Shore Gold Looks Beyond Current Diamond Demand Collapse

SASKATOON, SASK. — As with all other commodities, diamonds had a rough year in 2008. All sectors of the diamond pipeline have adjusted, and will continue to adjust to the current economic climate.

While polished diamond prices have fallen by 10-20%, rough diamonds prices have plunged 30-50%. Rough diamond production has declined as miners have cut back production, shuttered operations and delayed sales. Rough diamond buyers and manufacturers have refused to purchase rough allocations and have shut factories. Dealers have closed doors, too, while retailers around the world are reducing inventories and closing stores.

But the longer-term outlook for the rough and polished diamond market remains excellent, as the past few years have seen a lack of major new discoveries, no significant mine openings, and reduced output from older mines. There have also been delays in exploration and development projects, as well as mine expansions.

In 2008, there were less than 20 years of known diamond reserves in the ground, at 2008 demand levels.

The structure of the entire diamond industry continues to evolve from one controlled by a dominant producer, De Beers, to one driven by consumer demand. And the current economic crisis is, in fact, forcing the industry to make this change more quickly. The successful companies will be those that not only survive and adapt, but also position themselves to ride the next wave — whether that comes in two years or more.

Saskatoon-based Shore Gold (SGF-T, SHGDF-O) is attempting to do just that. The company has advanced its 100%-owned Star kimberlite project in Saskatchewan to the feasibility stage, while work on the nearby Orion South project (owned 60% by Shore and 40% by Newmont Mining [NMC-T, NEM-N]) should result in a National Instrument 43-101-compliant resource estimate by mid-2009.

The environmental impact assessment (EIS) process began last November, when Shore submitted its project proposal to the Saskatchewan government. It outlined plans to develop an open-pit mine at the Star kimberlite, and potentially a second pit at the Orion South kimberlite, with common processing facilities and infrastructure.

Shore expects to submit the EIS in early 2010, and receive the necessary approvals from the Saskatchewan government in 2010.

Then, if the company decides to proceed with the mine, production would likely begin sometime in 2013.

The proposed mine would process between 40,000 tonnes and 120,000 tonnes per day (depending on whether or not Orion South is included in the project), producing between 180,000 and 600,000 carats per year.

Well over 1,000 jobs would be created during construction and, once in operation, 400-450 people would be directly employed.

Unlike the more remote diamond mines in the Northwest Territories and Ontario, the Shore project has not only a local skilled workforce available, but easy access to natural gas, power and transportation infrastructure.

One big issue that Shore will have to address is what value per carat to use for the Orion South resource and the Star reserve estimate, both of which are anticipated this summer.

The figure of US$225 per carat used in the June 2008 resource estimate for the Star kimberlite is no longer valid, given the current state of the rough diamond markets.

Shore continues to work at building strong community relationships. An advisory committee, including representatives of 21 communities and First Nations was formed in January 2007. In February, Shore organized four public meetings in communities near the proposed development, and is planning a second round later this year.

Meanwhile, the Saskatchewan government is developing draft royalty regulations in consultation with the industry and Shore. Whether Saskatchewan will follow the example of the Northwest Territories and Ontario — and indeed the trend in all diamond-producing jurisdictions around the world — of supporting the development of local diamond value-added industries is still unknown.

Shore Gold has 183 million shares outstanding and traded at 29¢ at presstime within a 52-week range of 20¢-$4.55. Shares traded above $8 in early 2007.

–Based in Saskatoon, Sask., the author is proprietor of Diamond Consultants Canada, which provides strategic planning and advice regarding all aspects of the diamond industry. He can be reached at mirving@sasktel.netorwww.diamondconsultants.ca.