Diavik diamonds command a premium for Aber

The first stones recovered from Canada’s $1.3-billion Diavik complex in the Northwest Territories have been sold at prices exceeding expectations.

In April, Aber Diamond (ABZ-T) reported its first parcel of rough diamonds comprising 42,619 carats had sold for US$4.1 million, an average price of US$96.22 per carat. The price realized is higher than the US$79 per carat valuation used in the 2000 independent feasibility study commissioned by Aber. The better diamond prices are attributed to the high quality of the larger stones and to under-recovery of very small diamonds. To increase recovery of the smaller stones, Aber is designing a system that’s expected to be installed by mid-year.

Aber owns a 40% interest in the newly constructed mine and markets its share of diamonds independently of Rio Tinto (RTP-N), the operator and 60% majority owner of Diavik. Rio’s interest is held through Diavik Diamond Mines (DDMI), a wholly owned subsidiary.

Upscale jeweller Tiffany & Co. (TIF-N) accounted for 23% of Aber’s first sales. The balance of the parcel was sold through the open market in Antwerp, Belgium. Under a direct off-take agreement, Tiffany, which owns a 14% stake in Aber, will purchase at least US$50 million worth of diamonds annually from Aber over 10 years. The deal with Tiffany accounts for 25% of the value of Aber’s share of the run-of-mine production.

Rio Tinto will market its share of diamonds through Rio Tinto Diamonds, based in Antwerp. At the close of the first quarter, Rio Tinto was securing its customer base, which will include northern cutting and polishing firms. The major expects to conclude its first sale of rough diamonds from Diavik mid-year.

The Diavik mine is centred on a small, 20-sq.-km island on the eastern shores of Lac de Gras, 300 km northeast of Yellowknife and 30 km southeast of Ekati, Canada’s first diamond mine. Construction of the Diavik complex was completed six months ahead of the original schedule and $50 million under budget. Commissioning began in December 2002.

The 20-year mine plan is based on four kimberlite pipes: A-154S, A-154N, A-418 and A-21. These contain proven and probable reserves of 27.1 million tonnes grading 3.9 carats per tonne, equivalent to 107 million carats at an average value of US$62 per carat.

The pipes host an additional geological resource of 11 million tonnes grading 2.4 carats per tonne, or an extra 26.4 million carats. Despite their limited size, the Diavik pipes are high-grade and among the richest in the world.

The pipes will be mined initially by open-pit methods, eventually shifting to underground methods on A-154S and A-418 in the latter part of the project’s life. Rio Tinto estimates the four pipes together contain open-pit reserves of 22.1 million tonnes grading 3.9 carats per tonne, equal to 87.3 million carats. Proven and probable underground reserves account for an additional 5 million tonnes grading 3.9 grams, or 19.5 million carats.

Water retention

The cluster of four pipes lies just offshore in the shallow waters of Lac de Gras, a 50-km-long lake. To mine these underwater pipes, DDMI expects to build three water-retaining dykes out from the island, surrounding the pipes. The first of these dykes was completed around the A-154S and A-154N pipes in 2002. A 3.9-km-long berm was built around the A-154 pipes using 6 million tonnes of crushed granitic rock quarried from the island. A 1-metre wide, impervious, plastic-cement wall in the centre of the dyke creates a waterproof barrier extending to bedrock along the dyke’s entire length.

The first 10 years of production will come predominantly from the A-154 pit, incorporating both the A-154S and A-154N pipes, which are only 100 metres apart. A-154S is the largest pipe of the bunch, with the highest grade and the most value. Alone, it will deliver a total of 55.2 million carats from a minable 11.6 million tonnes of kimberlite grading 4.76 carats per tonne, including an underground portion containing 1.4 million tonnes at 4.2 carats per tonne, equivalent to 6.1 million carats. In May 2002, an independent bankable feasibility study by WWW Diamond Conultants valued the A-154S stones at US$79 per carat.

Following completion of the dewatering of the A-154 pit area, upwards of 30 metres of lake-bottom sediments and glacial till had to be removed. During this prestripping process, non-lithified, fine-grained kimberlite ash, mixed with mudstone lenses, was found to occur at the contact zone at the top of the A-154S kimberlite body, where it interfaces with the lake-bottom overburden. This contact zone material, not included in the original reserve, is being mined and processed on-site. Production in the first quarter revealed that this material contains about 2.7 carats per tonne. DDMI reports that ore grades are improving as mining moves deeper into the more competent kimberlite ore. Production will continue to ramp-up, and normal operations, based entirely on ore reserve kimberlite, should be under way by August.

Ramp-up

For the first three months of 2003, the Diavik mine recovered 411,000 carats from the treatment of 202,000 tonnes of diamond-bearing material. The largest diamond recovered during the quarter weighed 102.58 carats but was not of gem quality. Under the current mine plan, Diavik expects to process 960,000 tonnes of diamond-bearing material by year-end to produce 3.7 million carats of rough diamonds.

The kimberlite processing plant has been built with a capacity throughput rate of 225 tonnes per hour (1.9 million tonnes per year). Rio Tinto will take two years to ramp-up to a planned rate of 1.5 million tonnes annually, utilizing 76% of design capacity. Annual diamond production will peak at more than 6 million carats. As of April, the processing plant was operating at 60% of the current, 136-tonne-per-hour rate.

Mine-site costs are pegged at US$60 per tonne of kimberlite for the first 10 years of production and US$101 per tonne over the life of the mine. Aber says that although operations have not yet reached steady state, the operating cost performance to date has been comfortably below the mine-plan estimates.

The mill circuit is designed to accept crushed kimberlite ore to a maximum 80-mm size fraction, which is then screened to minus 25 mm. Oversize material is re-crushed and screened. The minus 25-mm size fraction material is fed to a dense media separation (DMS) tower, where the addition of water and a ferro-silica thickening agent aid in the recovery of heavy minerals and diamonds.

The back-end of the circuit employs bulk wet X-ray sorters, infrared dryers, magnetic separators, and single particle X-ray sorters; these are designed to capture, by airblast, each diamond larger than 1 mm. The circuit is designed so that no person comes into direct contact with the diamonds.

Splitting plant

The recovered diamonds are then forwarded to the Diavik production splitting facility in Yellowknife for cleaning and valuation for royalty purposes, before being distributed to the joint-venture partners.

DDMI is modifying the plant in minor ways, for example by redesigning the crushing circuit. Diamond recovery by weight has averaged 91% up to April, versus 96% predicted in the feasibility study. An optimization program is fine-tuning the X-ray recovery of small diamonds, while examining options for fine diamond recovery.

On the exploration front, 63 kimberlites have been discovered to date on the Diavik property, half of which are diamond-bearing. The Diavik property comprises 2,667 sq. km in and around Lac de Gras. An aggressive exploration program in 2003 will include ground geophysical surveys over some 90 promising airborne anomalies followed by drilling to test 15-20 of the most prospective targets. In addition, delineation drilling will be conducted on three known diamondiferous kimberlites. Mini-bulk samples collected last year from two diamond-bearing bodies will be processed.

The Diavik high-quality gems will complement Rio Tinto’s low-value production from its 99.8%-owned, high-volume
Argyle mine in the Kimberley region of Western Australia. “We will be able to supply about eight per cent of the world’s demand,” Rio Tinto’s chief executive, Leigh Clifford, told shareholders at the annual general meeting. “Diavik will double Rio Tinto’s revenues from diamonds.”

In 2002, the Argyle operations produced a total 33.5 million carats from the open-pit mining of 10.1 million tonnes of AK1 lamproite ore grading 3.19 carats per tonne and the treatment of 2.9 million tonnes of alluvial grading 0.46 carat per tonne. Alluvial mining was suspended in 2002. Argyle contributed net earnings in 2002 of US$65 million, a 12% increase over 2001.

Although Rio Tinto has not disclosed Argyle diamond sales for the year, they have typically garnered around US$400 million annually, giving an average carat price of under US$15. The Argyle product — small, coloured and labour-intensive — is readily absorbed by the Indian cutting centres (95% by value), where it is transformed into affordable polished diamonds commanding US$100-300 per carat.

Argyle is the single largest producer of diamonds used in mass-market jewelry in the U.S., Japan and Southeast Asia. It has also developed a niche for its famous “pink diamonds,” which are sold by an international tender process. The pinks represent less than 1% of the mine’s output.

Proven and probable pit reserves at the end of 2002 were 42.9 million tonnes grading 3.2 carats per tonne, equivalent to 135 million recoverable carats. Open-pit production at Argyle is expected to continue until 2007. Approval has been given for a feasibility study to assess the economics of going underground. A production decision is expected in 2005. An exploration decline will be developed to assist in confirming design criteria. Undeveloped resources total 167 million of tonnes of lamproite grading 2.8 carats per tonne, equivalent to 468 million carats.

Rio Tinto reports that deep drilling at the Argyle mine in 2002 identified ore extensions beneath the deposit.