Diavik turns in strong performance

Exceeding expectations in nearly all aspects, the Diavik diamond mine in Canada’s Far North is operating well ahead of original design.

The mine achieved an annualized processing rate equal to 2 million tonnes per year during the second quarter of the year. This compares to an original feasibility level of 1.5 million tonnes per year and a target of 1.7 million tonnes per year announced in March. For the three months ended June 30, Diavik recovered close to 2.3 million carats of diamonds from the treatment of 541,000 tonnes of kimberlite ore grading 4.2 carats per tonne, a 48% increase in carat production over the first quarter in which a little more than 1.5 million carats were retrieved from 394,000 tonnes of ore grading 3.9 carats per tonne. Operating cash costs quarter-on-quarter declined US$5 to US$19 per carat.

While the dilutive effects of a lower-grade, mud-rich unit surrounding the A-154 South kimberlite pipe are diminishing with depth, dilution is expected to continue into the third quarter as open-pit mining operations advance through the 320-metre bench level, beyond which the kimberlitic mud unit is not observed. However, lower-grade ore from the top of the adjacent A-154 North pipe will be processed in the fourth quarter.

Processing levels are expected to continue ahead of nameplate capacity, which will help offset lower grades from the two pipes. Rio Tinto (rtp-n), the mine’s operator and 60% majority owner, forecasts a production target for 2004 in the mid-to-upper range of 7-8 million carats. During its first ramp-up year of operations in 2003, the mine produced more than 3.8 million carats of rough diamonds at an operating cash cost of US$31 per carat. For the first six months of 2004, Diavik has produced over 3.8 million carats at a cash operating cost of US$21 per carat.

For competitive purposes, neither Rio Tinto nor Aber Diamond (ABZ-T), which owns the other 40% of the Diavik mine, will disclose realized carat sales values or volumes other than to say prices continue to comfortably exceed feasibility expectations. In April 2003, Aber sold its first parcel of run-of-mine diamonds from the A-154 South pipe for US$96 per carat, well above the US$79-per-carat valuation used in an independent feasibility study completed on behalf of Aber in 2000. Aber markets its share of diamond production independently of Rio Tinto.

Diavik generated US$56.3 million in sales and US$28.8 million in earnings for Aber during the quarter ended July 31, compared to US$42.2 million in sales and US$14.6 million in earnings for the preceding quarter. Sales from the second quarter of 2003 totalled US$15.1 million. Aber held two rough diamond sales this quarter and two sales in the first quarter. Three rough diamond sales are scheduled for the third quarter.

“Rough supply in the global diamond market is expected to remain tight in the second half of the fiscal year, and the outlook for this period in both market demand and pricing remains positive,” Aber states in its quarterly report. “The rough diamond market remains strong on an overall basis and Aber’s rough diamond sales assortments enjoy particularly positive market recognition due to consistency of quality.”

The Diavik mine is centred on a small, 20-sq.-km island on the eastern shores of Lac de Gras in the Northwest Territories, 300 km northeast of Yellowknife and 30 km southeast of the Ekati diamond mine. It was placed into production at the start of 2003 based on a 20-year plan to mine four kimberlite pipes — A-154 South, A-154 North, A-418 and A-21 — containing 107 million carats in 27.1 million tonnes averaging 3.9 carats per tonne.

Proven and probable reserves at the start of 2004 were re-calculated by Rio Tinto at 25.6 million tonnes of kimberlite grading 3.8 carats per tonne, equal to 97.8 million carats. The four pipes host additional measured, indicated and inferred kimberlite resources totalling 11 million tonnes at 2.4 carats per tonne, for an extra 26.4 million carats.

A-154 South is the largest and richest pipe of the bunch. Alone, it will deliver some 49.1 million carats from an open-pittable 10.2 million tonnes of kimberlite grading 4.8 carats per tonne, with a modeled underground portion containing a further 6.1 million carats in 1.4 million tonnes grading 4.2 carats per tonne.

The mine plan incorporates only 9.1 million carats of A-154 North from 2.9 million tonnes of open-pit ore grading 3.1 carats per tonne, with no additional underground reserves. There appears to be some significant upside to the A-154 North pipe. A 19,342-tonne bulk sample was mined last year from the low-grade upper phase of the pipe, and the quality of the diamonds was revealed to be much higher than originally assumed. The 11,771-carat parcel of diamonds recovered above a bottom-size cutoff of 1 mm were valued by WWW International Diamond Consultants at US$82 per carat, versus the original price estimate of US$33 per carat, which was based on a limited parcel of only 157 carats recovered during the prefeasibility drilling campaign.

A-154 North has an overall resource containing some 27.6 million carats. Ore reserves, based on the US$33-per-carat valuation, account for about 33% of the pipe’s resource. By comparison, reserves at A-154 South comprise about 86% of the pipe, based on a valuation of close to US$80 per carat. Likewise, ore reserves for the A-21 pipe are based on a small 90-carat parcel of stones recovered from a mini-bulk drill sample of 30.5 tonnes. The mine plan includes 11.7 million carats of A-21 from 3.9 million tonnes grading 3 carats per tonne, based on a US$28-per-carat valuation.

To better assess the higher-than-expected ore value in both the A-154 South and North pipes, a comprehensive delineation drilling and sampling campaign is targetting both pipes, as well as the A-418 kimberlite, in order to revise and upgrade the mining plan. The A-418 pipe contains minable open-pit reserves of 5 million tonnes grading 3.4 carats per tonne, equivalent to 17.4 million carats, plus an underground portion containing an additional 13.3 million carats in 3.6 million tonnes grading 3.8 carats per tonne. A diamond price of US$56 per carat was estimated by WWW using January 2000 market values, based on a portion of the 8,326 carats of diamonds recovered from underground bulk-sampling on A-418 in 1996.

An update to the Diavik mine plan is expected later this year. Rio Tinto has created a separate team to evaluate and develop the underground orebodies.

Exploration efforts have been stepped up this year with a US$6-million campaign aimed at expanding the mine life beyond the current 20-year estimate. The Diavik holdings comprise about 2,640 sq. km in the Lac de Gras area. Last year, ground crews tested 21 geophysical targets with 31 drill holes without making any new discoveries. In late 2003, a detailed airborne gravity and magnetic survey utilizing the Bell Aerospace AIRFTG system was conducted over a 224-sq.-km area of the Diavik property.

The results of this work were incorporated into the 2004 exploration plan, resulting in 75 airborne targets to be further investigated with detailed ground geophysical surveys. Spring exploration drilling successfully intersected two new kimberlite pipes, bringing the number kimberlite pipes and bodies on the Diavik claim block to 64. One of the new discoveries is 55 km northeast of the mine site; the other being just 4 km east of the A-154 pit.

This year’s program will also include the processing of previously collected mini-bulk samples from the C-12 and C-13 pipes.

At the half-year, Diavik’s workforce totalled 730 people, 73% of whom are northern-based and 36% Aboriginal.

Aber realized net earnings of US$12.3 million (or 21 per share) for the quarter as compared to US$2.8 million for the first quarter and US$5.8 million for the same period as last year. Aber’s 51% ownership of renowned international diamond jeweller Harry Winston accounted for US$28.2 million in retail sales and US$300,000 in earnings for the first full quarter since the acquisition was
done in April.

Harry Winston operates six high-end retail salons in New York, Beverley Hills, Paris, Geneva, Tokyo and Osaka. New openings in Las Vegas and Taipei are scheduled for the third quarter.