Minerals commentary: Replenishing the diamond pipeline is a daunting task for miners

First Barge of 2017 bringing Q 1-4 sample bags to the sea lift. Credit: North Arrow Minerals Inc.First barge of 2017 at North Arrow Minerals' Naujaat diamond project in Nunavut bringing Q 1-4 sample bags to the sea lift. Credit: North Arrow Minerals.

Given that most of the highly economic diamond deposits in the world have already been put into production, diluted via expansion or depleted, going forward the economics of diamond mines will inevitably gravitate towards higher-cost, lower-value operations.

Miners are left with a fairly limited decision to replenish their declining resource bases by either discovering or buying greenfield projects, or expanding their existing legacy mines, thereby elongating the life of mine, but typically at lower-quality economics.

The uncertainty surrounding greenfield projects tends to be a risky proposition given the operational complexities of a brand-new mining operation, constantly changing economics based on real-world variables, and substantial financing and capital expense requirements, especially in the case of Canada’s remote Arctic, for example.

Geopolitical risk also plays a significant role in the case of jurisdictions like Angola, Zimbabwe and the Democratic Republic of the Congo. Further, Russia — the largest diamond producing nation in the world — is off limits to outsiders, as the government considers diamonds a strategic resource.

Expansion projects tend to offer lower risk relative to greenfield projects, given that operational, economic, and geopolitical risks have already been experienced, reconciled or at least properly gauged. That said, expansion projects in some cases can be as costly as new mine construction, in the billions of dollars, especially if the project involves a large new open-pit cut or transitioning from an open-pit to underground operation.

Figure 1: Sample of diamond mine operating margins. Credit: Paul Zimnisky.

Figure 1: Sample of diamond mine operating margins. Credit: Paul Zimnisky.

Figure 1 on page 15 provides a sample of current diamond mine operating margins based on 2018 estimates, where operating margin is considered value per tonne of ore at a given mine, minus the cash cost to produce a tonne of ore at the mine. The mines falling on the bottom right quadrant of the figure are shown to be of highest margin.

In general, mine economics have gravitated away from the “high margin area” in recent years, as most new mines offer lower-quality resources than in the past and legacy mine economics have diminished, as the most economic ore has depleted.

Value per tonne in Figure 1 is calculated as ore grade multiplied by average diamond price per carat, and cash cost is the cost to mine and process a tonne of ore inclusive of waste stripping, but exclusive of mine construction costs and sustaining capital expense.

That said, while this analysis provides a glimpse into the economics of a given mine, it only serves as a partial relative analysis, since resource size, capital expense and geopolitical variables are not factored in.

Given the time value of money and subjective depreciation methods of capital expenses (i.e. mine construction and capitalized expansion investment), a complete relative profitability comparison of current producing mines is difficult.

Also, variables such as value per tonne of a given mine are constantly changing, given the sensitivity to grade, which depends on factors such as strip ratio and the portion of the orebody being mined, as is the average diamond price, which is influenced by the diamond population produced at a given time.

Further, geopolitical factors such as government royalties, taxes and nationalization risk influence a mine’s profitability, which can vary greatly depending on the jurisdiction.

Figure 2: Production start dates of active diamond mines. Credit: Paul Zimnisky.

Figure 2: Production start dates of active diamond mines. Credit: Paul Zimnisky.

Solely based on operating margin as described above, De Beers’ Jwaneng mine in Botswana (De Beers is 85% owned by Anglo American and 15% by the Botswana government) and Alrosa’s International and Nyurbinskaya mines are the richest large-scale commercial diamond mines in the world. Jwaneng has been in production since 1982; International, since 1971; and Nyurbinskaya, 2003.

De Beers recently completed an open-pit expansion referred to as “Cut-8” at Jwaneng to extend the life-of-mine to 2024. After eight years of construction and a US$3-billion capital expense, Cut-8 preserves operations at what is easily the most valuable diamond mine in the world.

Jwaneng tonnage is estimated to be worth over US$250 per tonne relative to a cash cost estimated to be less than US$40 per tonne. In addition, Jwaneng hosts a massive resource of almost 350 million carats.

The mine by itself is estimated to account for 47% of De Beers’ company-wide production by value, and 17% of total global diamond supply by value in 2018. A Cut-9 at Jwaneng is already being proposed, which would extend the life-of-mine another 10 years or more. 

De Beers is also expanding its largest mine in South Africa, Venetia, by going underground by 2022. In nominal terms, the US$2-billion project is the largest investment in South African diamond mining history, and will extend Venetia’s mine life to 2046. By the time underground production starts, Venetia will likely be De Beers’ only remaining South Africa diamond mine, as the company divested most of its South African portfolio to independent producer Petra Diamonds over the last decade.

New processing plant at the Cullinan diamond mine in South Africa. Credit: Petra Diamonds.

New processing plant at the Cullinan diamond mine in South Africa. Credit: Petra Diamonds.

Petra recently expanded two legacy South African assets acquired from De Beers in 2008 and 2011: the Cullinan and Finch mines. An expansion project at Cullinan — perhaps the most famous diamond mine in the world, having produced the two largest diamonds set in the British Crown Jewels — was completed this year via accessing a richer portion of the orebody and increasing throughput capacity with a new processing plant. Petra’s Finch mine, South Africa’s second-largest diamond mine after Venetia, was also expanded to access undiluted ore from new areas of the mine. The projects are estimated to extend both mine lives to 2030.

Cullinan has been in production since 1903, while Finsch has been in production since 1967. Consequently, the complexities of working with older mines has been apparent as the completion date of both expansion projects was initially delayed, and shortly after operations finally started, production guidance was cut at both mines due to lower-than-anticipated grades at Cullinan and a change in mine plan at Finch. While not plotted in the figure above, Cullinan ore is estimated to be valued at US$53 per tonne, versus a cash cost of US$16 per tonne. Finsch ore is estimated to be worth US$61 per tonne at a cost of US$28 per tonne.

Russia — estimated to be the largest diamond producer in the world by value and volume in 2018 — hosts 12 active kimberlite mines, 11 of which are owned by Alrosa. While some of these mines are the most economically significant diamond mines in the world, many have been in production for almost a half a century, and their age is beginning to show.

Miners being transported underground at the Aikhal diamond mine in Russia. Credit: Alrosa.

Miners being transported underground at the Aikhal diamond mine in Russia. Credit: Alrosa.

In operation since 1957, Alrosa’s Mir mine sustained a fatal accident in mid-2017 when the open pit collapsed into the underground portion of the mine. Production at Mir has since been halted and a restart date is undetermined. At over 1,700 feet (519 metres) deep, the Mir open pit is one of the largest excavated holes in the world.

Production at Alrosa’s International mine has also been disrupted after the company suspended deep-mine underground construction in June 2018. Development work at the mine below 800 metres was halted as a safety precaution until studies are concluded on the health risks of “gas-dynamic phenomena” to workers at depth. Alrosa has indicated that it expects full operations to resume at International no earlier than 2023. The mine has been in production since 1971.

When in production, the Mir mine produced ore worth US$450 a tonne at a cost of about US$175 per tonne. The International mine hosts ore worth almost US$1,400 a tonne at an operating cost of about US$285 per tonne.

In Canada, privately held Dominion Diamond Mines suspended development of its Jay-extension project at the company’s Ekati mine in the Northwest Territories in May 2018, pending economic reassessment. Jay was planned to extend Ekati production from 2024 to 2034 at a cost of US$650 million. Dominion’s other mine, Diavik, is scheduled to be depleted by 2025, and De Beers’ Victor mine in Ontario is in its last year of production.

While expansion projects typically serve as a means of maintaining production levels, greenfield projects are necessary to replace production lost due to mine closures.

However, large-scale, economic greenfield projects are few and far between at the moment.

Last year, three new greenfield mines started production — De Beers and Mountain Province Diamonds’ Gahcho Kué in the Northwest Territories, Stornoway Diamond’s Renard in Quebec and Firestone Diamonds’ Liqhobong in Lesotho — leaving only two new diamond development projects globally with production capacity in excess of 1 million carats: Alrosa’s Luaxe in Angola and its Verkhne-Munskoe in Russia.

Further, there are only a handful of pre-development stage diamond projects globally with large commercial-scale potential: Star Diamond’s Star-Orion South; Peregrine Diamonds’ Chidliak on Baffin Island; North Arrow Minerals’ Naujaat; and Bunder, owned by the Indian state of Madhya Pradesh.

A sample of diamonds recovered at the Chidliak project in Canada. Credit: Peregrine Diamonds.

A sample of diamonds recovered at Peregrine Diamonds’ Chidliak project on Baffin Island. Credit: Peregrine Diamonds.

In July, De Beers announced plans to acquire one of these pre-development stage projects. De Beers offered $107 million cash for 100% of Peregrine Diamonds, owner of the Chidliak project. Relative to De Beers’ asset portfolio — if put into production — Chidliak would rank as one of the company’s smaller mines, representing less than 5% of De Beers’ company-wide production by volume.

If finalized, the deal would be De Beers’ first upstream acquisition since 2000, when it acquired Winspear Diamonds, owner of the Snap Lake project, which was put into production by De Beers in 2008, but placed on care and maintenance in 2015, due to unfavourable operating economics.

At this point only a preliminary economic assessment has been done at the project, but Chidliak “ore” is estimated to be worth US$270 per tonne at an operating cost of US$125 per tonne, given a pre-production capital expense of $455 million and a 13-year mine life.

Paul Zimnisky

Based in New York City, Paul Zimnisky is an independent diamond industry analyst and publisher of the Zimnisky Global Rough Diamond Price Index. He publishes State of the Diamond Market — a monthly diamond industry report featuring industry trend identification, supply and demand forecasts, rough and polished price trends, rough diamond sales and inventory analysis, implied diamond price growth analysis and lab-created diamond data and analysis.

Zimnisky will be speaking at HSBC’s Environmental, Social and Governance day in New York on Sept. 24, 2018, and will be a keynote speaker at the Brazilian Diamond Geology Symposium in Salvador, Brazil on Nov. 5, 2018. He can be reached at paul@paulzimnisky.com and followed on Twitter at @paulzimnisky.

At press time the author held long positions in Lucara Diamond, Stornoway, Mountain Province, Diamcor Mining, North Arrow Minerals and Signet Jewelers.

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