By Abraham Dayan
The beginning of commercial mining at the Gahcho Kue diamond mine in Canada's Northwest Territories at the start of March put the spotlight again on the issue of the scarcity of significant diamond mines coming on stream. Together with the depletion of large mining operations around the world, the industry is starting to try to estimate when the shortfall will come into play.
Before the financial crisis of late 2008, many analysts thought the shortfall would start in approximately the middle of the following decade. However, it took the industry several years to recover from the blow to diamond jewelry sales from the crash and the severe recession in the United States, Europe and elsewhere that followed.
At Gahcho Kue, first diamond production at the mine in the Arctic region and the world's largest and highest grade new diamond mine, began last year and has been gradually increasing. Annual average production is forecast to be 4.5 million carats over the expected 13-year life of the mine, around 54 million carats in total. De Beers owns 51 percent of the project, with the rest held by Mountain Province Diamonds.
And the way to developing the mine was no less easy. Securing government approval for Gahcho Kue ended up needing in excess of 15,000 pages of environmental reviews.
De Beers CEO Bruce Cleaver said the event was a "significant landmark for De Beers in Canada". And Mountain Province Diamonds President and CEO Patrick Evans said the deposit "secures Canada's position as one of the world's leading diamond producers".
Given the location of the mine, its development – which took more than a decade – is all the more remarkable. It is so far north that is beyond the tree line. For most of the year, there is heavy snowfall and the mine's neighbors are wolves, bears and caribou. Only an ice road built year after year serves to bring in supplies, and then only for a short period of time. All this in order to unearth 12,000 carats of diamonds each day. It is the biggest new mine in the world in over a decade, and could well be a defining moment for the diamond business.
There are, quite simply, fewer new diamonds. And De Beers, judging from the ongoing reduction in its exploration budget – around $35 million this year – does not seem convinced that it is going to find any exciting new finds.
A look at the figures provides a stark reminder of the difficulty of finding diamonds. Exploration companies have investigated fewer than 7,000 kimberlite pipes, with only about 15 percent being diamond-bearing and a measly 1 percent – about 60 locations – holding enough to justify mine construction. De Beers is exploring in Canada, South Africa, Botswana and Namibia, using the latest technology to find changes in magnetic fields below Earth’s surface which could be a pointer that there kimberlite in present.
And even when a deposit is found that is commercially viable, it is a long and tiring process to get it up and running. Mountain Province Diamonds, which owns 49 percent of the project, with De Beers Canada owning the rest, discovered Gahcho Kue’s first pipe 22 years ago. One billion dollars worth of investment later, Gahcho Kue is producing diamonds.
Looking for economies of scale, De Beers has focused for some years on getting more diamonds from existing large operations in Botswana and South Africa rather taking a gamble on building new ones. Although new technologies may help in the discovery of diamonds more efficiently, Bain & Co, for example, estimates that output will peak in 2019. Supplies of new diamonds will then start to fall, sinking by 1-2% each year until 2030, according to a report The Economist.
Of course, it is not certain that the shortfall will come about. Consumer demand for diamond jewelry cannot be taken for granted. As De Beers' CEO Bruce Cleaver said: “Long-term demand is only going to be there if we continue to generate it.” After a decade of failing to agree on a strategy for promoting diamonds, the industry has only in the last two years created the Diamond Producers Association (DPA). The main aim that the DPA has set itself is attracting Millennial buyers aged 20-35. Although it's possible that the DPA will agree a move to raise its annual budget to $60 million from the current $6 million, the task ahead is incredibly complicated.
And then there is the issue of synthetic diamonds which some industry analysts forecast will take an increasing share of the diamond jewelry market. Given the many unknowns, it can come as little surprise that mining firms are somewhat nervous about investing huge sums when they really have no idea about what the market will look like 10-20 years down the road.
