Winter Closure At Diavik Cancelled

Improving market conditions and rising diamond prices mean that a planned six-week winter shutdown of the Diavik mine, in Canada’s Northwest Territories, has been called off.

The economic downturn had forced the Diavik operation, owned 40% by Harry Winston Diamond (HW-T, HWD-N) and 60% by London- based Rio Tinto (RTP-N, RIO-L), to curtail production and shut down the mine during the summer before reopening it on Aug. 24. Another shutdown had been planned for Dec. 1 through Jan. 11. (Prices for rough diamonds in the first quarter were at their lowest level since Diavik began operating in January 2003.)

But the outlook for diamonds is starting to look brighter, some miners and analysts believe, and Diavik’s management has had a change of heart. “We do not foresee a return to extreme conditions that would warrant a further shutdown,” Robert Gannicott, Harry Winston’s chairman and chief executive, said in a statement on Sept. 15.

“It’s a good sign. . . (and) makes a lot of commercial sense in the current market,” commented Charles Wyndham, founder of website PolishedPrices.com, the only independent publisher of diamond price-lists based on multiple-source transactions. But he cautioned that while prices for rough diamonds have climbed, those for polished diamonds have not. “There are exceptions,” he said. “But as a general comment, polished prices haven’t moved anything as much as rough.”

In certain areas, he added, prices for rough diamonds are higher than for polished diamonds, which to a large extent “seems to have been driven by an acute shortage of rough in the market.”

Diavik operator Rio Tinto raised the prices of Diavik diamonds by 15% in September, according to Bloomberg. “We’re seeing demand start to pick up,” Bret Clayton, Rio Tinto’s chief executive officer for diamonds, copper, and nickel, told the news agency. “The supply chain is now destocked so we are starting to see some pull-through in demand for diamonds.”

In a press release outlining Harry Winston’s second-quarter results, Gannicott noted that the market for rough diamonds had continued “to build momentum” from the end of the first quarter. “Rough diamond prices increased substantially during the quarter with our own pricing ending at 50% above the low point in the first quarter,” he said.

“Polished diamond demand continued to be resilient in the Far East and a cautious but definite return of interest from U. S. buyers has helped to revive the industry,” he added. “Diamond polishers have been eager to purchase rough diamonds, which are still restricted in supply, leading to firmer prices in the quarter.”

Kinross Gold (K-T, KGC-N) is one company that sensed the diamond market might be on the verge of a turnaround and made a strategic investment in Harry Winston in March that has paid off handsomely.

The gold producer’s investment consisted of two parts. The first component was a subscription for a minority 22.5% interest in the partnership that holds Harry Winston’s 40% interest in the Diavik joint venture. The net effective subscription price was US$104.4 million.

The second component was an equity private placement that gave Kinross 15.2 million Harry Winston shares at a price of US$3 per share, for a total investment of US$45.6 million, bringing Kinross’s interest in the diamond miner and retailer to 19.9%.

Since then, Harry Winston shares on the New York Stock Exchange have soared to US$9.26 apiece — handing Kinross a paper gain of about US$285 million. (Over the last 12 months, Harry Winston shares have traded between a low of US$1.69 and a high of US$10.75.)

“We believe that, as with gold, the long-term supply and demand fundamentals for high-quality diamonds are strong,” Kinross president and chief executive Tye Burt said in a statement at the time of the investment. “Harry Winston occupies a unique and respected place in the global diamond business.”

In addition to the investment, Kinross’s executive vice-president and chief financial officer, Thomas Boehlert, joined Harry Winston’s board of directors.

Despite posting a net loss of US$24.5 million or US32¢ a share in the quarter ended July 31, (due in part to net foreign-exchange losses on future income-tax liabilities), and the fact that consolidated sales slipped to US$94.8 million from US$186.1 million in the same quarter a year ago (resulting in a 75% decrease in gross margin and a loss from operations of US$3.9 million), Harry Winston’s Gannicott said he was confident the diamond market was improving.

“Although retail sales remained below profitable levels (in the second quarter), we have seen a 9 per cent increase in transactions worldwide compared to the prior quarter led by increases in the Far East, including Japan,” Gannicott said on Sept. 10. “Sales have also edged up month to month during the quarter, suggesting a shift in momentum.”

This year the Diavik joint venture expects to mine about 1.3 million tonnes of open-pit ore, the majority of which will come from the A-418 kimberlite pipe, and the remainder from the A-154 south open pit. Total carat production is forecast to be between 5 million and 6 million carats on a 100% basis. The JV expects Diavik could deliver about 7.5 million carats in 2010.

Currently an open-pit mine, underground production at Diavik is slated to start in early 2010. Openpit mining will end in 2012.

Of course, diamond producers aren’t out of the woods yet — not by a long shot — and a weakening U. S. dollar could spell further trouble. “Even if diamond prices increase, the benefit isn’t being felt by the mines,” Wyndham told The Northern Miner in a telephone interview from a London airport en route to Botswana. “Costs are in local currency and your revenue is in U. S. dollars and that has fallen against the rand, for instance, by something like 20 per cent. It makes life a hell of a lot more difficult for mines.”

Wyndham’s personal view for the diamond sector: “Extreme caution.”