In January 2009, on the background of the crisis which plagued the diamond market, the contract announced between OAO Arkhangelskgeologodobycha (further AGD, for short) and FORACO of France for drilling big-diameter wells on the Kimberlite Pipe named after V. Grib in the Arkhangelsk Region (the Verkhotina Diamond Field) did not make a big splash. According to the data posted on the web-site of LUKOIL which owns 100% of AGD’s stock, this contract worth almost 10.5 million euros was needed to “specify the quantity and quality of this deposit.” The operation plan made provisions for drilling 11 wells 24 inches in diameter to a depth of 600 meters from April till October 2009 within the area of the earlier pilot wells drilled for core samples. Last summer AGD was reported to gear up for commissioning a plant for dressing ore recovered from the new wells. By the end of 2009 this enterprise produced 2000 carats of diamonds.
The conclusion of the contract between AGD and FORACO coincided with De Beers’ final refusal from their claims for the Verkhotina Diamond Field. In April 2008, after long-term legal proceedings LUKOIL entered into the agreement to sell 49.99% of AGD’s authorized capital to De Beers’ subsidiary, Archangel Diamond Corporation (ADC) of Canada, for $225 million with an initial payment of $100 million. But in December ADC said that this transaction will be cancelled because of the financial crisis and also in the absence of approval from the Russian authorities.
Six months before the contract between AGD and FORACO, ALROSA’s management said that the owner of the Verkhotina Diamond Field “was doomed to friendship” with Russia’s diamond mining leader since all the economically advantageous solutions related to the development of the Arkhangelsk diamondiferous province had been developed and applied by ALROSA’s subsidiary, OAO Severalmaz, engaged in mining operations at the Mikhail Lomonosov Diamond Field. Meanwhile, Severalmaz developing the Lomonosov Field as an open-pit mine was steadily in the red during all its business life. The open pit mining method brought to perfection by ALROSA on the Yakut kimberlite pipes was introduced on the Lomonosov Diamond Field after unsuccessful experiments with hydraulic borehole mining (at the Snegurochka and Lomonosov Diamond Pipes) and with drilling big-diameter wells (at the Karpinsky-1 Diamond Pipe). The attempt to transfer hydrowashout technologies and big-diameter-well drilling - earlier applied in the USSR at the Kursk Magnetic Anomaly and in Donbass accordingly - to the Lomonosov Diamond Field was exactly dictated by economic feasibility reasons since theoretically it could provide fast results without costly works to waterproof the site or construct expensive quarries and the more so mines, and besides it permitted an easy way of solving environmental problems.
Experts said the failure of hydrowashout was due to the properties of the Arkhangelsk kimberlite: unlike the friable and water-encroached iron ore of the Kursk Magnetic Anomaly it would not be washed out. As for drilling big-diameter wells it was probably the case of a successful idea ruined by amateurish fulfillment. The drilling machines made by Germany’s WIRTH (type L35) and capable to bore wells 6 meters in diameter were though to be suitable for the task by the authors of the project because such machines were used in Donbass since the mid-1980s and after the breakdown of the USSR remained in Ukraine, except for one, which turned out to be in the Rostov Region and was not in the best technical condition. This machine was jerry-adapted to operate in the environment of the Lomonosov Diamond Field and then installed on the Karpinsky-1 Diamond Pipe. After several successive contingencies the experiment aimed at extracting Arkhangelsk diamonds by way of big-diameter wells was terminated. It is necessary to note, that neither the authors of this project, nor its executors had any previous experience of similar work.
FORACO is the world leader in the field of drilling services to the mining sector. All the major diamond-mining companies (De Beers, BHP Billiton, Rio Tinto) collaborate with it, except ALROSA. So attracting FORACO to the V. Grib Diamond Pipe may have not only tactical consequences bringing about a more exact specification of the deposit. If it will be possible to find comprehensible solutions for developing the diamond pipe by way of big-diameter wells – and FORACO’s experience and technological level makes the probability of such an outcome high - AGD may quite become an efficient diamond-mining company capable in the long term to outstrip the “diamond redoubts” of Rio Tinto and BHP Billiton.
Late in 2009, apparently proceeding from the results of FORACO’s work the AGD management announced that the characteristics of the Grib Diamond Deposit had been significantly corrected. Diamond content is now estimated at no less than 1.0 carat per tonne, while earlier in the open sources the figure was 0.69 carats per tonne. The average cost of Verkhotina diamonds is currently estimated at $80 per carat. However, a source in Gokhran, where now a parcel of AGD-supplied diamonds is being evaluated, says that they are valued at no less than $120 per carat in current prices. The diamond field reserves are estimated at about $6 billion. Thus, the Grib Diamond Pipe is now the world's largest prospected primary diamond deposit where so far no mining operations have been commenced.
Unlike traditional diamond miners, AGD today does not have any problems with financing which makes it possible to build up infrastructure on the Verkhotina Diamond Field at short notice. The company has already solved the problems of power supply and transportation and built a shift camp. In 2010, AGD’s total investments to develop the Verkhotina Deposit will exceed $200 million. Of course, this success is due to the relationship between AGD and LUKOIL, the biggest Russian private oil company, whose EBITDA in 2009 ($14.1 billion) was much higher than the total value of the global diamond market. LUKOIL in its turn has a strategic partner which is Texas ConocoPhillips (owning 20% of LUKOIL’s stock) holding the 7th place in Fortune Global 500, the rating of major global companies. The “roped team” of ALROSA-Severalmaz or even Gokhran-ALROSA-Severalmaz looks skimpy, at least financially, in comparison with such a partnership.
The partnership with ConocoPhillips may largely explain LUKOIL’s successful expansion in Western Africa (Cote d'Ivoire and Ghana) attained in cooperation with Texas-based Vanco Energy. So far, mining African diamonds stays outside of LUKOIL’s interests, but having such influential American partners and significant and free financial flows may well push the company in this direction, especially taking into account the fundamental factor of the world’s depleting rough diamond reserves and a possible prospect of rush demand for rough diamonds. And a fast recovery of the diamond market in 2010 may serve as an additional inducement. While ALROSA is abandoning some of its African projects and complaining about unprofitability of others, LUKOIL could well add several African diamond “affiliates” to AGD. Besides, LUKOIL’s field of interests includes the diamond-rich Venezuela.
Thus, there are fair prerequisites for establishing an AGD-based Russian diamond-mining company of a world level or at least comparable by its capacity with the diamond redoubts of Rio Tinto and BHP Billiton. Unlike ALROSA, it will not be propped up by state support, but rely on the transnational capital of the private oil giants and initially possess a flexible and modern form of a public company. While the conservative galleons of the diamond market are painfully slow in drifting towards organizational and structural transformations imposed by increased competition, a vigorous and well armed corsair may appear on their horizon.
After the years-long legal disputes around Verkhotina ended with final transition of the rights for the diamond deposit to AGD, the media was repeatedly asking to whom and when this deposit will be sold. It is obvious, that today there are no real buyers among the traditional diamond miners. And it may well happen that there will be no need in them tomorrow.
Sergey Goryainov, Rough&Polished
