Dominion Diamond banks on Ekati

It’s been one year since Dominion Diamond (TSX: DDC) took over operations at the Ekati diamond mine in the Northwest Territories, and president and CEO Bob Gannicott says the company’s transition to being an operator has been “remarkably smooth.”

“One of the nice things about a place like Ekati is that it was built by a very large company that only does things very well,” Gannicott said in an interview in April. “There were no corners cut on the engineering of Ekati to say the least, so it was all very good, sound equipment in good condition.”

The company bought an 80% interest in the mine from BHP Billiton (NYSE: BHP; LSE: BLT) for US$553 million in November 2012, with the transition of ownership completed last April. (Mine finders Charles Fipke and Stewart Blusson each retain a 10% interest.)

Although the operator role is new to Dominion, Gannicott notes that the company isn’t a total neophyte when it comes to mining. Dominion owns 40% of Diavik along with operator and 60% owner Rio Tinto (NYSE: RIO; LSE: RIO), and a core group at Dominion, including Gannicott, participated in its development.

In addition, Ekati’s workforce has largely remained the same under Dominion as it had been under BHP.

“Everybody except the top five people were all Canadian employees who are keen to continue to make their career at Ekati, so there was no great rush for the doors,” Gannicott said.

Lastly, the company did make one key addition to the team to get up to speed: Chantal Lavoie, a former chief operating officer with De Beers Canada, came on as president and chief operating officer of Dominion Diamond Ekati Corp. last May.

It’s a good thing that Dominion — which sold its luxury Harry Winston retail division to Swatch Group last year for $1 billion — has the resources and expertise to manage Ekati because it has big plans for the aging mine.

Canada’s first diamond mine, Ekati began production in 1998. As such, some kimberlites have already been mined out (Panda, Fox) and under the mine plan, new pipes need to be brought onstream. Mining is scheduled to start at the Pigeon, Lynx and Misery Main pipes in 2015 and 2016. Before that can happen, a multitude of tasks from building roads to prestripping and permitting (in the case of Lynx) have to be completed.

In all, Dominion has budgeted $180 million for development costs this year.

But even with all the work the company is doing to bring the new pipes online, current reserves (18.8 million carats in 17 million tonnes grading 1.1 carat per tonne) only support mining until 2019.

That’s where the Jay-Cardinal development comes in.

Gannicott says the opportunity to develop Jay — which is projected to contain more carats than have so far been mined at Ekati — is potentially transformational for the company.

The Jay pipe holds inferred resources of 78.1 million carats in 36.2 million tonnes grading 2.2 carats per tonne, plus 12.9 million inferred carats in 9.5 million tonnes grading 1.4 carats per tonne.

That’s the lion’s share of resources at Ekati: overall, the project hosts 127.1 million indicated carats at 1.2 carats per tonne. (Cardinal, a small pipe 5 km away from Jay, does not yet have a resource).

While the Jay diamonds are some of the lower-value diamonds at Ekati, estimated at US$74 per carat, Jay-Cardinal could add 10 to 20 years to its mine life. A US$25-million 2014 exploration program is under way in support of a prefeasibility study due out later this year.

With reserves running out in just six years, Dominion has a fairly tight timeline to prove up, permit and develop Jay-Cardinal, which is located about 25 km from the main mine facilities and 7 km northeast of the Misery pit. In order to start feeding ore to the plant in 2019, the company needs to start construction in 2016.

Moving quickly, the company submitted a project description to the Wek’éezhìi Land and Water Board in October — only six months after taking over operations at Ekati. In November, the project was referred to the McKenzie Valley Environmental Impact Review Board for an environmental assessment. The company anticipates that the board will make its recommendation in 2015 and that Jay-Cardinal could get ministerial approval by the end of 2015. Land use and water permits would take another six to eight months, allowing development to begin in the third quarter of 2016.

Jay and Cardinal lie in Ekati’s Buffer zone, which is owned 58.8% by Dominion, 31.2% by Archon Minerals (TSXV: ACS), and 10% each by Fipke and Blusson.

One of the many benefits of dealing with a mine expansion rather than a new project is that impact benefit agreements are already in place with aboriginal communities that would be affected by the development. Gannicott says these communities have responded very positively to the project because they have “skin in the game.”

“Not only are a lot of their band members (mine) employees, but they’ve also got businesses that they own that are now very dependent on the business they have with the diamond mining companies,” Gannicott said, noting that a Tlicho company is responsible for hauling 80 million litres of fuel to the project every year. “So the prospect of that all going away in 2019 is not a comfortable one for them.”

Current operations

Dominion has significant capital investment to make over the next few years, but the company anticipates it will pay off down the road.

“We’d always expected the first two years to be close to revenue neutral as we fund the development of Misery to deliver a surge of revenue in 2017 that more than covers the Jay capital development program,” Gannicott said on a conference call. “The results to date certainly justify that view.”

The company is spending US$95 million this year alone on development at Misery Main, which it notes is one of the richest kimberlites in the world. With an average grade of 4 carats per tonne (for a total of 12.3 million carats) and an average diamond value of US$105 per carat, the pipe will enter production in 2016.

Dominion’s future financial commitments will likely include capital costs for an expansion at Diavik as well.

On the conference call, Gannicott explained that operator Rio Tinto is once again actively studying the development of the A-21 pipe by open pit. The company is looking for ways to cut capital cost of development, previously pegged at roughly US$500 million. Gannicott expects a decision by the end of the year, after a revised feasibility study is completed.

Diavik’s mine life extends to 2023, and A-21 has the potential to supplement the later years of production, which is currently fully underground.

In the meantime, Dominion’s financial position is strong. As of Jan. 31, the company recorded cash and equivalents of US$224.8 million, plus restricted cash of US$113.6 million and debt of only US$4 million.

For its fiscal 2014 (ended Jan. 31), Dominion recorded a profit of US$471.2 million or US$5.64 per share. However, that included a US$502.9-million gain from the sale of Harry Winston.

The company saw a consolidated net loss from continuing operations of US$23 million or US27¢ a share, compared with a US$22.3-million profit (US27¢ a share) a year earlier.

In fiscal 2014, Dominion sold 3 million carats of Diavik diamonds for $352.3 million at cash costs of production of $162.6 million. The average price per carat was US$118.

Diavik is expected to produce 6.1 million carats from 1.9 million tonnes (on a 100% basis) this year.

At Ekati, which is expected to produce 1 million carats from 2.7 million tonnes (on a 100% basis) this year, diamond values were higher, but production and grades lower.

For the period from April 10, 2013, when it took over operations, to the end of its fiscal year, Dominion sold 1.3 million carats of Ekati diamonds for US$399.6 million or US$301 per carat. It incurred cash costs of production of US$303.9 million (better than the forecast at US$320 million). The mine produced 1.65 million carats from 3.4 million tonnes during this period.

Looking ahead

Aside from its exploration program at Jay, Dominion is looking farther into its future with early stage exploration at the Lac de Gras project just southwest of the Diavik property.

The company is earning a 55% interest in the project from North Arrow Minerals (TSXV: NAR).

“The reason we acquired this land is that it sits on the extension of a regional trend line that hosts many of the other big and important pipes,” Gannicott says. “It’s the trend line that has the Jay pipe on it, the Misery pipe, 154-South, 154-North, 418, and A-21 and if you continue that line onto the south shore of Lac de Gras, that’s where we acquired the land position.”

Last year’s sampling program, whereby the company collected samples from bedrock by drilling short holes, identified some indicator mineral anomalies where Dominion thought they should exist on the trend line.

More sampling is planned in this year’s follow-up program, with specific targets likely to see drilling next year.

And Dominion is also looking to get back some of the diamond pricing intelligence it lost when it sold Harry Winston last year through the revitalization of the CanadaMark brand it acquired from BHP Billiton along with Ekati.

“BHP actually put quite a bit of effort into producing this concept and registering it as a trademark and so on and had even done some work on a type of website platform for it,” Gannicott says.

CanadaMark certifies that a particular diamond (trackable with an inscribed serial number) was mined in Canada, and is natural and untreated.

“We want to turn it into a platform where people who have purchased Canadian rough diamonds from us and polished them, can put them back to sale on a B2B basis,” Gannicott says.

Dominion envisions a platform whereby polishers who buy from the company can in turn sell the polished diamonds in a way that continues their chain of custody and assures jewellers or jewelry manufacturers they may sell to that the diamonds are natural and Canadian.

The benefit to Dominion customers is that if there is a premium that can be achieved for the Canadian origin, this is a way that they can have it without added costs.

For the person buying the polished diamond, they get the assurance that they’re buying a Canadian diamond, which they can pass on to the retail customer. And for Dominion, Gannicott says it not only makes it more attractive to its customer base, but it also gives it a window on the actual pricing at which polished diamonds are trading hands — the kind of information the company had when it owned Harry Winston and a buyer of polished diamonds.