A depressed rough diamond market has given
The Snap Lake project is part of the Camsell Lake property in the Northwest Territories, 220 km northeast of Yellowknife and 110 km south of the Ekati diamond mine. It is wholly owned by De Beers, which was taken private by DB Investments (DBI) in early June of this year. DBI is owned 45% each by
The project centres on the highly diamondiferous NW dyke, which subcrops on a narrow peninsula on the western shore of Snap Lake. The NW dyke is unique in that it is horizontal rather than vertical. The gently dipping dyke extends beneath the lake at a northeast orientation of 4-15 degrees over a confirmed distance of 3.2 km north-south and 3.1 km east-west, to a depth of 1 km. It is generally 2-3 metres thick, but narrows to 1.3 metres at the eastern margin.
De Beers spent the summer extending the 1,200-metre-long decline a further 400-500 metres to obtain additional geological, mining and hydrological data in the granite host rock. Last year’s underground bulk sampling was done in the meta-volcanic unit, which hosts just 10% of the Snap Lake dyke resource. The bulk of the kimberlite resource is contained in the granites. An additional 2,000 tonnes of kimberlite was to be collected during the summer and run through the on-site test plant.
“We do believe that the reserve needs careful delineation,” Ralfe told analysts during a recent conference call. “This is a horizontal dyke. It is not absolutely uniform, or lying at exactly the right angle, and we need delineation in order to ensure that we minimize dilution.”
At last report, De Beers estimated indicated reserves for the Snap Lake dyke of 22.8 million tonnes at a minable grade of 1.65 carats per tonne, equivalent to 37.6 million carats. A further 20 million tonnes are categorized as inferred. The diamonds are valued at about US$100 per carat.
Last February, De Beers filed land and water use permit applications with the Mackenzie Valley Land and Water Board to develop a 3,000-tonne-per-day underground diamond mine with a projected life of more than 20 years. Annual production is pegged at 1.9 million carats. De Beers intends to submit an environmental assessment report to the Mackenzie review board in October.
Richard Molyneux, president of De Beers Canada, acknowledges that the original schedule to achieve production by the end of 2004 was “optimistic.” The company now expects to receive the required regulatory approvals in early 2003. De Beers plans to proceed with a phased approach that will see test mining begin in 2004, with full production slated for 2006.
The scale of the proposed underground operation, together with the flat-lying nature of the kimberlite body, makes Snap Lake a technically challenging project. It will be Canada’s first underground diamond mine and the first mine owned by De Beers outside southern Africa.
De Beers operates more than a dozen of mines in South Africa, and in nearby Botswana, Tanzania and Namibia (some are wholly owned, while others are joint-ventures with government). Total carat production of the De Beers Group increased by 13% last year to 36.6 million carats, representing 43% (by value) of the estimated world total of US$7.5 billion. Ralfe estimates production will further increase in 2001 to around 39 million carats, despite the downturn in the diamond sector.
Expansions
A US$300-million expansion project at the Orapa mine in Botswana achieved full throughput by mid-2000, effectively doubling production from 1998 levels. During the year 2000, Orapa produced almost 12.2 million carats from the treatment of 14.7 million tonnes of ore grading 82.9 carats per 100 tonnes.
At 117 ha in size, Orapa is one of world’s largest kimberlites being mined. Situated 240 km west of Francistown in the northern part of the country, Orapa entered production in 1971 at a design rate of 2.5 million carats per year. The plant’s capacity was doubled in 1979. At current production levels of 12 million carats per year, the open-pit mine has a remaining 29-year life. Reserves and resources at year-end 2000 totalled 652.9 million tonnes grading 49 carats per 100 tonnes, equal to 320 million carats. This is based on an open-pit model to a depth of 660 metres, a planning revenue of US$47 per carat, and a bottom-size stone cutoff of 1.65 mm.
Mine owner Debswana Diamond began construction in March 2001 of a new small mine on the BK-9 group of kimberlites, some 17 km west of Orapa. The US$30-million project includes a kimberlite processing plant and associated infrastructure designed to treat ore from four satellite pipes at a rate of 200 tonnes per hour. The new mine is expected to come on-stream in September 2002.
Debswana’s production from Orapa, and from its two other mines, Jwaneng and Letlhakane, totalled 24.6 million carats in 2000, accounting for 67% of De Beers’ total production. Debswana has a stated goal to produce 30 million carats worth US$2.5 billion (at current prices) annually by 2004, through efficiency improvements using working capital.
In the meantime, depressed diamond market conditions have forced De Beers to put the US$650-million C-Cut expansion project at the Premier mine in South Africa on hold. Ralfe hopes the delay will last no more than a year. “Given the state of the diamond market now and the cash flow imperatives of our new shareholders, it seemed to be a good idea that we should not go ahead immediately with this project,” he says.
The Premier mine is 37 km northeast of Pretoria, in Gauteng Province. Last year, it produced just under 1.8 million carats from the treatment of 2.8 million tonnes grading 62.6 carats per 100 tonnes. As it stands now, Premier will be exhausted by 2010 when ore in two underground mining blocks has been depleted. The C-Cut project examined the feasibility of extending the mine workings to a depth of 1,100 metres from the existing 630- and 732-metre levels. It has added 170 million tonnes and 85 million carats to the mine resource.
The project will consist of new shafts, development work, material handling systems and a new plant designed to process 9 million tonnes of ore, or six million carats per year, taking the mine life beyond 2025.
Premier is the largest known kimberlite in South Africa. Since operations started in 1902, 326 million tonnes of kimberlite ore have been mined, yielding 113 million carats of diamonds for an average grade of 35 carats per 100 tonnes. Remaining ore reserves and resources (to a depth of 1,000 metres) are estimated at 336 million tonnes grading 45.8 carats per 100 tonnes, or 154 million carats, based on a bottom cutoff size of 1 mm and a planning revenue of US$46 per carat.
Faced with the prospect of scaling back and ending its operations at the Kimberley mine in Northern Cape by 2003, De Beers is proceeding with the construction of a new US$100-million combined treatment plant (CTP). The recovery plant has been designed to treat both underground ore and surface dump material at a high recovery rate, extending the life of the three remaining Kimberley mines to 2018. The CTP is due to start operating in the second quarter of 2002 and will boost production to 1.9 million carats by 2003.
The Kimberley mines produced 570,000 carats in 2000 from the processing of 3.5 million tonnes grading 16.2 carats per tonne. Ore reserves and resources are estimated to a depth of 995 metres at 284 million tonnes grading 11.1 carats per tonne, equivalent to 31.5 million carats, based on a 0.5-mm bottom size cutoff and a planning revenue of US$76 per carat.
Rough markets
Through its marketing arm, the Diamond Trading Company (DTC), De Beers controls about two-thirds of the world’s trade in rough stones. In addition to its own mines, De Beers purchases diamond production from group companies including Debswana and Namdeb, as well as from Alrosa (a Russian diamond mining company) and
Ralfe says contract negotiations are under way with the Russians on the renewal of sales agreements. “We remain confident, together with our partner in Russia, Alrosa, that we should be able to renew the contract with effect from the beginning of next year.”
De Beers is currently in the second year of a three-year contract to purchase 35% of the run-of-mine production from Ekati.
Buoyed by strong U.S. demand, DTC sold a record level of rough gem diamonds in 2000 totalling US$5.67 billion, up 8% over the previous year. The 2000 sales performance was underpinned by strong consumer demand, particularly in the U.S., and by restocking of the retail pipeline following a successful millennium marketing campaign in 1999.
During the fourth quarter of last year, the U.S. market began to sour. The downturn came at a time when some 40% of all diamond jewelry purchases are made between the Thanksgiving and Christmas holidays. The U.S. alone accounts for close to 50% of all diamond jewelry purchases worldwide. The total global retail market for diamond jewelry is currently estimated at US$56 billion.
In the first half of 2001, sales of rough diamonds totalled US$2.62 billion, down 25.5% from a record US$3.52 billion in the same period a year ago. De Beers’ net diamond account earnings were US$595 million, off 19.8% from the six-month period in 2000, while headline earnings were down 15% at US$744 million.
Operations generated a cash flow of US$733 million for the half-year, against US$2.04 billion last year. The 2000 period was bolstered by US$1.24 billion generated from the drawing down of diamond stockpiles.
Now that De Beers is private, DBI will no longer disclose the level of its stockpile of rough diamonds. Nicky Oppenheimer, chairman of De Beers, says that since none of its competitors divulge their stock figures, the disclosure of De Beers’ rough diamond stock levels only serves to give an unfair advantage to its competitors. It is known however, that the De Beers stockpile decreased by 23% last year to US$3.06 billion.
The global slowdown in economic growth was exacerbated by the overhang of polished stones in the pipeline, particularly at the retail end, at the beginning of this year. De Beers estimates that its retail pipeline started the year off with a polished overhang of somewhere between US$700 million and US$1 billion (at wholesale prices).
While U.S. diamond jewelry sales for the first half of the year are down by only a few percentage points, the impact of the strong U.S. dollar on other countries has meant an overall 7% reduction in diamond jewelry sales worldwide.
Ralfe explains that when there is a 5-7% reduction in sales at the retail level, the effects are felt through the diamond pipeline. He estimates that net polished exports from the cutting centres to retail centres are down by about 20%. “In gross terms, they are only down by 5%, but when you take account of the returns coming back, particularly from America to India and Israel, we calculate a net affect of more like 20%.”
Rough imports into the cutting centres are running 22% down on the equivalent period a year ago, which compares closely to the reduction in DTC’s sales of 25%.
Ralfe says there has been serious erosion of confidence within the cutting centres, particularly in the past few months. Polished stocks in the cutting centres have not been falling and stand at somewhere about US$6 billion.
There has been pressure on polished prices, which has been feeding its way back into rough prices.
Looking forward, Ralfe sees some pockets of good news. Sales by U.S. independents in the first half of the year were “pretty reasonable,” with 66% reporting second quarter sales the same, or higher than, last year. In the U.S., net polished imports were down from late year by US$700-800 million in the first six months of 2001, whereas retail sales were off by a more modest US$100 million. The difference between the two numbers is a reduction in the overhang of polished that began the year.
“When that overhang has been used up, we should expect to see signs of modest restocking coming from the United States,” Ralfe says. “We’re not expecting a great turn around, neither in the American economy, nor in the fortunes of the diamond market.”
Given the deteriorating diamond market, Ralfe says the DTC will not meet its projected sales target for this year of US$4.8 billion. “We’re going to undershoot it by some distance,” he says. He remains confident that sales will be “substantially above US$4 billion, but not at the US$4.8-billion figure.”
With diamond supplies currently running ahead of demand, De Beers is imposing quota restrictions on those producers supplying diamonds to the DTC.
“We don’t think that this [means] a very large application of quotas for this year,” Ralfe says, adding that it does mean producers will all be holding “some stockpiles” at year-end. De Beers also made adjustments to pricing, both for purchases and sales, in response to slump in the market over the past few months.
“The focus now is on achieving good returns for our new owners,” says Ralfe. “We are very much conscious of cash flow imperatives, which were not part of the old De Beers culture before the buy-out, balanced with our continuing strategy, fully endorsed by our new owners, to continue to be the leader of the diamond industry and to grow our business.”
At the beginning of the year, De Beers signed an agreement with France’s luxury goods marketing group,
The supplier of choice strategy was unveiled in July 2000. The focus of the initiative is to build market position and grow demand for diamond jewelry, as well as provide globally recognized distribution channels so consumers can be confident they are purchasing “politically clean diamonds.” Another one of its aims is to develop business relationships with sightholders in a manner that will encourage long-term growth at the retail level and produce a sustainable increase in rough diamond demand, with a focus on meeting the requirements and expectations of consumers.
Under the proposed supplier of choice strategy, sightholders will be encouraged to take a more proactive role in promoting diamonds at the retail level. The DTC will make its marketing experience expertise available, as well as possible financial support, to assist clients in developing their own marketing campaigns. The DTC will also offer technical support and act as a consultant.
De Beers must reply to the European Commission’s statement of objections by the end of September. “We are actively in the process of preparing that response, and, at the same time, look forward to resuming what has been a constructive and fruitful dialogue with the commission over the last few months on this whole issue,” Ralfe says.
This year, more than half of De Beers’ worldwide exploration budget of US$75 million will be spent in Canada. The company has more than 20 exploration projects under way in the nation, with work targeting the Slave Craton of the Northwest Territories and Nunavut, and the Superior Craton which covers parts of Manitoba, Ontario and Quebec.
The company’s three most advanced prospects include the Victor project in the James Bay Lowlands of northern Ontario, the Gahcho Kue (formerly known as Kennady Lake) joint venture in the Northwest Territories, and the Fort la Corne joint venture in Saskatchewan.
“All of those projects look reasonably interesting,” Ralfe says, though emphasizing that “all are pretty small.”
On a grassroots level, De Beers holds several joint ventures with Canadian juniors, including
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