Rio Tinto green-lights A-21 pipe at Diavik

Rio Tinto (NYSE: RIO; LSE: RIO) has approved the development of a US$350-million A-21 kimberlite pipe at its 60%-owned Diavik mine, 300 km northeast of Yellowknife.

First production from A-21, which was part of the original mine plan at Diavik, is expected to start in late 2018, after four years of construction.

Rio, the mine operator, will pay US$210 million of the total cost, with its 40% partner Dominion Diamond (TSX: DDC; NYSE: DDC) responsible for US$140 million in development costs.

“Our decision to invest in the Diavik A-21 project reflects our strong confidence in the diamond sector and in our ability to compete effectively in the industry,” Rio Tinto Diamonds & Minerals CEO Alan Davies said in a release.

While A-21 won’t extend Diavik’s mine life, it is expected to keep production levels steady over five years. Under Diavik’s current mine plan, production will end in 2023.

The price tag to develop a fourth kimberlite at Diavik isn’t cheap, but it’s a great deal lower than a previous estimate of US$500 million, which could mean that Rio has brought costs down. Like the other Diavik kimberlites, A-21 is under a lake, which means a dyke will have to be built to hold the water back during mining. The partners have already built two other dykes at Diavik, which has resulted in three kimberlite pipes: A154 South, A154 North and A418.

Construction at A-21 will begin in 2015, with equipment and supplies trucked in via winter road. Work next year will consist of pipeline construction and initial dyke foundation and abutment work, with dyke construction in mid-year 2016 and 2017.

Diavik began production in 2003.

The A-21 kimberlite holds 10 million carats in measured resources totalling 3.6 million tonnes grading 2.8 carats per tonne; 1 million carats in indicated resources contained in 400,000 tonnes grading 2.6 carats per tonne; and 2.3 million carats in inferred resources contained in 800,000 tonnes grading 3 carats per tonne.

Dominion says that, based on September prices for Diavik diamonds, A-21 diamonds have been modelled at US$145 per carat.

Updated reserve and resource figures for Diavik — which could produce more than 6 million carats of diamonds in 2014 — are due out early next year.

Dominion shares set a 52-week high of $18.74 on the news. The stock traded as low as $13.10 in May. Rio Tinto’s ADRs dropped US83¢ to US$46.60 in New York on Nov. 28