Temporary Shutdowns Planned For Diavik

To deal with a global drop in diamond demand, Rio Tinto (RTP-N, RIO-L) is planning two shutdowns at the Diavik mine in the Northwest Territories in the coming months, as well as further delays to the start of underground production. The operation will also speed its transition to a smaller workforce.

Production at the diamond mine, which is 60%-owned and operated by Rio Tinto and 40%-owned by Harry Winston Diamond (HW-T, HWD-N), will stop for six-week intervals beginning July 14 and Dec. 1.

“Doing nothing was not an option,” says Doug Ashbury, acting principal adviser of communications for the Diavik Diamond Mines partnership.

Ashbury says falling consumer demand in the United States, traditionally the biggest purchaser of polished diamonds, is hurting the diamond industry.

“We are aligning our business with what’s happening in the world,” Ashbury says.

Startup of underground production will be further delayed until the first quarter of 2010, putting production a full year behind the original schedule.

Ashbury says this will help delay the higher costs associated with underground mining.

But since construction of the underground mine will be finished by the third quarter, the mine will need to be put on care and maintenance until the economic conditions are strong enough to warrant production.

About 830 people currently work at the open pit, and 500 people will be laid off during the shutdowns.

The plan is to transition completely to underground mining by 2012, at which time only 600 people will be needed to run the operation.

Ashbury says the company hopes to pare down its workforce mostly through attrition over the next few years. To help speed along this process though, he says people are being transitioned into new roles sooner than originally planned.

As an example, Ashbury says someone working in the processing plant whose position would be eliminated in 2012 might be trained to work in the new pace plant or given a job that would usually be contracted out.

Ashbury says the company is still broadly optimistic. “Our belief is that this is short term,” he says of the market turmoil.

Rough diamond prices have dropped more than 30% since last summer, prompting other diamond producers to drastically reduce production around the world.De Beers hassuspended production at its Debswana joint venture in Botswana, which produces half of De Beers’ yearly output — and one-fifth of the world’s. The company also laid off 220 people from the Snap Lake diamond mine near Yellowknife in an effort to match production with demand.

In Russia, meanwhile, Alrosa is withholding its substantial output from the world market, and is stockpiling mine production instead.

The economic situation put Harry Winston in a tight spot to make debt repayments, but in March, Kinross Gold (K-T, KGC-N) offered $150 million for stakes in the company and the Diavik mine, putting the company on firmer footing.