Demand for diamonds to keep market vibrant

Despite expanding production in Botswana and new Canadian mines in the offering, strong demand from the U.S. and Asia is expected to drive the market for diamonds in 2000.

Coming off a financially stellar year, De Beers Consolidated Mines (DBRSY-Q), which produced roughly half of the world’s diamonds by value last year, expects another banner year for the industry. Stock analyst Roger Chaplin of Canaccord Capital agrees, placing a buy recommendation on the major diamond producer, with a suggested price target of US$35 per share.

Chaplin sees earnings for De Beers jumping 30% this year, hitting US$2.74 per share. A vibrant diamond market, driven by strong consumer demand, has the analyst expecting a 10% dividend increase for owners of the stock.

De Beers has three producing diamond mines in Botswana: Jwaneng, Orapa and Letlhakane. The company estimates that these operations accounted for 21 million of the 120 million carats produced globally last year. According to Tom Beardmore-Gray, senior vice-president for De Beers Canada, Botswana will remain the world’s most important diamond producer for years to come.

This year, Debswana, a partnership between the government of Botswana and De Beers, is set to double the annual capacity of the Orapa diamond mine to 12 million from 6 million carats.

The world’s second-largest producer, Russia, cranked out US$1.6 billion worth of stones last year. De Beers feels that the major producing mines — Udachnya, Jubilee, Mir and International — will hold production steady, while the potential for new discoveries remains high.

With a full year of production under its belt, the Ekati diamond mine in the Northwest Territories has elevated Canada’s ranking to the status of core producing country. Currently producing 5% of the world production by value, Ekati is expected to crank out just under 3 million carats this year, with prices fetching US$160 per carat. Ekati is 51%-owned by BHP Diamonds, a unit of Broken Hill Propriet- ary (bhp-n), and 29% by DiaMet Minerals (dmm-t). The remaining 20% is shared equally by Charles Fipke and fellow geologist Stewart Blusson.

The Diavik diamond project, owned 60% by Rio Tinto (RTP-N) and 40% by Toronto-listed Aber Resources (ABZ-T), recently moved a step closer to construction (estimated cost: $1.3 billion) by signing an environmental agreement and obtaining a land-use permit. Diavik’s minable reserve is estimated at 102 million carats in 25.6 million tonnes grading 3.96 carats per tonne. The figure includes only measured and indicated resources to a depth of 420 metres. The inferred resource, which totals 12.5 million tonnes grading 2.38 carats (or 29.8 million carats), has been excluded from the feasibility study. The diamonds are valued at an average price of US$53 per carat. Total capital costs are pegged at $1.28 billion. Operating costs over the first 10 years are expected to ring in at $85 per tonne.

Another Canadian diamond project moving ahead with an advance exploration program is the Camsell Lake joint venture, held 68% by Winspear Resources (WSP-T) and 32% by Aber. It currently hosts a global resource of about 20 million tonnes with an implied grade of 1.7 carats per tonne (based on bulk-sampling in 1999) at an average value of US$105 per carat.

This year’s program will include a 20,000-tonne underground bulk sample, drilling to upgrade resources to the indicated from the inferred category, and tests for additional resources. The work will entail development of a 600-metre drive in kimberlite 120 metres below Snap Lake and the collection of a large bulk sample. Results of this work will be included in a final feasibility study, along with geological, geotechnical and hydrogeological data, for mine-planning purposes.

The U.S. accounted for 46% of global diamond sales in 1998. With a recovery under way in Asia and North American economies performing at multi-decade peaks, De Beers remains confident demand can accommodate increased production from Canada, Botswana and Russia.

De Beers’ stock recently closed at US$23.31 in a 52-week range of US$16 to US$32.