For decades the concept of the junior miner in the diamond sector was akin to the startup company in the high-tech sector, Antwerp Facets says. Hitting the jackpot involved a successful exit strategy, which for the high-tech startup more often than not required first developing a technology and then being bought out by a larger company. For junior miners it meant initially finding the rough diamond resource, demonstrating its long-term financial potential, and then being bought out or becoming a joint venture partner with a major producer.
The classic junior miner was Aber Resources, which in late 1991 staked a large group of claims in the Lac de Gras region of Canada’s North West Territories. Aber at the time was cash-poor but geologically gifted. The discovery of a number of diamond pipes attracted the attention of global mining giant Rio Tinto, which helped finance the development of what would become, in Diavik, one of the world’s richest diamond mines. Aber, which was eventually bought out by the Harry Winston Corporation, received a 40 percent share in the Diavik mine.
The inherent problem faced by the classic junior miners is that diamond mines, while potentially very profitable, require a considerable lead-in period, where success is not guaranteed but expenses are. The Orapa mine in Botswana, for example, was on the surface and yet took four years to develop. Meanwhile, the Ekati mine in Canada took 10 years to find and seven years to prove and build, while the history of the Gahcho Kue project, also in Canada, owned by Mountain Province and De Beers Canada, has already lasted two decades and may only be in production at the end of 2012. Similarly, exploration work started at Stornoway Diamonds' Renard project in Canada in 1999, but it is unlikely to become a mine before 2013.
The odds for hitting pay dirt are very low indeed. Consider this: while around 6,500 kimberlites have been discovered since the 1800s, fewer than 50, or less than one percent, have become profitable mines.
But Aber is not the only success story. The largest of the smaller miners, but one that has grown quickly in recent years, while also attracting investor interest, is Petra Diamonds. It has based its strategy on acquiring mines, and has bought the majority holding in four former De Beers mines in South Africa and Tanzania, with the latest being the Finsch mine in South Africa, which it bought from De Beers for around $210 million earlier this year. In addition, it owns the Cullinan, Koffiefontein, and Kimberley underground mines in South Africa which it also bought from De Beers, as well as a 75-percent stake in the Williamson mine in Tanzania.
Petra operates eight mines in Africa, and said last month that it foresees production of two million carats this year, and annual production of four million carats by 2014 rising to five million carats by the end of 2019. The miner, the largest diamond producer on London's smaller Alternative Investment Market, said full-year revenue rose 24 percent for the year ending June 30, as higher rough diamond prices and fast-growing demand in Asia outweighed a decline in production.
According to Petra Diamonds CEO Johan Dippenaar, the firm's strategy is to buy mines that have been producing for many years and which have geological advantages and strong commercial feasibility with significant resources, and significant life spans. "The Finsch mine, for example, will help to balance and diversify our portfolio by adding an additional 1 million carats or more per annum," he told Antwerp Facets Online.
Then there is Gem Diamonds, whose most profitable venture is the Letšeng diamond mine in Lesotho. That, too, was a previously De Beers-operated venture. Gem Diamonds, like Petra, took a different path. Both manage their own marketing operations, which also is a departure from the route followed by classic junior miners, who generally would market their goods with the help of the major producers.
According to Royal Bank of Canada analyst Des Kilalea, diamond exploration as a rule is not something that smaller miners can be expected to undertake any more, but rather larger miners with deeper pockets. Since developing an underground mine is very expensive, many junior miners have, instead, opted for alluvial operations on the surface, where it is possible to bring a mine to production in less time and use up less financing. However, alluvial mining also requires not inconsiderable capital investment in large-scale earth moving operations and other costs.
The aim for junior and medium-size miners is to be able to produce the type of diamonds that are less susceptible to economic downturns and for which there is a continuing demand.
And that is what is happening at Gem Diamonds, which in June reported a 17 percent fall on the year in production for the first six months of 2011 and a seven-percent decrease in diamonds sold. Nonetheless, revenues soared by 84 percent, while the average price per carat almost doubled – up 98 percent to $1,759. The reason was rising rough diamond prices supported by very strong prices for large, high-quality, white and fancy colour diamonds.
Gem Diamonds’ Letšeng mine achieved a record average price per carat of $3,052 in the first half of this year, posting a 77 percent rise. The quality of its stones is seen in the fact that the miner sold 30 rough diamonds for more than $1 million. The mine produced 105 rough diamonds with a value of more than $20,000 per carat, and 295 rough diamonds weighing more than 10.8 carats.
Meanwhile, at Gem Diamonds’ Ellendale mine in Australia, although output was more than 30 percent lower, total sales from production inched down just 1 percent. The company agreed a 24.7-percent price rise as of April 1 for fancy yellow diamonds, which are sold to luxury jeweller Tiffany & Co. Fancy yellow diamonds from Ellendale recorded a record average price per carat of $4,045 in the first half of 2011, compared with $2,588 per carat for the same period of 2010.
Similarly, another junior miner, Firestone Diamonds last month announced that it had recovered some high-quality diamonds from its Liqhobong mine in Lesotho. The most outstanding rough stones included two white diamonds weighing 33 carats and eight carats, respectively. There were also two coloured diamonds. One was a nine-carat fancy vivid yellow and the other a 1.7-carat pink diamond.
The importance to junior diamond miners of the discovery of large, high-quality gems was seen this month when Rockwell Diamonds Inc. said that its Saxendrift mine produced a windfall production on August 2, with 373 carats recovered, representing around half of the mine's budgeted monthly production in a single day. The one-day output is the highest daily production ever achieved in Rockwell's five-year operating history. Among the stones recovered were four large stones weighing 180, 94, 43 and 34 carats.
Rockwell's competitive advantage in the diamond world is the regular production of large high-quality diamonds and although recoveries such as recently experienced at Saxendrift are rare they enhance the profitability of our mines," said Rockwell CEO James Campbell.
Meanwhile, in Canada, scores of exploration projects have been launched, with the two mines likely to come on stream in the coming years being Stornoway Diamond Corp's Renard project, set to be Quebec's first diamond mine. The Renard project illustrates the irony that lengthy development can actually provide junior miners with certain advantages.
In June, Stornoway reported that the latest diamond price estimates for diamond samples from the Renard 2 and 3 kimberlite pipes had soared 56 percent from the last estimate in September 2009 to $182 per carat. In addition, diamond samples from the Renard 4 kimberlite pipe jumped 49 percent to $112 per carat. Furthermore, there were "high" diamond price models of $236, $205 and $185 per carat for the Renard 2, 3 and 4 kimberlite pipes respectively.
As President and CEO Matt Manson said: "This comprehensive new valuation of the Renard bulk sample diamonds has confirmed the substantial increases in rough diamond prices of the last 18 months, brought about by sustained demand growth and tightening mine supply. The new price data are expected to have a very positive impact on the project's revenue profile and mining margin." He added that the firm's feasibility study, due to be ready in the third quarter, would "outline a project with a high production rate, high diamond price, and long mine life potential."
"Realistically speaking, the junior miners are only going to be able to play a small part in the diamond industry," Kilalea said. "De Beers and Alrosa produce 30-plus million carats each, while output from Rio Tinto and BHP Billiton together is another 10 million carats. The same principle applies to exploration; there isn't any real grassroots exploration going on because only the large firms like De Beers and Alrosa have the resources for it."
"I don't believe the smaller firms will be able to play a large role. They are really focusing on what they have, rather than looking for new deposits," he added.
