By Drew Hasselback -- The diamond recovery: It’s not just about operating mines
The economy turned the corner during the second half of 2009, and the Bank of Canada expects the nation’s economy to grow at a pace of about three per cent during 2010. That’s a significant bounce, considering how scary things looked at this time last year. Even so, this return to expansion from a prolonged period of contraction won’t be of instant aid to those who are still out of work. As is often the case, it usually takes a while for unemployment to shrink once economies start growing again.
As we narrow the focus from the broader economy to the Northern diamond industry, a happier picture emerges. Regular readers will know that I’ve long believed that a diamond rebound would herald the recovery of the Northern mining industry. Just four miners – De Beers Group, Rio Tinto, BHP Billiton, and Alrosa – control about 90 per cent of global rough stone output. That concentration makes the industry uniquely suited to deal with periods of oversupply through production cuts. And output was definitely curtailed in 2009. According to RBC Capital Markets, global diamond mine production was worth about $8-billion (U.S.) in 2009, down almost 40 per cent from $13.1-billion (U.S.) in 2008. That seems to have taken enough slack out of the market to cause some miners to rethink the need for additional production curtailments in Canada this winter.
Producers seem to be of the opinion that the worst is over and that cautious recovery is underway. Prices for rough stones jumped near the end of 2009. In fact, there’s actually some worry that rough stone prices might have risen too fast, and that they may fall back a bit in 2010. Setting that worry aside, however, the general trend is positive. No one expects a quick return to the conditions of the commodities boom of 2008, but we are seeing some growth.
Diavik, for example, hasn’t just cancelled plans for a winter shutdown. It’s ready to hire some 150 workers as the mine begins its underground phase. Meanwhile, De Beers says it’s ramping up Snap Lake again and plans to hire 175 people, though it might take a year or so before the mine returns to full production.
This has to be fantastic news to all those in the Yellowknife area who depend on mine workers’ salaries: governments, shopkeepers, mine suppliers – you name it.
For myself, I’m also watching what’s going on away from the head frames of the big producers. If diamond mining is to be a longer-run activity in the North, somebody needs to be priming the proverbial pump by discovering the fresh set of properties that will eventually offer mining employment to a future generation of workers.
This is where I’ve reason to be even more hopeful. Mining financiers understand that investors run in herds. Rightly or wrongly, booms beget booms. That means that during a stock market dry spell, much like the one that kicked in after the commodities market collapsed in 2008, you’ll hear the bankers moaning: “You know what this market needs? One big discovery.”
It’s a line I’ve heard during many bear markets for many commodities – and it’s definitely a line I had been hearing from some diamond investors in recent years.
I see a buzz returning over Northern diamonds and I think it’s coming back for two reasons. The first is that, in answer to all of those bankers’ prayers, a big discovery is at hand: Peregrine Diamonds’ Chidliak project on Baffin Island. Last September, Peregrine said that a 399-kg sample from Chidliak recovered many large diamonds, including 131 that were bigger than the 0.6-mm sieve size. This is still an early-stage project, but the preliminary results are prompting some to compare its potential to Ekati or Diavik. John Kaiser, an old hand at sussing up promising mining juniors, didn’t mince words: “There is a possibility that this is Ekati and Diavik all rolled into one.”
The second is that diamond hunters seem to be able to raise funds from the market. I have in mind Mountain Province Diamonds. I recently wrote in this space how Mountain Province had buried the hatchet in a long-standing dispute with De Beers Canada, its joint venture partner on the Gahcho Kué project. Mountain Province had long complained that De Beers was moving too slowly in developing the property. In 2009, Mountain Province secured more control over the project by taking on the responsibility for funding the on-going development work, something that had previously been left up to De Beers.
Mountain Province recently went to the market place in hopes of raising $5-million from investors. The sales pitch was clearly a success, because the financing proved popular enough to raise $9-million. Proceeds will be used to complete a feasibility study for Gahcho Kué.
So the earliest indications are that 2010 should be a fairly good year for the Northern diamond business. It would be too much to expect some of the blockbuster numbers of 2008, but we don’t need another bubble. We just need a steady phase of growth that keeps some miners employed and that sparks some fresh investor interest in the Northern exploration scene.
Long-time mining journalist Drew Hasselback is associate editor of financialpost.com.
