Is the era of great diamond mines over? Mining firms have spent, and continue to spend, tens of millions of dollars annually in the hunt for the next major diamond find. But could it be that the likes of an epic operation, such as the original Kimberley mine in South Africa or the enormous Jwaneng mine in Botswana, will never be seen again, Antwerp Facets asks and further offers the views expressed by RBC analyst Des Kilalea in his report at the 2009 Antwerp Diamond Symposium.
If the past decade is anything to go by, the prospects of another mother-lode find are far from certain. While new deposits are being discovered and developed, or existing mines expanded, they are only small or medium-sized operations. Even when companies release updated and improved resource estimates, the overall figures are low relative to global output.
RBC Capital Markets analyst Des Kilalea believes that over the next five years demand from China for diamonds will double to $1 billion, or 10-15 million carats. That alone is the equivalent of all of South Africa's production in 2008. "In addition, even if you assume only slow growth in diamond jewellery sales in the United States, you would need about another five million carats annually. In other words, five years from now, there is going to be a need for another 15-20 million carats every year.”
"Add to that declining production from South Africa, Botswana and Australia and it is difficult to see where the shortfall can come from. The Venetia mine in South Africa will decline to about 5.5 million carats annually from eight million, and Botswana will drop to about 30 million carats from 32 million. Mines in Canada and Botswana that are being developed now will come to about five to six million carats of production per annum. You can add in some alluvial production from the Democratic Republic of Congo (DRC) and other mines in West Africa and Brazil, but even all those factors when taken together are not going to make up the shortage in the future," he added.
As things stand at present, production is meeting market demand. In fact, even De Beers, the world's largest producer and historically the leading figure in the diamond business, appears to be in no hurry to expand production at its mines. In Botswana, where it jointly owns the national diamond mining company Debswana, it is reportedly operating at just 80 percent of capacity.
Kilalea says De Beers has the capacity to produce around 45 million carats annually for the next 10-12 years. However, according to some analysts, it might keep annual production considerably lower in a bid to preserve its resources and take advantage of the much higher prices that are forecast as demand outstrips supply.
But this is a short to medium term strategy. Over the longer term the industry will need a consistent and significant increase in the number of rough diamonds mined. As things appear right now, this is not a sure thing. "The dynamics of the diamond industry can only be affected by changes in Botswana, Russia and Canada," said Kilalea.
"I believe Russian production will fall because its mines are old, and significant amounts of money are needed for development. In Canada, output will decline, albeit not straight away, due to Diavik having to go underground. Canada is never going to get back to its peak production of a couple of years ago of eight million carats annually," he stated.
Kilalea said exploration dollars are concentrated in a number of countries and areas. In addition to the major producer states of Canada, Botswana, Russia, South Africa, and Angola, money is also going into the Democratic Republic of Congo (DRC), a number of other countries in East and West Africa, Finland, Lesotho, and South America.
"Despite all this investment, nothing is assured, however, because BHP Billiton spent $50 million in Angola along with Petra Diamonds with no result. Similarly, the DRC has absorbed millions of dollars of exploration investment," Kilalea stated.
Another factor for diamond miners is the difficulty in local conditions. Kilalea says that mining in Botswana costs around just $10-$15 per tonne of ore, while that figure rises to $45-$50 in Angola and the DRC, and shoots up to $85-$110 in Canada's frozen Northwest Territories. "Would the Venetia mine in South Africa have been economic to develop in the Northwest Territories?"
Attaining financing for exploration is a particularly difficult subject for two main reasons. Firstly, publicly traded diamond companies are a relatively unusual phenomenon, and as a result neither institutional nor individual investors searching for investment opportunities have extensive knowledge or interest in what these diamond companies offer. And that problem has been further compounded by the financial crisis that started 18 months ago. As a result, investors, many of whom saw large parts of their holdings wiped out, are even less willing to inject their money into a relatively unknown, and therefore apparently risky, field.
Another issue is that the diamond industry is a relatively small one, and that tends to deter investors, Kilalea said. Diamond production, until the financial crisis of 2008, was around $13 billion annually compared with oil at $2.2 trillion, copper at $120 billion, gold at $80 billion, and aluminium with production valued at $70 billion. But, he points out, diamonds are one of the most profitable mining sectors with margins sometimes as high as 80 percent.
Despite widespread investor knowledge of the diamond industry, however, the economic recovery of the last year has not passed by diamond companies. U.S.-listed jeweller Harry Winston Diamond Corp, which has a 40-percent stake in the Diavik mine and whose shares are traded on the New York Stock Exchange, have risen by more than 200 per cent in the past year. Meanwhile, London-listed mining and exploration companies Gem Diamonds and Petra Diamonds are up 130 percent and 135 percent, respectively, for the period.
But these are small players in the global diamond industry. In 2008, De Beers produced around 50 million carats worth $5.5-$6 billion, while Alrosa's output was 36 million carats worth $2.5 billion. Rio Tinto produced 25 million carats valued at $1.1 billion, and even BHP Billiton's output was 3.2 million carats worth $440 million.
Such figures stand in sharp contrast with smaller explorers such as Petra Diamonds with an output of 1.1 million carats in 2008, Gem Diamonds with 300,000 carats, and Trans Hex with 200,000 carats. Petra Diamonds' output, in financial terms, came to $150 million, while the two other miners both earned $100 million from their production.
Although deposits are being explored, the amounts of diamonds they are projected to produce cannot make up for the loss from the world's major mines as their output depletes. Among the more promising prospects, Kilalea mentions Canada's Gahcho Kue whose development has taken more than 10 years so far and may start producing at the end of 2012. Even then, he said, output would be just three million carats annually for 15 years.
Then, there is the Renard mine, owned by Stornoway Diamonds and Soquem where work started in 1999 and a mine is unlikely to be up and running before 2013. Annual output is estimated to be just one million carats annually. The Star Project, owned by Shore Gold, has seen $300 million invested so far with production still several years away with the possibility of annual production of 1-2 million carats.
Similarly, the AK6 mine in Botswana may see a relatively small output of 1 million carats or less for 12 years, while the Lace mine in South Africa could produce 500,000 carats annually from 2012 onwards.
"Within a decade, demand from China could grow by 20 percent while demand from the United States may only grow by 4-5 percent," Kilalea said. "If that is the case, then the amount of diamond jewellery being bought by China will be equal to that of America. Some analysts believe it could happen in five years which seems too soon to me. I believe that this will be the situation in 10 years."
