A look at the world diamond-mining industry, and some of the ethical issues that continue to dog it
By Simon Walker, European Editor
In 1948, De Beers made history: the company’s advertising agency came up with the 20th century’s most memorable slogan. More than 60 years on, ‘A diamond is forever’ still carries exceptional weight on more than one level, with an unprecedented number of companies seeking diamond deposits, and demand from consumers across the world steadying once again after the economic uncertainties of the past few years. From the producers’ perspective, the problem with a high-value commodity such as gemstones is that demand closely mirrors the wider economic scenario. 2009 was a year that most of the world’s diamond companies would probably prefer to forget.
According to data from the Kimberly Process Certification Scheme (KPCS)—more about that later on—official new-mined diamond production totaled around 133 million ct last year, worth $12 billion. In terms of actual quantity, Russia was the top producer with an output of 34.9 million ct, with Botswana, Democratic Republic of Congo, South Africa and Canada completing the top five. However, not all diamonds are equal, to misquote George Orwell, and in value terms Botswana’s output outshone Russia’s, with values of $2.6 billion and $2.3 billion respectively. Table 1 shows the world’s major diamond suppliers for 2010 in terms of both their production and value, while Figure 1 shows the split graphically.
The KPCS data show Brazil, the Central African Republic, China, Congo, Ghana, Guinea, Guyana, India, Lesotho, Liberia, Tanzania and Togo all produced rough diamonds last year, with the proviso that Venezuela did not report any production to the organization while Côte d’Ivoire is currently barred by U.N. sanctions from exporting rough stones. That, of course, is no guarantee that there was no production, nor that any output did not leave the country through unconventional channels.
Figure 2 shows rough-diamond production trends since 1999, from which the impact of the global economic recession on discretionary purchases of high-value goods can be clearly seen.
Looking briefly at per-carat values, it is clearly a case that quality and quantity do not go hand-in-hand. Table 2 shows the leading rough diamond producers last year, using this criterion as a yardstick.
It is important to remember in this context that a single large, high-quality stone can command a huge premium over smaller yet equally graded material, an example being the high-value output from Gem Diamonds’ Letšeng mine in Lesotho. In its most recent report, the company noted: “In the second quarter [of 2011], 36 of the mine’s rough diamonds achieved a value in excess of $40,000 per carat. In June 2011, a 73.10-ct white diamond was sold for $69,000/ct, and in May 2011, a 71.17-ct white diamond sold for $67,955/ct.” Other landmark sales from Letšeng this year, the company added, have included a 10.00-ct pink diamond sold for $171,851/ct and a 2.79-ct blue diamond sold for a Letšeng record of $199,199/ct.
Which puts into sharp perspective the value of output from the DRC and Australia.
A Quick Guide to Rough Diamonds
For most of recorded history, India—or at least Southeast Asia—was the world’s sole source of diamonds. The bulk of what little production there was came from the alluvial deposits of Golconda, the region of central India that now forms parts of the states of Maharashtra and Andhra Pradesh. River gravels hosted diamonds that had been eroded out of now-lost kimberlite bodies, and from the 14th century onward, some of the fabulous stones recovered there eventually found their way to adorn the regalia of European monarchs as well as those of their Indian counterparts.
India’s dominance came to an abrupt end, however, with the discovery of diamonds in Brazil. Between 1725 and 1860, alluvial mines in the states of Minas Gerais, Matto Gosso and Bahia supplied—and from time to time saturated—the European market, but although the quantities that crossed the Atlantic were much greater than had been traded from India, the quality and size of stones was less spectacular. In a way, this was beneficial to the trade, since relatively cheaper diamonds were now available to the merely rich of Europe, rather than just to royalty and the excessively wealthy.
And, just as Brazil had supplanted India as the world’s main supplier, in the 1870s South Africa became the dominant force in the diamond trade, a position it was to hold for the best part of 100 years. However, two factors were different, and provided the key to its long-term success: mines quickly developed in the South African kimberlites that had fed the initial alluvial finds, while the emergence of De Beers as the controlling influence over the world diamond market meant that for much of the 20th century, the value of a diamond, and its cachet for the wearer, were guaranteed.
In turn, De Beers’ ability to control the market depended on other criteria. The geographical dominance of South Africa in particular as the world’s major source of diamonds was one, while the company’s deep pockets that could fund the creation of a stockpile during times of reduced demand was another. In addition, De Beers was able to corral most of the significant producers in other countries, such as Sierra Leone or Tanzania, into its marketing strategy, and was able to counter the emergence of the Soviet Union as a potential competitor from the 1950s onward.
By the late 1980s, the changing face of world politics brought De Beers’ effective monopoly to a close. The collapse of the Soviet Union brought greater freedom for Russia’s leading diamond producer, Alrosa, to market its output internationally, while the influx of stones from Rio Tinto’s Argyle mine suddenly pushed South Africa off the top-producer position it had held for decades. The new producers no longer wanted to play ball, while the European Union stymied De Beers’ marketing agreements with Alrosa.
The world of diamond production today is vastly different to that of even 25 years ago. Countries such as Australia and Canada have joined the list of major producers, while in West Africa, the decades of political instability that ruined so many economies are now largely a thing of the past. In consequence, officially sanctioned diamond mining has returned to the likes of Sierra Leone (see sidebar) and Liberia. On the other side of the coin, however, Côte d’Ivoire has slid from stability into turmoil, with diamond exports banned by the U.N.
In southern Africa, the ending of its civil war allowed major companies such as De Beers and Alrosa to invest in Angola’s diamond wealth, and the introduction of new capital has given Lesotho’s diamond industry a spectacular boost. More disturbingly, Zimbabwe’s fledgling producers have also been making headlines within the diamond community, but not for the right reasons.
Perhaps the biggest change, however, has come about in the structure of the industry worldwide. Major players still dominate the field, but the liberalization of marketing that has taken place since 1990 has paved the way for a host of junior companies to become involved in diamond exploration and production. Long-established expertise has been augmented by junior-led entrepreneurialism, with an increasing list of successes as new areas of the world are explored in greater detail.
Although two types of host rock for diamonds have long been recognized—kimberlites and lamproites—until the Argyle mine in Australia was commissioned in 1983, there had never been a commercially successful lamproite-based operation. Although the lamproite-hosted Crater of Diamonds in Arkansas was discovered in 1906, and was the first place outside South Africa where the diamond host rock was identified, it was never commercially viable.
Even today, lamproite-hosted diamond deposits are few and far between, with the vast majority of recent discoveries having been ‘conventional’ kimberlite pipes or dykes. What has changed, however, is the much greater geographical spread where exploration has shown the potential for diamonds to be found, even if commercial deposits constitute a small fraction of those identified.
Add to that the advances that have been made in exploration techniques, with remote sensing surveys providing enhanced target definition, and today’s exploration teams go out into the field much better equipped than their predecessors of 25 years ago.
Understanding of kimberlite geology has also improved substantially, and while the significance of indicator minerals has been recognized as an essential exploration tool since the 1970s, the genetic processes involved can shed additional light on pipe location, state of erosion and other parameters. For example, the recognition that the lower reaches of a pipe often carry lower diamond grades than higher up can provide a rapid indication as to the potential viability of a newly discovered pipe.
As an illustration, the original ground surface overlying the five Kimberley pipes has been estimated to have been around 1,500 m above the current ground level. Underground workings in these are currently between 800 and 900 m below surface, with the original Kimberley pipe having been worked to exhaustion at a depth of nearly 1,100 m. By contrast, the Orapa pipe in Botswana is generally recognized as lying near the original emplacement surface, on which basis the long-term future for the mine must be substantial.
Although the association of kimberlite bodies with both Archaean and Proterozoic cratons is accepted, the ‘elephant country’ approach to exploration is much more challenging for diamonds than it is, say, for copper-bearing porphyries. Indeed, as Petra Diamonds notes, of the more than 12,000 kimberlite bodies that have been discovered since the 1980s, fewer than 120 have proved to be economically viable. Small elephants indeed.
The Big Players
Four companies form the core of current diamond production worldwide: Russia’s Alrosa, De Beers and the multinational giants, BHP Billiton and Rio Tinto. Alrosa’s hub in the Sakha republic of eastern Siberia has been the key to the company’s development since the 1950s, with its only venture outside its homeland having been in partnership with the Angolan state company, Endiama.
Having whittled down its South African operations to just four, De Beers is now focused on its joint-venture operations in Botswana and Namibia, and on developing its third mine in Canada. Rio Tinto has its operations in Australia, Canada and Zimbabwe, while BHP Billiton’s sole venture to date, also in Canada, paved the way there. While companies and individuals had been quietly exploring northern Canada since the 1960s, the commissioning of Ekati by BHPB and its partners in 1998 placed Canada firmly on the diamond-mining map, as Rio Tinto’s Argyle mine had done for Australia a decade earlier.
Without question, the big success story of the past 20 years has been Alrosa. Despite the challenging political, corporate and social conditions under which it has had to operate since it was founded in the 1950s, the company has emerged as the world production leader, with an IPO of part of its shares now firmly on the cards for next year. The company reported the production of 34.3 million ct during 2010, up from 32.8 million ct in 2009, with sales worth $3.3 billion and net profits of $295 million.
For the first half of 2011, Alrosa’s output rose by 8% year-on-year to 19 million ct, with the company targeting sales worth more than $4 billion for the year. Importantly, Alrosa reported that the average price received for its stones rose from $80/ct in first-half 2010 to $113/ct in the first half of this year, clear proof (if any were needed) that the diamond market is now much more buoyant than it was a year or 18 months ago.
Diamonds from Yakutia (now Sakha) first entered the world market in 1959, just five years after the discovery of the Zarnitsa pipe. Since then, Alrosa and its predecessor enterprises discovered and developed a series of pipes, as well as operating dredges in the surrounding river systems. Its current operations include the International, Mir and Aikhal underground mines, the Komso-
molskaya, Udachny and Jubilee open pits, and a number of alluvial plants. Alrosa also holds a 95% stake in OJSC Severalmaz, which began mining operations in the Lomonosov region of northwestern Russia in 2005. Late last year, it was reported the company was in discussions with Rio Tinto over the sale of a 49% interest in loss-making Severalmaz.
The general trend since mining began has been for the development of deep open pits, followed by a transition to underground operations. In this way, the 525-m-deep Mir pit was superseded by underground mining in 2009, while today the company is developing Udachny underground, with full capacity of 4 million mt/y of ore scheduled for 2016.
Argyle Back on Track
In September last year, Rio Tinto gave the go-ahead for a further $803 million in spending to complete the development of a block-caving operation beneath the Argyle open pit. Started in 2005, the $1.6-billion project was put on the back burner during 2009 as the company tempered its investment ambitions.
In operation since 1983, Argyle has produced more than 760 million ct to date, and while the majority of its output is relatively low-grade, the tiny proportion of pink gem diamonds within its output helps increase the overall value. The operation produced 9.8 million ct last year compared with 15 million ct in 2008, and a far cry from its world-leading output during the 1990s. Nonetheless, with the underground mine due to be commissioned in 2013, Rio Tinto is predicting that output will rise again to around 20 million ct/y until at least 2019.
Underground is also the direction for the Diavik operation in Canada, in which Rio Tinto is in a 60:40% joint venture with Harry Winston Diamonds. Diavik produced a total of 6.5 million ct last year, against 9.3 million ct in 2008. Developing the underground mine there cost $787 million, with the first output achieved last year and all of the production expected to be from underground in 2012. Construction of a new dyke network should allow open-pit production to resume in 2015.
The Diavik operation covers three individual pipes that have supported mining thus far, and a fourth that is currently being evaluated, out of around 70 kimberlites that have been identified on the concession area. By contrast, BHP Billiton’s Ekati holdings in the Lac de Gras field host a reported 156 pipes, of which six have contributed to the 45 million ct of production achieved to date.
Mining started in 1998, with the initial production from the Panda pit. Since then, mining has moved sequentially through the Koala, Misery, Beartooth and Fox pits, and underground beneath both Panda and Koala. BHPB reported attributable production from its 80% stake in the operation at 2.5 Million ct for the year to the end of June, 18% less year-on-year, from 4.7 million mt of ore processed.
In May, BHPB gave the go-ahead for a pushback of the existing Misery open-pit to access new reserves, with mining scheduled for a two-year period from 2015. Capex costs are around $400 million.
De Beers Boosts Mid-tiers
De Beers’ decision to switch its operations away from its South African roots was to a large extent economic: in 2004, six out of its seven operations in the country were loss-making. Since then, it has sold off all but four (Venetia, Voorspoed, its Kimberley tailings retreatment operation and its marine mining division), with the principal beneficiary having been Petra Diamonds. Petra’s most recent acquisition, the Finsch mine, joined Kimberley, Cullinan, Koffiefontein and the three ‘fissure’ mines, Helam, Sedibeng and Star, in its South African portfolio earlier this year. De Beers also sold its Namaqualand operations to Trans Hex this year.
The effect has been to give a significant boost to Petra as an emerging mid-tier producer in South Africa and Tanzania, while Trans Hex also has other diamond interests in both South Africa and Angola. Meanwhile, De Beers is building on its existing Snap Lake and Victor mines in Canada, both opened in 2008, with a permitting application for its joint-venture Gahcho Kué project in the NWT currently in progress. It is also moving ahead with its Mulepe-1 prospect in Angola, as well as targeting its current exploration on Botswana, South Africa and India.
However, the jewel in De Beers’ crown remains its Debswana joint venture with the Botswana government. The company’s headline project here is the Cut-8 extension at Jwaneng, which will access a 100-million-ct resource and extend the mine’s life to beyond 2025. Debswana has invested heavily in state-of-the-art diamond-recovery technology, with its CARP (completely automated recovery plant) and FISH (fully integrated sort house).
Operations at both Debswana and De Beers’ Namdeb joint venture with the Namibian government were cut back substantially during 2009, but picked up speed again last year, with Namdeb recovering 980,000 ct out of its 1.47 million ct total from its offshore division.
Both Rio Tinto and Alrosa have major projects that are currently at an evaluation stage. Rio Tinto’s focus on India has crystallized into its Bunder project in Madhya Pradesh, which hosts an eight-pipe cluster. The company said this was the first diamond discovery in India for over 50 years, with a prefeasibility study started during 2010.
Alrosa, meanwhile, spent $76 million earlier this year to win the rights to mine the Ruchey Gusiny and Ebelyakh alluvial deposits and the Dalnyaya kimberlite pipe, all of which are close to its existing operations. Total resources there are some 42 million ct, the company has estimated, with little capital investment needed to commission the three new mines.
BHP Billiton is in joint venture with Peregrine Diamonds at the Chidliak prospect on Baffin Island in northern Canada. Peregrine recently reported having identified a total of 58 kimberlite pipes on the property since 2008, of which seven appear to have economic potential.
A list of some of the junior companies currently involved in diamond exploration projects worldwide is shown in Table 3. Those with a North American focus include Shore Gold, which has been working on its Fort à la Corne prospects in Saskatchewan since 1995, Stornoway Diamond Corp., which recently acquired full ownership of the Renard prospect in northern Québec, and Dianor Resources at its Leadbetter prospect near Wawa, Ontario. Stornoway plans to complete a feasibility study on Renard later this year, while Dianor claims to have identified a new type of diamond host rock, Archaean conglomerate, which presumably represents recemented palaeo-placer material derived from ancient eroded kimberlites. Mid-last year, Shear Diamonds bought the Jericho mine in Nunavut from Tahera Diamond Corp., which operated there from 2006 to 2008, adding the property to Churchill and the other projects in its portfolio.
The Kimberley Process—Fatally Flawed?
No review of the diamond industry could be complete without mention of conflict diamonds and the mechanism established to thwart their sale: the Kimberley Process (KP). Despite the infinite goodwill and high ambitions expressed when it was set up in 2003, today the KP is under intense international scrutiny as its inability to deal with recalcitrant producer nations becomes apparent.
By way of background, the 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. However, as Ian Smillie (one of the KP’s founders) noted in a recent paper, while the KP has succeeded in many respects, its weaknesses have become more apparent over time. “There was no provision in the KP to do what all regulators must do,” he wrote. “There was no provision to close loopholes, fix the parts that were not working and adapt the system to new realities.
“The weakness or absence of internal controls in the countries most affected by conflict diamonds—Angola, the DRC and Sierra Leone—have gone more or less unheeded for seven years,” he said, going on to cite Venezuela, Guinea, Lebanon and Zimbabwe as countries where significant non-compliance issues have been identified but not resolved.
In the case of Venezuela, for example, the country has simply refused to cooperate with the KP. So far as the rest of the world is concerned, Venezuela has no diamond production or exports; the truth is substantially different, observers believe. The government of Zimbabwe’s role in perpetrating human-rights abuses as well as expropriating concessions at the potentially huge Marange diamond field, close to the border with Mozambique, also provoked widespread international condemnation, yet the KP’s perceived acquiescence by allowing Zimbabwe to export stones has been seen as another example of its weakness in practice.
Reaction to the KP’s decision on Zimbabwe was vituperative: in March, the U.S. government issued a warning that it found the decision “most objectionable,” noting it had “advised the UAE, South Africa, India and probably others that it will view any shipments proceeding as a result of this decision as non-compliant.”
Little was achieved either at the KP’s annual meeting in Kinshasa in June. Commenting afterwards, the president of the World Diamond Council, Eli Izhakoff, said: “The Kinshasa meeting did not conclude as we would have liked.
“I believe all sides agree what is at stake here is not only the wellbeing of the diamond business, but also the economic future of ordinary people living in the diamond-producing areas. And this, of course, includes Zimbabwe, whose production provides an exciting new opportunity for economic prosperity in Africa.
“But, if the Kimberley Process is rendered ineffective as a result of indecision at the executive level, nobody really benefits,” Izhakoff said.
In the meantime, companies such as African Consolidated Resources, which had its concessions at Marange expropriated by the Zimbabwe government, is still seeking redress through negotiation. Chinese companies are believed to be increasingly involved in the Marange operations, while reports of the government holding a $5 billion diamond stockpile and of publicity surrounding alleged ‘gray’ sales of diamonds do little to inspire increased confidence within the industry or the international community as a whole.
An Industry on the Up
The world’s diamond producers may have had a rough time during 2009, but the increase in investor confidence that has been apparent through 2010 and into 2011 has proved to be a big plus for them. “This has been a renaissance. The diamond market has really clicked into gear, particularly led by sales in Asia,” the chairman and CEO of Harry Winston Diamonds, Robert Gannicott, told the Canadian business news channel, BNN, in an interview in June.
Gannicott’s comments echoed those contained in a recent report from CapGemini and Merrill Lynch on the world’s super-rich, which noted: “record prices for diamonds in 2010...exemplified the trend [in this sector] to see large diamonds as a safe and high-growth investment alternative. Current demand at the highest end of the market appears to be largely from Russia and the Middle East,” the report added, “but demand from Chinese and other Asia-Pacific investors is also growing fast.”
One thing on which all commentators seem agreed is that things are likely to get better for producers, if for no other reason that demand is certain to outstrip newly mined supply. In a research note prepared after a set of company presentations in London in May, the Royal Bank of Canada’s analyst, Des Kilalea, pointed out that the oversupply of diamonds that was apparent during the 1990s led to a lack of investment in exploration that has continued to the present. An example, he said, has been De Beers, which has cut its annual exploration budget from $100–$150 million in the past to just $43.3 million last year. As a result, he added, there are few new projects coming on stream that can compensate for falling production from existing mines that are nearing the ends of their lives.
In its 2010 annual report, Rio Tinto pointed out (assuming it proves viable) its Bunder project in India will be one of only four significant new mines likely to come on stream worldwide in the next 10 years. With consumer demand strong in both established (the U.S.) and emerging (Asian) markets, this is simply not going to be enough to compensate for falling production from existing mines, let alone satisfy demand increases. There seems to be only one answer: buy the lady her KP-certified diamond now, before the price goes up even more.