Diamond Miners Respond
Suffering from lower jewelry demand over much of the past 10 years, the world’s diamond industry picked up last year, at least in volume terms

By Simon Walker, European Editor

The only diamond mine in Russia not in Alrosa’s portfolio, Grib was developed by the oil-and-gas
company, Lukoil. Last November, the U.S. Supreme Court ruled that Archangel Diamond Corp.’s
15-year legal fight to win compensation from Lukoil for what the company claimed was loss of its
contractual rights over Grib was at an end. Archangel went bankrupt in 2010, having invested
US$30 million in the project
Since the last occasion when E&MJ took an in-depth look at the world diamond industry, September 2011, the world’s diamond producers have continued the process of restructuring that began in the early 2000s when De Beers began to relinquish its traditional role of industry custodian. In the intervening period, statistics compiled by the Kimberley Process Certification Scheme (KPCS) indicate that producers responded in no mean way to reduced consumer demand, particularly in the aftermath of the 2008 global economic downturn, with output fluctuating within a fairly narrow band between 2009 and 2015, and only showing signs of picking up again last year.

Significant events within the industry since 2011 have included De Beer’s continued rationalization of its property portfolio, reducing its interests in South Africa and building new capacity in Canada. And having spent a number of years in evaluating the Bunder prospect in India, Rio Tinto finally decided that it was not viable and gave it away, having also spent some $2.2 billion on developing the underground section at Argyle in Australia.

Winning the top spot in the producers’ league, Russia’s Alrosa clearly has no intention of giving it up, and has consolidated its position with new capacity coming on stream. But perhaps the most visible — and newsworthy — aspect of the past six years has been the regular discovery of large, high-value diamonds at mines run by a number of the new generation of producers, companies that have both picked up the discards from long-established producers such as De Beers, and have explored, financed, developed and commissioned their own new operations.

E&MJ’s 2011 article looked in depth at some of the background to diamond resources, the history of production since India ceased to be the world’s leading supplier of gem-quality stones during the 1700s, and the world’s major diamond-mining companies in the 21st century. In point of fact, little has changed since then — the host rocks have remained the same, the major producers have neither expanded nor contracted significantly, and history is history. There is thus little to gain by repeating what was written then, and the interested reader is directed to that article for information on those topics.

World rough diamond production, 2004-2016 (million ct). (Source: KPCS statistics)
Recent Production Trends
Data compiled by the KPCS covering the period from 2004 to 2016 show clearly how the world diamond industry reacted to the wider economic malaise that began in 2008. Before that, consumer confidence was high, and demand for both industrial and gem-quality diamonds was good.

As shown in Figure 1, the industry reached peak output of 176.7 million carats (ct) in 2005, albeit at an average value of $65.68/ct. The drop in output in 2006, 2007 and 2008, while noticeable, was minor in comparison to what happened in 2009, when production plummeted to 120.2 million ct.

Since then, weak consumer demand has effectively put a cap on what producers are prepared to place on the market. From time to time, as Figure 2 illustrates, demand has squeezed the market somewhat, to the extent that higher average per-carat prices have given producers an economic boost, although the marked increase in output from 127.4 million ct in 2015 to 134.1 million ct in 2016 merely managed to weaken average prices from $108.96/ct to $92.49/ct as consumers in China and India in particular were wary of parting with their cash.

Bear in mind that these average per-carat prices relate to rough (uncut) stones, with a huge differential between the amount paid for large, high-quality gems and run-of-the-mill industrial diamonds. This is clearly illustrated by considering that the average price received by producers in the DRC last year was $10.63/ct, while their counterparts in Lesotho averaged $1,065.88/ct. KPCS data show that the DRC produced 23.2 million ct of predominantly industrial-quality diamonds. Lesotho’s 342,000 ct may have been a small fraction of that, but the country’s mines have developed a reputation for unearthing some truly spectacular gemstones.

Average per-carat prices for world rough diamond production, 2004-2016 (US$/ct). (Source: KPCS statistics)
In addition, producers still have the capacity to manage their diamond sales to a much greater extent than for most other mined commodities. With the traditional method of sales based around the concept of prepared packages of rough stones being offered at “sights,” from the producer’s perspective the skill comes in understanding what the market wants in relation to consumer demand. Offloading surplus stock will inevitably result in prices falling, yet for most producers there is a limit on how much inventory they can afford to carry.

By way of illustration, Bain & Co. in the 2016 edition of its Global Diamond Industry report for the Antwerp World Diamond Center, noted that “Major rough-diamond producers in 2015 reacted to the challenging circumstances of their customers by reducing output, increasing their own inventory levels and providing more flexible purchasing terms while cutting rough-diamond prices. As a result, rough-diamond sales fell 24% in 2015.”

Published in the second half of the year, the report continued “the industry rebounded in 2016. Restocking by midstream players, following their inventory sell-off in late 2015, produced growth of around 20% in rough-diamond sales during the first half of 2016. However,” it warned, “strong rough-diamond sales in 2016 may again lead to swollen midstream inventories if retail demand does not strengthen proportionately.”

Were these fears realized? According to De Beers in a report published in June, global demand for diamond jewelry increased marginally last year to reach a total of $80 billion, with the U.S. alone accounting for $41 billion of this. Elsewhere in the world, the Japanese and Chinese markets also showed growth, while jewelry demand in India and the Middle East was weaker.

Gahcho Kué, where the De Beers-Mountain Province Diamonds joint venture began mining mid-last year, is expected to produce some 54 million ct over an initial 13-year life.
Commenting on these data De Beers’ CEO, Bruce Cleaver said “while U.S. demand drove global growth in 2016, it is increasing demand from emerging markets that is behind the last five years being the strongest on record. Despite some markets facing challenging conditions last year, we see this trend continuing, with improvements in demand from China and India, in particular, emerging in 2017.”

Conflict Diamonds: Still a Challenge
As E&MJ noted in its 2011 article, established in 2003, the Kimberly Process (KP) “relies on a system of cross-referencing production, exports, and imports of rough diamonds between producer and consumer countries. The aim is to make it more difficult for illegally mined or smuggled diamonds to be sold to help finance civil conflicts.” The article went on to highlight some of the weaknesses that have been perceived in the way that the KP operates, in particular its inability to police areas where diamond production takes place under conflict or corrupt conditions.

Consisting of 54 participating countries and organizations, the KP claims that 99.8% of world diamond production now comes from conflict-free sources. Without question, it has made major inroads into this source of income for the participants in (usually) civil wars, but has it now been able to achieve the level of credibility that it needs to win public confidence?

Set up to strangle the trade in conflict diamonds, the Kimberly Process suspends export certification
for the Central African Republic between 2013 and 2015. The organization has since allowed exports
to resume from areas under government control, but critics question the effectiveness of the way this
is policed. (Photo: Emmanuel Braun, Reuters)
That corruption can ease the way for diamonds to be awarded fraudulent KP certification is one allegation frequently made by its critics. An article in the U.K. newspaper, The Guardian, in 2014 summarized other concerns. “The process has two main flaws,” said author David Rhode. “First, its narrow terms of certification focus solely on the mining and distribution of conflict diamonds, meaning that broader issues are not addressed.

“Second, a KP certificate does not apply to an individual stone but to a batch of rough diamonds, which are then cut and shipped around the world. Without a tracking system, this is where the trail ends,” he added.

In fairness, the message seems to have landed on fertile ground, with the chairman of the KP in 2016, the UAE’s Ahmed Bin Sulayem, taking the unprecedented step of publishing a “midterm” report on progress being made during his tenure of the office. “Only by visiting diamond-producing countries is it possible to fully appreciate the challenges affecting all those involved in diamond production, from government regulators to hundreds of thousands of miners and their families whose livelihood depends on a transparent, accountable industry,” Bin Sulayem said. “This work will continue.”

One of the key innovations proposed for the KP during 2016 is the establishment of a blockchain system for tracking diamonds. Bin Sulayem’s report explained that “blockchain is a list of transactions that happen in a peer-to-peer network. Those who join in the blockchain can transfer value without the need for a central third party or ‘clearer’ like a bank. Blockchain is a distributed database, completely aligned to the structures of the internet, which maintains a continuously growing list of encrypted data records, secure from tampering or revision.”

The report went on to acknowledge that “adopting blockchain technology would be a long process requiring a great deal of research. The cost and complexity of implementation would also be significant,” it added. But by establishing a permanent public record of the diamonds in the blockchain, this would create an indisputable, unchangeable chain of ownership transfer, replacing physical certificates with digital proof of a diamond’s progress from mine to madame.

Russian Roundup
With an output of more than 40 million ct last year, Russia accounted for nearly 30% of the world’s total rough diamond production, and well ahead of the second-largest producer in volume terms, the DRC (23.2 million ct). The other big producers, Botswana, Australia, Canada, Angola and South Africa produced 20.5, 13.9, 13, 9 and 8.3 million ct, respectively, KPCS data show.

In its 2016 annual report, Alrosa, which celebrates its 60th anniversary this year, reported group production of 37.4 million ct of rough diamonds, with sales revenues 41% higher than in 2015 at RUB317.1 billion ($4.9 billion). A key event during the year was the reduction in the federal state holding by a further 10.9%, bringing it down to 33%. This followed a 16% selloff in 2013, with the prospect of the state selling a further 8% stake either this year or next being mooted. However, while last year’s sale realized $814 for a federal government that is desperate to plug holes in its finances, this was some $90 million less than it had hoped for, with the Financial Times reporting at the time that “investor appetite was affected by poor political relations between Russia and the West.”

In June, Debmarine Namibia’s US$157 million SS Nujoma was named at a ceremony at Walvis Bay. The company says
that it is the world’s largest and most advanced diamond exploration and sampling vessel. (Photo: De Beers)
On the operational side, Alrosa reported that the underground section of its Mir mine reached its design capacity of 1 million metric tons per year (mt/y) in 2016, and that it is starting the development of the Zarya pipe. In addition, it began construction of the infrastructure for the Verkhne-Munskoye deposit, with capex costs to bring a mine into production cited at RUB63 billion ($1 billion).

While most of Alrosa’s operations are in Russia’s Far East, its Severalmaz subsidiary has been developing the Lomonosov deposit in the Arkangelsk district of northwest Russia. Two of the six pipes that occur there (Arkhangelskaya and Karpinskogo-1) are in production, with the capacity of the ore processing plant having been increased from 1 million mt/y to 4 million mt/y in 2014.

The district is also host to the Verkhotinskoye (Grib) mine, operated by Russia’s only other diamond producer, Arkhangelskgeoldobycha — until earlier this year a subsidiary of the oil-and-gas company, Lukoil, and now owned by the Otkritie Holding group. Having earned US$314 million from rough diamond sales from Grib in 2016, Lukoil sold the operation to Otkritie for US$1.45 billion in March.

“Lukoil successfully developed a major diamond project from its very early stage and brought the Grib diamond mine to almost full capacity on time and within budget. Spinning-off of this noncore asset allows us to effectively monetize the significant shareholder value that we have created over the past five years,” explained Alexander Matytsyn, Lukoil’s senior vice president for finance. The mine produced around 4.5 million ct last year, having come on stream in 2014, and is reported to be the eighth-largest diamond operation in the world.

Canada’s Diamond Sector Expands
Since Ekati was commissioned in 1998, Canada’s diamond industry has grown to the extent that the country is now the world’s fourth-largest producer. Ekati was followed by Diavik in 2003, Jericho in 2006, and by Snap Lake and Victor in 2008. The commissioning of Renard and Gahcho Kué early this year followed a period of consolidation within the sector.

The 1,109-ct ‘Lesedi La Rona,’ the second-largest
gem-quality rough diamond ever discovered, according
to Lucara Diamond Corp. At auction last year, the
bidding stopped at US$61 million, below the
company’s reserve price.
However, it has by no means been plain sailing for the industry, with Jericho — Nunavut’s only diamond mine — closed as uneconomic in 2008 and Snap Lake falling foul of high pumping and water-treatment costs in 2015. Following this, De Beers sought offers for the property, but having failed to do so, announced in December that it planned to flood the mine. Snap Lake produced 1.2 million ct in 2015, and at the time had resources to support production until the late 2020s.

De Beers also faces challenges at its 600,000-ct/y Victor mine in northern Ontario, where reserves in the existing pit are expected to be exhausted by late 2018. Earlier this year Reuters reported that the company had shelved plans to evaluate the neighboring Tango resource, following its inability to reach an agreement on the project with the Attawapiskat First Nation.

De Beers presumably hopes for better fortunes with its third Canadian mine, Gahcho Kué, where it is in 51:49% joint venture with Mountain Province Diamonds. Operations at the three-pit complex started to ramp up in August last year, with commercial production being confirmed in early March.

Located some 280 km northeast of Yellowknife in the Northwest Territories, Gahcho Kué operates on a fly-in/fly-out basis. The world’s largest new diamond mine, it is based on a cluster of four diamond-bearing kimberlites, three of which have a probable mineral reserve of 35.4 million mt grading 1.57 ct/mt. Commissioned at a capital cost of near $1 billion, the mine is expected to produce an average of 4.5 million ct/y, with a 13- year lifetime output of around 54 million ct.

Mountain Province Diamonds discovered the 5034 kimberlite pipe at Gahcho Kué in 1995, with De Beers then adding to the resource with the discovery of the other three pipes. Mining is now focused on the 5034, Hearne and Tuzo pipes, requiring the water level in the adjoining Kennady Lake to be lowered and protective dykes and berms constructed to allow access to them.

In all, De Beers produced just over 1 million ct from its Canadian operations last year, markedly down from the 1.9 million ct it won in 2015 — mainly as a result of Snap Lake having been suspended at the end of 2015. Meanwhile, Stornoway Diamond Corp. sneaked in ahead of Gahcho Kué with the declaration of commercial production at its Renard mine at the beginning of January. Situated 350 km north of Chibougamau in the James Bay region of northcentral Québec, Renard cost Stornoway, the sole owner, C$775 million to develop.

Ore processing began in July 2016, two years after construction began. The mine produced 2 million mt of open-pit ore during the year, while recovering nearly 450,000 ct. Four kimberlite pipes host the initial resource of 22.3 million ct. Open-pit mining from the combined Renard 2 and 3 pipes will continue until next year, and from the Renard 65 pipe until 2029. Underground production will be from the Renard 2, 3 and 4 pipes, with Renard 2 holding the bulk of the underground resources. Stornoway expects to produce 1.7 million ct this year, while mining 4.4 million mt from the open pits and 500,000 mt from underground.

And the search for Canadian diamonds is by far from over, with a number of junior companies at work. These include Peregrine Diamonds with its Chidliak open-pit project on Baffin Island, Dunnedin Ventures (the Kahuna project in Nunavut) and Kennady Diamonds, which has the Kennady North landholding near Gahcho Kué.

In June, Rio Tinto took a three-year exploration option on Shore Gold’s long-standing Star-Orion South project in the Fort à la Corne area of central Saskatchewan, with a $18.5 million commitment to win a 60% stake in a future joint venture. Conversely, De Beers recently walked away from its own seven-year, US$15.8 million option agreement with CanAlaska Uranium in the West Athabasca region of the province, having failed to identify any kimberlite at targets identified from airborne magnetic surveys.

Exploration core drilling is just one end-use for industrial diamonds. Natural stones, while comprising
around 70% of production, now account for only 1% of annual industrial diamond demand, with China by
far the world’s biggest producer of synthetics. (Atlas Copco bits on the left and Roschen NQ wireline core
bits on the right.)
And in July, Dominion Diamond Corp. (formerly Harry Winston Diamond Corp., formerly Aber Diamond Corp.), which has a 40% stake in Diavik with Rio Tinto and owns 80% of Ekati, agreed to a US$1.2 billion takeover by privately owned, U.S.- based The Washington Cos. The new owners have said they plan to invest in the Jay and Fox Deep projects at Ekati, and in new greenfield exploration.

Crystal Gazing
In the most recent edition of its diamond industry report, Bain & Co. suggested that in value terms, measured in constant dollars, global demand is likely to grow at a rate of between 2% and 5% annually in the period up to 2030. Against that, the company believes that “the global supply of rough diamonds will decline by an average of 1% to 2% per year from 2016 to 2030 because of the aging and depletion of existing mines.”

This decline will be offset to a certain extent by new mines coming on stream which, the report suggested, could add as much as 26 million ct/y up to 2026, then tail off to around 16 million ct/y after that. All in all, plans announced by producers indicate an increase of rough diamond production to about 150 million ct/y by 2019, with output then falling back to 110 million ct/y by 2030.

The one constant in the company’s estimates is Alrosa, which, it predicts, will maintain current levels of production right through the next decade and beyond. Rio Tinto and De Beers will also maintain their respective production levels until the late 2020s unless either can develop new capacity. The slide will come more from the small players, which typically have smaller, shorter-life resources.

In the end, for gem diamond sales it all comes down to consumers’ willingness and ability to spend money on jewelry. As the report noted, “A continued source of both concern and opportunity is the question of long-term demand for natural diamonds. As a new generation of consumers — the millennials — heads toward its prime spending years, the industry needs to find ways to effectively engage with them.”

Conveyor structure at Lucara Diamond Corp.’s Karowe mine in Botswana, which
it commissioned in 2012. The company is currently installing four more Tomra X-ray
Transmission diamond-recovery units, having already used the technology very
successfully to recover large stones.
Industrial Diamonds – The Overlooked Sector
For reasons that probably need no explanation, most peoples’ focus is invariably on gem-quality diamonds. After all, jewelers shops sparkle on the high street; outlets for drill bits and abrasives are usually lurking in some dark recess of an out-of-town industrial park. Yet there is a huge and increasing market for non-gem diamonds as well, a market now so large that natural diamond can only supply about 1% of world demand. The other 99% is synthetic.

In terms of mined output, gem-quality stones make up somewhere between 20% and 30% of total annual production. The remaining 70%-80% is destined for industrial uses — and it is this volume (around 100 million ct in 2016) that makes up the 1% of industrial diamond that is not supplied by synthetic material.

According to the commodities research firm, Transparency Market Research, synthetic diamond is often preferred to natural material for industrial purposes such as grinding, cutting and polishing diamond because its physical properties can be modified according to end-use requirements. Developed in the 1950s, two routes are available for producing synthetic diamonds: the HPHT (High Pressure High Temperature) or CVD (Chemical Vapour Deposition) processes. The HPHT system involves replicating the natural formation process for diamonds by applying high pressure and temperature to carbon or graphite, while the CVD process operates at low temperatures and pressures.

Today, the main producers of natural industrial stones and bort (fragmented material) are the DRC, Russia, Australia, Botswana and South Africa, which supply around 80% of the world’s annual output. By contrast, China alone accounts for around 90% of world synthetic diamond production, with the USGS estimating its production at some 4,000 million ct last year. To put this in perspective, U.S. production was 125 million ct worth around $1/ct.

In the 2017 edition of its industrial diamond mineral commodity survey, the USGS pointed out that “constant-dollar prices of synthetic diamond products probably will continue to decline as production technology becomes more cost effective; the decline is even more likely if competition from low-cost producers in China and Russia continues to increase.

Putting some figures on this outlook, Transparency Market Research estimated that the global synthetic diamond market was worth $15.7 billion in 2014, with the company predicting lower costs and an increase in the number of industrial applications for synthetic diamonds will build the market to a value of $28.8 billion by 2023.

Big Stones Sparkle
A feature of the period since E&MJ’s last major review has been the number of large rough diamonds that have been unearthed — an achievement in which some smaller producers can claim equal credit with the industry’s long-standing majors. And they have not been slow in advertising their successes either, presumably working on the premise that successful, well-publicized sales of large stones will do their share price no harm at all.

For example, Gem Diamonds discovered a 314-ct stone at its Letšeng mine in Lesotho in May 2015, and two months later had a 357-ct diamond in its safe — later sold for $19.3 million. Also in 2015, Lucara Diamond Corp. discovered the 342-ct “Queen of Kalahari” at its Karowe mine in Botswana, with the US$20.6 million stone subsequently being transformed into a suite of six pieces of jewelry containing 23 flawless cut diamonds.

Not all sales of large diamonds are successful, though, as was shown in May this year when the government of Sierra Leone tried to garner interest for a 709-ct rough stone that had been found two months earlier. The top bid of US$7.8 million was rejected as insufficient, according to a Reuters report, although the price offered would suggest that the diamond was not of a quality to match its size.

Lucara was also disappointed when the 1,109-ct “Lesedi La Rona,” the second-largest gem-quality rough diamond ever discovered, failed to meet its expected price of at least US$70 million in June last year, although the company gained some recompense as its 813-ct “The Constellation” had sold for US$63 million a month before that.

Even Rio Tinto has been in on the act, with the 187.7-ct “Diavik Foxfire” discovered during 2015. By all accounts the stone should have been rejected and sent to waste, but its elongated shape allowed it pass through the scalping screen. The sale price was not disclosed.

And not to be outdone, Alrosa reported the recovery in July of a 75-ct stone and one weighing almost 110 ct at its Mirny operations in Russia. In 2016, the company found a 207-ct diamond at its Zarnitsa mine, the largest recovered since open-pit mining started there in 1999.

As featured in Womp 2017 Vol 09 - www.womp-int.com