Diamond sector enters 2000 on bullish note ( Part1)

Underlying market sentiment for the diamond mining sector, from a sales perspective, remains positive going into the new year.

De Beers Consolidated Mines (dbrsy-q) announced record diamond sales in 1999 of US$5.24 billion, 57% higher than last year’s US$3.34 billion. Sales in the second half of 1999 were US$2.79 billion, up from US$2.45 billion in the first half of the year and 70% higher than in the second half of 1998. Through its London-based Central Selling Organization (CSO), De Beers controls up to 70% of the world’s trade in rough (uncut) diamonds.

De Beers attributes the dramatic turnaround in 1999 to strong U.S. retail sales, some recovery in the Asian and Japan markets, and steady growth in Europe. In 1998, the CSO reduced sales to the market in order to ease the pressure of excessive stock in the cutting centres and allow the industry to adjust to the economic crisis affecting Southeast Asia and Japan.

George Burne, managing director of Vancouver-based De Beers Canada, told The Northern Miner that the December 1998 site was extremely gloomy, but then Christmas sales proved better than expected, particularly in the U.S., and, even in the Far East. Returns were low, so customers came to the January 1999 site looking for goods.

“We sold a modest January site and then we were off to the races,” said Burne. “People were looking for goods to replace their inventories; they looked around and they couldn’t find them.” Burne said production from Angola was cut dramatically because of the ongoing civil war, whereas Russia stopped pushing goods on to the market outside the CSO. “Prices rose and suddenly the market was hungry for rough,” said Burne. “The only game in town was the CSO.” He added that demand has been good across the board.

De Beers’ 1999 sales have been bolstered by its millennium marketing campaigns, which began in the second half of the year and will continue throughout 2000.

Burne was optimistic about the new year: “I think it’s going to be a wonderful Christmas season, a lot of merchandise is going to go, the returns in January will be very small and people will be looking for goods again. It certainly looking promising.”

According to Argyle Diamonds 1999 Industry Review: “Total world mine production will increase by 2% per annum from 1998 through to 2007. Supply increases from Canada and the Orapa mine expansion in Botswana will only be partially offset by reduced production from Argyle [the mine in Western Australia] and the limited outlook for African production due to ongoing civil war.”

The publication estimates the total value of 1999 world mine production to be US$7 billion. It further states that “production from mines with an average output of below US$20 per carat accounted for over 50% of the volume of world mine supply in 1998. It is estimated that by 2007, this category will only represent 35% of total mine supply. This is largely due to the decline in production from Argyle when the transition to underground mining takes place.”

The Argyle mine is managed by Argyle Diamond Mines, owned 56.8% by Rio Tinto (rtp-n), 38.2% by Australian-listed Ashton Mining (ash) and 5% by Western Australia Diamond Trust. In 1998, Argyle produced 40.8 million carats from the treatment of 11.2 million tonnes of lamproite ore grading 3.5 carats per tonne from the AK1 pipe, plus 6.3 million tonnes of alluvial ore grading 0.3 carat per tonne. Argyle’s diamonds are readily absorbed into the Indian rough market. More than 90% of Argyle’s production is processed in India. The Argyle product — small, coloured and labour-intensive — fits well with India’s processing capability, which transforms it into affordable diamonds.

India imported 137 million carats in 1998, up 19% from 1997 levels of 115 million carats and 46% higher than the 1996 figure of 94 million carats. For the period up to July 1999, rough imports into India were 102 million carats, up 30% from the corresponding period in 1998.

During the first nine months of 1999, the Argyle mine produced 22.3 million carats from 7 million tonnes of AK1 ore and 4.4 million tonnes of alluvial, compared with year-ago output of 31.8 million carats from 8.5 million tonnes of AK1 and 5.1 million tonnes of alluvial. The lower production reflects the lowering of planned throughput rates and the mining of lower-grade ore. Argyle is pushing back the western ridge of its open pit to expose additional ore at depth. Argyle’s production at the end of 1999 was expected to be 30 million carats. Development work to extend the open pit will limit access to some of the higher-grade southern portion of the pit during 2000 and 2001; this is expected to lower production a further 10-20% during these years.

Argyle diamond sales for the first half of 1999 totalled US$213.5 million, compared with US$229.2 million in the corresponding period of 1998. Sales during the third quarter were 34% higher than in the corresponding period of 1998. Argyle’s diamond sales in 1998 totalled US$398 million.

Argyle has developed a market for a brand of rare and pink diamonds. Argyle retains all its pink diamonds, which are either cut and polished in Perth or toll-processed in offshore centres. The pink stones represent an extremely small proportion of the total production from the Argyle mine. In 1998, fewer than 10,000 carats of pink-polished were produced, from the smallest and lightest colours to special and rare pink diamonds larger than 1 carat. The 15th annual Argyle pink tender was held in September 1999, with 46 stones sold to 13 customers. The 1999 tender set new standards for size, with five stones weighing more than 2 carats, the largest being a 2.76-carat, oval-shaped pink diamond.

At the end of March 1999, reserves for the AK1 open pit at the Argyle mine had increased by 22.1 million tonnes to 71.6 million tonnes grading 2.7 carats per tonne, extending the pit’s life into 2006 at current mining and processing rates. Studies are considering various underground mining options, and a $2.8-million program of deep drilling has begun. The first four holes have encountered diamond-bearing lamproite in a new area behind the Razor Ridge fault in the southern end of the AK1 pipe. Preliminary microdiamond analysis indicates grades are in line with the orebody. Ashton’s chief executive officer, Douglas Bailey, stated: “The likelihood of [their being] a different shape to the lamproite pipe from that previously envisaged further improves the potential for large-scale bulk mining, and all underground options will be re-examined.” The measured resource of AK1 totals 170.7 million tonnes grading 3 carats per tonne.

Ekati

Closer to home, 1999 marked the first full year of production from Ekati, Canada’s first-ever diamond mine, 300 km northeast of Yellowknife in the Northwest Territories. Production has been well-received by the market. Stones have commanded an average of US$165 per carat, well above the US$130-per-carat valuation that was predicted for the Panda pipe, based on the bulk-sampling stage. Currently, all production is coming from the Panda pipe, which will be mined by open-pit methods for five years.

BHP Diamonds, a subsidiary of Australia’s Broken Hill Proprietary (bhp-n), is the operator and 51%-owner of Ekati. Dia Met Minerals (dmm-t) owns a 29% stake, with the remaining 20% split between Dia Met founder Charles Fipke and his former prospecting partner, Stewart Blusson.

During a December 1999 briefing to analysts, Paul Anderson, managing director and CEO of BHP, said the increase in carat values partly reflects a more buoyant diamond market. But he added: “The biggest impact we are finding is that we have a better quality of stone and a higher mix of larger stones than we had anticipated originally, so we are getting more carats per individual stone and better — particularly colour — quality. They cut very well [and] the market acceptance is very high.”

The Ekati mine was brought into production in October 1998 at a capital cost of $900 million.

During the first 11 months of 1999, Ekati produced 2.4 million carats at an average of 218,000 carats per month. Large diamonds have been, and continue to be, recovered, including a 69-carat stone earlier this year and a 47-carat in December 1998. Over the 9-month period ended Oct. 31, 1999, Ekati sold just under 1.8 million carats for US$289 million — an average of US$165 per carat. Analysts John Lydall and Kerry Smith of National Bank Financial reported that mine operating costs averaged US$69 per carat during the first six months of 1999.

Earlier this year, De Beers secured an agreement with BHP to buy 35% of the run-of-mine production from Ekati for three years.

BHP realized a profit of about $75 million from diamond sales for its half-year ended Nov. 30, 1999, whereas Dia Met reported net earnings of $30.5 million (or $1.01 per share) on revenue of $78.2 million for the 9-month period ended Oct. 31.

Under Ekati’s current mine plan, five kimberlite pipes — Panda, Misery, Koala, Sable and Fox — are to be mined by open-pit methods, followed, in the case of Panda and Koala, by underground mining. The projected mine life is 17 years. The Panda, Koala and Fox pipes are near the main processing plant, whereas Sable lies 17 km to the north and Misery, 29 km to the south. All five pipes lie under small shallow lakes that vary in depth from 12 to 29 metres. The next pipe to be mined is Misery, starting in 2001, followed by Koala later that year.

An estimated 78 million tonnes of ore (and 508 million tonnes of waste rock) will be mined over the mine life; of that amount, 85% is defined as proven and probable. Based on the 1997 feasibility study, the diamonds range in value from US$26 per carat for the Misery pipe to US$130 for Panda, with an average of US$84 per carat for all five pipes. Combined, the pipes contain proven and probable reserves of about 65.9 million tonnes grading 1.09 carats per tonne.

The mine plan is described as “somewhat dynamic,” based on exploration results. It has been modified in order to replace the Leslie pipe with the more economic Sable. With 121 kimberlite pipes discovered to date on the Ekati property, including the outlying Buffer zone claims, the owners are confident that ongoing exploration will extend the mine life beyond 25 years.

During the 1999 spring and summer exploration drilling programs, BHP discovered 14 new kimberlite pipes. Four of the new discoveries were made on the Core group of claims, where the total number of kimberlite pipes now stands at 85. The other 10 discoveries are in the outlying Buffer zone claims, home to 36 known pipes.

One of the Buffer zone discoveries, the Lynx pipe, yielded a significant number of micros. An aggregate 424.7-kg sample collected from two drill holes returned 69 macros and 275 micros weighing a total of 1.656 carats. (A macro is defined as measuring greater than 0.5 mm in at least one dimension.) The largest recovered stone was a transparent brown octahedral weighing 1.43 carats. The Lynx pipe lies under a small lake 2 km southwest of the Misery pipe.

The Buffer zone block, which surrounds the central Core group of claims, is held 51% by BHP, 31.2% by Archon Minerals (acs-v), 10% by Fipke and 7.8% by Dia Met.

Another kimberlite discovery in the Buffer zone, 99A, yielded 39 macros and 266 micros weighing 0.239 carat from a 191-kg composite sample of core. The three largest stones recovered weighed 0.1, 0.04 and 0.03 carat.

In addition, BHP bulk-sampled the Phoenix (Core claims), Gazelle (Buffer claims) and Piranha kimberlite pipes by large-diameter, reverse-circulation drilling. The Phoenix, estimated to comprise 0.6 ha, is a satellite pipe of the Point Lake kimberlite — the first pipe discovered by the joint venture, back in 1991. A 106.1-tonne sample of Phoenix yielded 149.22 carats exceeding 1 mm in size for an implied grade of 1.41 carats per tonne. The diamonds were valued in Antwerp, Belgium, at US$24.78 per carat. By comparison, the Point Lake pipe yielded grades of about 0.6 carat per tonne, with diamond values of less than US$40 per carat.

The Gazelle pipe covers about 2 ha. A parcel of stones weighing 141.38 carats was recovered from a 240.7-tonne sample for an indicated grade of 0.59 carat per tonne. The stones are worth an estimated US$15.12 per carat.

The smaller Piranha, or A-841, pipe covers a surface area of 0.4 ha and straddles the property boundary of the Buffer claims and the neighbouring Diavik project. About 70% of the pipe is believed to lie within the Buffer claims. An 84.7-tonne drill sample returned 203.44 carats of diamonds, giving a grade of 2.33 carats per tonne with an average value of US$29.72.

Archon Minerals is Stewart Blusson’s exploration vehicle. Last summer, the company collected geophysical data in the Lac de Gras area using an enhanced, high-resolution airborne technique. The targeted area includes properties where Archon holds farm-in rights, and the company reports its has identified several potential anomalies.

Aber

The past year proved disappointing for Aber Resources (abz-t). The company spent the better part of the year embroiled in a bitter legal dispute with Winspear Resources (wsp-v), its partner at the Camsell Lake property, 220 km northeast of Yellowknife, N.W.T. Winspear, the operator and 67.76%-owner of the NW Snap Lake diamond project, claims that Aber had elected not to participate in 1999’s $12-million exploration program by failing to provide written notice, and that its 32.24% interest would therefore be reduced to 16%. Aber has stated that it verbally informed Winspear on numerous occasions of its intention to pay its share of the costs. Litigation between the two has yet to be resolved.

In September, Aber announced the appointment of Robert Gannicott as president and John Lamacraft as chairman, replacing Ken Hanna and John Parker, respectively. Hanna had been the bearer of bad news regarding the completion dates for the final feasibility study for the Diavik project, culminating with the release of a study in August that stunned the market.

Situated 30 km southeast of Ekati, the Diavik project is 60%-owned by Diavik Diamond Mines, a subsidiary of London-based Rio Tinto (rtp-n), and 40%-owned by Aber.

The feasibility study prepared by Rio Tinto indicates project construction will take three years to complete, rather than two years as previously thought; the additional year is due to a longer-than-expected period of regulatory permitting and construction related to the water-retention dykes. This production can start no sooner than the first half of 2003.

Capital costs are now pegged at $1.28 billion — some $408 million higher than prefeasibility estimates. The price tag swells to $1.6 billion after factoring in an additional $260 million for construction of the A-418 and A-21 dykes in 2006-2010, plus $48 million in 2014-15 for underground development. Operating costs over the first 10 years are now estimated to be $85 per tonne, versus $66 per tonne in the prefeasibility report.

The project plan calls for construction of infrastructure in 2000, construction of a water retention dyke around the A-154 South and North pipes in 2001 and 2002, dewatering and overburden removal in the second half of 2002 and startup in the first half of 2003. This plan is contingent on receipt of all necessary permits and licences, plus a go-ahead decision by Rio Tinto.

The proposed mine will require the development of four kimberlite pipes:

n the A-154 South and A-154 North pipes, found 150 metres apart;

n the A-418 pipe, approximately 1 km to the southwest; and

n the A-21 pipe, 4 km farther to the southwest.

Together, the pipes contain a diluted minable reserve of 101.5 million carats in 25.6 million tonnes averaging 3.96 carats per tonne to a depth of 420 metres. An additional inferred resource totals 12.5 million tonnes grading 2.38 carats, equivalent to 29.8 million carats.

Higher value

Based on valuations conducted in June 1998, the stones from the four pipes are worth an average of US$53 per carat. The diamonds were recently reassessed in the Antwerp market and found to have risen in value by about 10%.

The four pipes lie immediately offshore of East Island in Lac de Gras. Diavik proposes to dam off the pipes with water retention dykes and mine, by open-pit methods, all four pipes, followed by underground mining on A-154 South and A-418 in the latter part of the mine’s life. One dyke will surround the A-154 South and North pipes; another will surround A-418; and a third will be built around A-21. In addition, one small dyke will be placed across the end of the North Inlet so that the area can be used as part of the water containment system.

Site facilities, including a processing plant, will be constructed on 20-sq.-km East Island.

The feasibility study calls for annual production of 1.5 million tonnes, from which will be extracted 6.3-7 million carats. Open-pit mining on the A-154 pipes is to begin 2003, followed by the A-418 pipe in 2010 and the A-21 pipe in 2013. The projected mine life is 18 years. The three open pits are to produce 250 million tonnes of waste rock.

Further delineation of the A-154 South pipe in 1998 served to boost the grade in the upper 90 metres of the pipe (where the resource is 3.2 million tonnes) to 5.2 from 4.4 carats at US$63 per carat. The upper portion of the A-418 pipe contains 1.4 million tonnes at an enhanced grade of 5.6 carats, worth US$73 per carat.

Earlier this summer, the Canadian government completed a comprehensive review of the project. The review states that “with the implementation of appropriate mitigation measures, the Diavik diamond project is not likely to cause significant adverse effects.” In November 1999, the project was given the green light by Environment Minister David Anderson to proceed through the final stages of permitting. Anderson concurred with the review and concluded that public concerns do not warrant further environmental assessment of this project by a review panel.

However, the Canadian Arctic Resources Committee (CARC) and the North Slave Metis Alliance have launched a legal challenge in the Federal Court of Canada seeking a judicial review of the permitting process.

As part of the final permitting process, public hearings on Diavik’s application for a class A water licence were held mid-December in Yellowknife. The Globe and Mail reported that a lawyer representing about 4,000 members of the Dogrib First Nation asked that the issuing of the water licence be delayed until there is further analysis of Diavik’s mining plans. The decision of the Northwest Territories Water Board is anticipated by mid-to-late January.

Since 1992, 53 kimberlites have been discovered on the Diavik area properties. Of this total, 26 were diamondiferous. Aber holds interests varying from 10% to 44.4% in 10 separate property blocks that cover 3,088 sq. km in the Diavik area. This past year, exploration drilling was confined to the A-180 pipe, which was discovered in the spring of 1998 on the main block, 25 km northeast of the Diavik camp, near Lac de Sauvage. The pipe yielded a previously reported 29 macros and 163 micros from 294.8 kg of drill core. No additional results have been reported.

Tiffany

On the marketing front, upscale jeweler Tiffany & Co. (tif-n) acquired a 14.9% stake in Aber by investing $104 million in the form of a private placement consisting of 8 million shares priced at $13 each. Tiffany has agreed to buy a minimum of US$50 million worth of diamonds annually over 10 years.

In December 1999, Franco-Nevada Mining (fn-t) announced it had acquired a further 1 million shares of Aber through the TSE for $8.3 million, boosting its holdings in the company to 6.6 million shares, or 12.4%.

Elsewhere in the Lac de Gras area, Rio Tinto subsidiary Kennecott Canada announced the discovery of the EG-5 kimberlite in shallow water off the lake’s southern shore. The Lac de Gras block is a 60-40 joint venture between Kennecott and SouthernEra Resources (suf-t).

A preliminary 129.4-kg sample of core from the third hole yielded 1 macro and 27 micros. The first two holes were lost. A fourth hole pulled 183 metres of kimberlite, but micro results from more than 600 kg of sample were never released.

At the southwestern end of Lac de Gras, Kennecott hit a narrow, land-based intrusive kimberlite body on the DHK claim block. A 2.1-metre (true width) interval of volcaniclastic kimberlite was encountered 150 metres northeast of the DD-42 kimberlite body. A 7-kg sample returned six micros.

Kennecott can earn a 51% interest in the DHK block, leaving SouthernEra with 25% and DHK Resources with the remainder. DHK Resources is owned equally by Dentonia Resources (dta-v), Horseshoe Gold Mining (hsx-v) and Kettle River Resources (krr-t).

Snap Lake

The delay at Diavik has some analysts speculating that the NW Snap Lake project on the Camsell Lake property, 100 km to the south, could become Canada’s second diamond mine, with production conceivable by 2002. Winspear is embarking on a $20-million underground program of exploration and development of the Snap Lake dyke, the objective being to confirm the quality and size distribution of the diamonds at depth.

The NW dyke subcrops on the northwestern peninsula of Snap Lake and dips 11-15 to the east beneath the lake. Drilling indicates the dyke extends 2 km in a northerly direction and 2.5 km downdip, with an average thickness of 2.5 metres.

Surface samples collected from two pits set 300 metres apart on the subcropping portion of the dyke yielded 10,708 carats of diamonds from 5,996 tonnes of kimberlite, for an implied grade of 1.79 carats per tonne. The diamonds were valued at US$104.96 per carat.

MRDI Canada used the micro results from 189 holes drilled into the dyke, together with the bulk-sampling results, to establish an overall grade for diamonds above 1.18 mm. MRDI assumed there was a constant stone size distribution throughout the NW dyke.

The NW Snap Lake dyke is modeled to contain a total resource of 21.3 million tonnes grading 1.97 carats per tonne at an average thickness of 2.4 metres, equivalent to 41.9 million carats. For that part of the dyke that exceeds 2 metres of thickness, the indicated resource is estimated at 8.3 million tonnes grading 1.97 carats at an average width of 3.1 metres.

Last fall, Winspear drilled a further eight holes that confirmed the dyke continues with a thickness greater than 3 metres at least 600 metres to the northeast, beyond previous drill limits. The dyke thins to the northwest, east, southwest and south.

Much of the work in 2000 will involve driving a 1,200-metre-long decline on the NW dyke, some 130-140 metres beneath Snap Lake, in order to collect up to 20,000 tonnes of kimberlite from the downdip extent of the dyke. Of that total, 6,000 tonnes representing three 2,000-tonne bulk samples will be processed on site in a newly acquired dense-media-separation plant. Winspear was recently granted a Class B water licence that allows it to proceed with the underground program.

A scoping study by MRDI shows economic potential for an open-pit and underground mining operation, with a minimum mine life of 10 years. The study was based on the mining of 8.2 million tonnes of kimberlite with a contained diamond value of US$170 per tonne ($251 per tonne). MRDI assumed a 10% diluted grade of 1.62 carats per tonne.

Initial production would begin from an open pit on the northwestern peninsula of Snap Lake at the rate of 1,000 tonnes per day for a period of two years. During that time, about 700,000 tonnes of kimberlite would be mined and processed.

Underground mine development would begin during the mining of the open pit so that, in the last six months of the pit’s life, production from underground would be available at an increasing rate. The scoping study assumed that underground production would reach 3,000 tonnes per day in the fourth year.

According to preliminary estimates, the capital cost for the combined operation is US$161 million ($241 million), whereas the average operating cost is pegged at US$47.68 per tonne ($71.52 per tonne) over the life of the mine. The project carries a 44.1% internal rate-of-return and a payback of 3.6 years.

Diamondex Resources (dsp-v) was spun off of Winspear in 1999. All of the latter’s exploration properties, except Camsell Lake, were transferred to the new company. Diamondex currently holds varying interests in 10 properties covering 580,000 acres in the Northwest Territories.

A 1,900-metre drill program tested 14 targets on the Hilltop property in the early part of the year, but no kimberlite was intersected. The 323,727-acre project adjoins the southwestern corner of the Camsell Lake property and includes 90,161 acres of scattered claim blocks comprising the Cache property, in which SouthernEra and Vaaldiam Resources (vrl-v) together hold a 20% interest.

Diamondex collected 634 till samples from the Hilltop property and an additional 229 samples from the Cache property during the summer. The company concentrated its efforts on an anomalous area where one micro was recovered in 1998. Sampling has revealed a southwesterly-trending 7-by-1.5-km area of elevated indicator mineral counts on the Hilltop property. A 10-hole program of 1,600 metres is planned for early 2000.

Back Lake

SouthernEra discovered the likely source of diamond-bearing kimberlite boulders found near the shore of Munn Lake at the Back Lake project, 50 km northeast of Snap Lake. The Yuryi kimberlite float material was discovered in the summer of 1997. A 581.3-kg sample of the boulder material yielded 62 macros and 164 micros.

During last spring’s drilling, Kennecott encountered a 0.25-to-12-metre-thick kimberlite sill in an area associated with a lake-bottom depression. A 42-kg composite sample returned 2 macros and 12 micros.

Partners Island-Arc Resources (iar-v) and Kalahari Resources (kla-v) elected to fund a follow-up, land-based 14-hole program designed to test the structure along strike. The program confirmed that the sill extends a further 950 metres southeast of Munn Lake for an overall strike length of 1.3 km. The land-based portion of the sill ranges in thickness from 0.06 to 1.86 metres. SouthernEra no longer considers the sill a viable target, owing to its narrow thickness. Exploration of other targets at Back Lake will continue this spring.

The Back Lake project is held 70% by SouthernEra; the remaining interest is carried, with Kalahari holding 19.38% and Island-Arc owning 10.62%. Kalahari and Island-Arc can earn an additional joint 10% working interest by spending $750,000 in exploration. To date, the two have earned a further joint 5%.

At the Yamba Lake joint venture, 46 km north of the Ekati mine, SouthernEra discovered a new narrow kimberlite body, dubbed S-141.

The S-141 discovery hole was collared at minus 45 into an elongated land-based magnetic low, 3 km southeast of the Ptarmigan pipe. A 14.7-metre-long interval of kimberlite was intersected at a down-hole depth of 62-76.7 metres. One microdiamond was recovered from 40.5 kg of kimberlite sample.

SouthernEra holds a 51% interest in the Yamba Lake joint venture, with Tanqueray Resources (tqy-v) and Mill City International (miy-v) each holding 19%; Cypango Ventures (cav-v) owns the remaining 11%.

Previous work has identified six kimberlite pipes, including Ptarmigan and T-10. SouthernEra re-drilled Ptarmigan with one hole, and the T-10 pipe, with three. No diamonds were recovered from a 61.8-kg sample of the Ptarmigan pipe, whereas T-10 yielded 1 macro and 2 micros from 86.2 kg of kimberlite. This correlates poorly with past recoveries of 6 macros and 62 micros from 83.6 kg, as reported by Cypango in 1997.

SouthernEra plans to drill-test several high-priority geophysical targets at Yamba Lake this spring.