Gahcho Kué shifts the future of De Beers Canada

With the Gahcho Kué diamond mine more than 90% complete, De Beers Canada and 49% joint-venture partner Mountain Province Diamonds’ (TSX: MPV; NASDAQ: MDM), are on the home stretch towards developing the project, 280 km northeast of Yellowknife.

On track for production in the second half of this year, De Beers Canada CEO Kim Truter says that Gahcho Kué will become the company’s second-largest producer behind its Jwaneng mine in Botswana, which produced 9.8 million carats last year.

“Gahcho Kué is the largest new diamond mine in the world, and certainly our flagship mine in Canada,” Truter says during a phone interview.

“The way we’re building it will make for a very efficient business, so therefore we need to match it with a very efficient organization.”

The $1-billion, open-pit mine is scheduled to deliver an average of 4.5 million carats a year over a 12-year mine life from three kimberlite pipes — 5034, Hearne and Tuzo.

Which is why, Truter says, the diamond miner is leaving Toronto and moving its Canadian headquarters to Calgary this June.

“We needed to move our centre of gravity closer to our operations in the North … so we’re connected to them, and service their needs better,” he says. “We chose Calgary because it’s the logistical hub, and in our business a lot of our work involves logistics like moving equipment and people.”

Gahcho Kué is welcome news for the territory, after being hit hard in December last year by De Beers’ decision to place its troubled Snap Lake underground diamond mine on care and maintenance, laying off 434 employees.

Snap Lake produced 1.24 million carats in 2015.

“Snap on its own is a very challenging operation, something will have to change fairly radically for it to come back online — either the market or the way we mine and operate it,” he says. “In some ways our shift to Calgary helps by lowering our cost-base, but at this stage we foresee it staying on care and maintenance for quite a long period.”

With Snap Lake on the shelf, Gahcho Kué will become De Beers’ second operating diamond mine in Canada, alongside the open-pit Victor mine in the James Bay Lowlands of northern Ontario, which produced 600,000 carats in 2015.

De Beers spent $1 billion on the construction of Victor before reaching commercial production in 2008, and estimates that the mine will contribute $6.7 billion cumulative gross-domestic-produce impact for Ontario during its life.

“Victor is a really wonderful asset, it’s never produced poor financial or operational results,” he says, noting that the mine was recognized in April by “Workplace Safety North in Ontario” as being the safest mine in the province.

Truter says that reserves at the mine are scheduled to diminish by late 2018 to early 2019, but there are “quite a few options” to extend that mine life.

“The Tango extension is one of them but there are other options, like how we could potentially mine the remainder of the orebody, or our low-grade stockpiles we could potentially process,” he says. “We are focused on seeing how we can extend its life in any way, shape, or form … and we’re reasonably confident that we’ll succeed.”

The Tango Extension kimberlite is one of 19 potentially diamond-bearing kimberlites identified in the vicinity of Victor that De Beers is currently exploring.

In 2015, De Beers’ global production fell 12% to 28.7 million carats, compared to the previous year. The drop was driven largely by cuts in production at the diamond giant’s operations in Botswana. Anglo American (US-OTC: AAUKY; LSE: AAL) owns 80% of De Beers, while the government of Botswana holds a 20% stake.

Truter says that the production cuts were a necessary measure to help restore balance to the diamond market, which has been losing its sparkle in the recent commodity rout.

“De Beers is the leader in the diamond market, and because of that we had to take a leadership position in terms of how we respond to the market,” he says. “So we’ve tried to be very responsible to make sure we don’t contribute to any oversupply.”

For 2016, the company expects to produce between 26 million and 28 million carats.

“We do not anticipate any further production cuts. We’ve already seen some stabilization as a result of our actions,” Truter says, noting that the first two rough diamond sales this year were “certainly better than expected.”

According to a company release, rough diamond demand is showing improvement as excess inventory has worked through the system in recent months. De Beers’ first and second sales this year were valued at US$545 million and US$610 million, respectively.

This is positive news considering that the company saw lacklustre numbers in sales for 2015.

Anglo’s fiscal results showed a 39% reduction in consolidated sales volumes to 19.9 million carats in 2015. That drove down total revenue by 34% to $4.7 billion and dropped earnings before interest and tax down 58% to $571 million, compared to 2014.

“Those two sales were very positive signals for the start of the year,” he says. “But we’re being cautiously optimistic — we don’t want to be too positive about things growing or improving — we’re assuming it’ll stay pretty flat at the moment.”

Truter says that from a Canadian perspective, De Beers aspires to grow its new roots in Calgary and prepare the business for the future.

“Efficiency is the heart of what we’re trying to do — we’re going to make the whole organization more efficient,” he says.

“We’ve got a new leadership structure in place, with really capable people backed by modern technology, and it’s something we’re all proud to be a part of.”

— Lesley Stokes is a Vancouver-based writer with The Northern Miner.