years until new supplies can offset the declining production in older mines.  Recently, the supply situation has been hampered by an energy crisis in the southern regions of Africa.

South Africa’s energy problems result from a booming economy and an incompetent government that has strained the energy infrastructure.  In Zimbabwe, the problem stems from a dictator’s management crisis.  As a result, some diamond mines are experiencing a 40% drop in production compared to last year at a time with demand and prices are soaring.

The slowdown in the U.S. economy has slowed the demand for diamonds in the market that historically purchases 50% of the diamonds sold annually.  However, the economies of India, China, and the Middle East are on fast growth paths for their economies and diamond production so that worldwide demand for diamonds continues to grow.  As the growing demand hits the declining production, diamond prices are on the way up.  Diamond speculators are fueling the demand already and it is hard to image what the diamond industry will be faced with in the next 5 to 10 years of this continuing imbalance of diamond supply and demand.

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.

Graff Jewellers Purchases 493-Carat Letseng Legacy Diamond

Gem Diamonds and its partner, the Lesotho government sold the Letseng Legacy 493-carat diamond to Graff Jewelers for $10.4 million.  This rough diamond, the 18th-largest diamond every found, was discovered September 7th at the Letseng-la-Terai Mine in the Kingdom of Lesotho.  Graff’s production company, Safdico, acquired the Letseng Legacy diamond and will be responsible for cutting the stone in Antwerp.

Graff Jewellers was also successful a year ago when it purchased the Lesotho Promise 603-carat diamond for $12.4 million from the same diamond mining company.  The Letseng diamond mine is famous for production of large, valuable diamonds.

Gem Diamonds recently announced that they are doubling the size of the Lesotho mining operations and expects to discover more large (over 100 carats) diamonds.  Three of the twenty largest diamonds every found were discovered at the Letseng-la-Terai Mine.

The market is hot for large, expensive diamonds and the two-year-old Gems Diamonds Company has already made quite a name for itself with the Lesotho operations as well as mines in southern and central Africa and developing operations in Indonesia.

4.38-Carat Discovered in Arkansas

Chad Johnson moved to Murfreesboro, Arkansas from Iowa in February.  Unlike most visitors to Crater of Diamonds State Park who are tourist, Chad has been trying to support himself based on the diamonds he finds at the park.  He has found about 80 diamonds thus far but Monday’s discovery of a 4.38-carat tea-colored diamond was his biggest find.

As is common practice at Crater of Diamonds, visitors sift through dirt to separate out the collectable gemstones and minerals, always with the hope of finding a big diamond.  Chad had put his sifting equipment in a locker when he finished digging Saturday but discovered the cube-shaped diamond stuck in his sifter when he started his dig on Monday.

While diamonds are mined every day in countries around the world, Crater of Diamonds State Park as the only location open to the public.  Since 1972, visitors have been able to keep the gems they discover in the park.  The park officials make every effort to help the visitors by plowing up fields to expose fresh soil but it still takes a hard work, patience and considerable luck to find diamonds, especially as big as the 4.38-carat.