Diamonds Update

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.

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.

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.

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.

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.

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.

Exploration for diamonds in Northern Ontario continues to accelerate as more diamond-bearing kimberlites are discovered.  Northern Ontario has huge potential as a major diamond-producing region but like most diamond sources in Canada, accessibility is very difficult.  Many areas have yet to be explored because they are so isolated in terms of the terrain and weather.

The world’s diamond exploration efforts are focused on Canada.  Diamond mines in South Africa, Botswana and Australia are coming to the end of their productive life and there are no major new discoveries in those areas to replace the supply.  Canada is currently the third largest rough diamond supplier in the world and diamond exploration experts believe there is abundant resources to fuel even more growth.

Like most natural resource efforts in Canada, diamond mining faces challenges to major mining efforts while maintaining environmental protection.  Ontario is home to 400,000 square kilometers of northern boreal wilderness, one of the largest remaining intact wilderness areas on the planet.  These fragile ecosystems took millennia to evolve and creatures like the woodland caribou will be driven to extinction if large-scale development efforts do not plan for conservation.

The Victor Diamond Mine is Ontario’s first diamond mine.  It is owned and operated by DeBeers Canada. The project will create 600 construction and 375 new, full-time jobs in Attawapiskat and nearby communities. Over the long term, the project could generate up to 3,200 jobs across the province.  The mine is expected to begin production in 2008 and turn out about 6 million carats of diamonds. In total, DeBeers Canada will invest over $980 million in the project, which could pump more than $6 billion into Ontario's economy.

Learn more about DeBeers Canada at http://www.debeerscanada.com/

Ekati diamond mine is a joint venture between BHP Billiton Diamonds Inc. (80%) and geologists Charles E. Fipke and Dr. Stewart E. Blusson (10% each).  Located approximately 300 kilometres northeast of Yellowknife and 200 kilometres south of the Arctic Circle in the Northwest Territories, Canada, the mine produces 6 percent of the world’s diamond supply in terms of value and 4 percent by weight (3 to 5 million carats per year).

The union representing about 375 workers at the mine has been on strike since April 7.  The union is asking consumers not to buy Ekati diamonds produced under the Aurias and CanadaMark trademarks while the union fights for a collective agreement.  Canadian diamonds gained popularity as they were advertised as the “conflict free” diamonds compared to diamonds from war-torn African countries like Sierra Leone and the Congo.  Now the unions are pushing their own awareness campaign against the “Dirty Diamonds” being produced at Ekati despite a labor conflict.  The newspaper ads can be seen online at the union’s website at: http://psacnorth.com.

In late May, the Ekati diamond mine owner BHP Billiton Ltd. began legal actions to sue the striking union for allegedly threatening and harassing workers who chose to return to the job.  BHP said the mine is operating at full production without the company bringing in replacement workers.

The talks broke off over employee protection clauses, according to mine management who said about 40 percent of employees have continued to work despite the strike.  The union seeks to fine those employees and refuses the company’s requests to drop any fines or recriminations against these employees.

With more dollars flowing into the “Dirty Diamonds” awareness campaign, consumers can expect to hear much more about this Canadian labor conflict in the months ahead.

Many jewelry stores in Vancouver sell Canadian branded diamonds but they are soon to face increased competition from one of the best known brands in the jewelry industry, Tiffany and Co.  The New York based Tiffany’s will open a 5,000 square foot store this November in Vancouver.

Tiffany’s has a direct relationship with some of the diamond mines in the Canadian North but will only be branding its products as “Tiffany diamonds.”  Tiffany’s has world wide brand recognition as the result of decades of marketing.

In 1837, Charles Lewis Tiffany and John B. Young established Tiffany & Young, a stationary and fancy goods emporium at 259 Broadway in New York City.  The Tiffany’s brand started that same year with the introduction of the distinctive shade of blue chosen for the boxes, shopping bags, brochures and catalogues.  Over time, the color became universally recognized as the trademark Tiffany Blue.

India and Canada have agreed to explore the possibility of cooperation in diamond mining on a mutually beneficial basis, Indian Ministry of Commerce and Industry.

This was discussed at a February 21 meeting between Indian Minister of Commerce and Industry Kamal Nath and Canada's Ontario Province Minister of Economic Development and Trade Joseph Cordiano.

Kamal Nath discussed the idea of investing in diamond mines in Canada for sourcing of rough diamonds which could be then cut and polished in India for exports. He explained how India had emerged as the top exporter of cut and polished diamonds in the world, while there was good scope for Canadian mines being tapped for rough diamonds.

Both the Ministers underlined the potential for expanding trade and investment ties between India and Canada. India is the 37th largest source of direct investment in Canada, with more than half of the Indian investment there being in pulp and paper. There has also been a steady increase in Indian investment in Canada in the last decade.

Cordiano said that Ontario would welcome increased Indian investment in different sectors.  He stressed the need to diversify trade in terms of products and markets as well as the need to enhance competitiveness in an era of globalization.