The Diavik mine in Canada’s Far North has consistently exceeded design expectations and delivered better-than-expected diamond values during the ramp-up to full production.
For 2004, the mine is on track to produce 7.5 million carats of rough diamonds.
“Diavik is near the bottom of the cost curve and has a long life and options for growth and development,” says Keith Johnson, head of
Diavik was constructed at a cost of just under US$900 million and placed into production at the start of 2003, based on a 20-year plan to mine four kimberlite pipes. The pipes — A-154 South, A-154 North, A-418 and A-21 — are just offshore in the shallow waters of Lac de Gras in the Northwest Territories, 300 km northeast of Yellowknife and 30 km southeast of the Ekati diamond mine.
Diavik was originally expected to produce 6-7 million carats in 2004. Each of the four pipes was to be mined sequentially by open-pit methods, followed by underground mining on A-154 South and A-418 in the latter part of the project’s life. A series of water-retaining dykes will be built from the shore around each kimberlite.
The feasibility-stage mine plan was based on kimberlite reserves of 27.1 million tonnes grading 3.9 carats per tonne, or 107 million carats valued, on average, at US$62 apiece. A-154 South, which contains more than half the overall reserves, will dominate production for the first 10 years. The A-154 pit incorporates both the A-154 South and A-154 North pipes, as they are only 100 metres apart.
In 2003, the first ramp-up year of operations, the mine produced more than 3.8 million carats of rough diamonds at an operating cash cost of US$31 per carat. During the first nine months of 2004, Diavik produced almost 6.1 million carats as a result of treating 1.5 million tonnes of kimberlite ore grading 4.06 carats per tonne at an operating cash cost of US$21 per carat.
Throughput grades have been trending up toward life-of-mine expectations as a lower-grade, mud-rich cap is mined out from the main orebody.
“The process plant has easily outperformed our expectations,” Johnson told analysts at a recent Rio Tinto investor seminar. Production in each of the past two quarters has exceeded 2 million carats. Annualized processing rates in excess of 2 million tonnes per year have been sustained for two consecutive quarters and are well above projected feasibility levels of 1.5 million tonnes per year and this year’s target of 1.7 million tonnes.
For the three months ended Sept. 30, Diavik recovered close to 2.3 million carats as a result of processing 560,000 tonnes grading 4.04 carats per tonne, which compares favourably with the second quarter, when almost 2.3 million carats were retrieved from 541,000 tonnes grading 4.2 carats per tonne. Cash operating costs, quarter over quarter, increased by US$1 to US$20 per carat.
Production in the fourth quarter will be affected by the processing of a higher proportion of kimberlite from the lower-grade upper portions of A-154 North pipe.
Neither Rio Tinto nor Aber will disclose realized carat sales values or volumes other than to say prices continue to exceed feasibility study expectations. “The Diavik diamond product has been extremely well received,” confirms Johnson.
In April 2003, Aber sold its first parcel of run-of-mine diamonds from the A-154 South pipe for US$96 per carat, well above the US$79-per-carat valuation used in an independent feasibility study done for Aber in 2000. Aber markets its share of diamonds independently of Rio Tinto.
Aber had aligned itself with
Amended deal
The pair recently amended their sales agreement so that the previously applied discount to open-market diamond prices no longer applies. In return, restrictions governing the re-sale of Tiffany’s equity holding in Aber were removed, and Tiffany subsequently sold its position in a brokered transaction to several financial institutions for US$268 million.
Diavik generated US$69 million in sales and US$38.8 million in earnings for Aber in the quarter ended Oct. 31, bringing the 9-month total to US$167 million in sales and US$82.2 million in earnings. Aber held two rough diamond sales in the current quarter, whereas three were planned. The October rough diamond sale was postponed as Aber elected to sell a substantial portion of its sales allocation through an open-market tender process in early November.
For the 12-month period ended June 30, 2004, Diavik earned just under US$100 million for Rio Tinto’s account, with an EBITDA (earnings before interest, tax, depreciation and amortization) margin of 80%.
“Diavik’s success has created opportunities for us to make it even more valuable,” says Johnson. To assess the higher-than-expected ore value in both the A-154 South and North pipes, a comprehensive drilling and sampling campaign was carried out on both pipes, as well as on the A-418 kimberlite.
An increase in the valuation of the diamonds in A-154 North has resulted in additional underground reserves, says Johnson. A large, 19,342-tonne bulk sample was mined last year from the upper phase of the pipe, and the quality of the diamonds was revealed to be much higher than assumed. The 11,771-carat parcel of diamonds recovered above a bottom-size cutoff of 1 mm was valued by WWW International Diamond Consultants at US$82 per carat, versus the original price estimate of US$33 per carat, which was based on a limited parcel of only 157 carats recovered during the prefeasibility campaign.
“The quality of the resource means there is now significant value in underground mining,” says Johnson. “Our review has enabled us to identify significant value over and above the original development through an increase in reserves, an increase in the mining and processing of the open-pit reserves, and the development of underground mining, including some new reserves in A-154 North.”
The mine’s strong performance and improved plant throughput means, in effect, that the A-154 pit will be mined out more quickly than expected. The Diavik partners have approved a revised mine plan that will accelerate production in a manner that boosts project value while ensuring a life of at least 20 years.
Revised plan
The revised mine plan calls for the A-148 pit to come on-stream more quickly than first expected. The construction and development of the A-418 dyke will start next summer and cost about US$190 million, leading to production in early 2008. In addition, US$75 million has been earmarked for the construction of a production-size exploration decline, which will allow Rio Tinto to assess the geotechnical and hydrological conditions. The underground mining of A-154 South is now scheduled to start in 2008.
On the basis of a revised reserve statement, expected in early 2005, the mine plan calls for an expanded throughput of 2.5 million tonnes per year to be achieved by 2008. Diavik will continue to work into the next year at opportunities to increase throughput in order to maintain carat production levels as mining proceeds in the A-154 pit. Rough diamond production in 2005 is expected to exceed 8.5 million carats. In 2005, about 70% of the ore will be supplied by the A-154 South pipe, with the remainder coming from A-154 North toward the end of the calendar year. Overall, Rio Tinto expects Diavik to produce in the range of 7-9 million carats per year through at least 2010.
Other targeted initiatives in 2005 will include large-diameter core drilling on the A-418 kimberlite to determine grade at depth, as well as further delineation drilling of the A-154 South and North pipes to refine pipe geometries in the area of the underground mine. In 2005 and 2006, a bulk sample will be taken from the A-21 pipe to provide a diamond sample of adequate size to determine a proper valuation. Reserves for the A-21 pipe are based on a US$28-per-carat valuation of a small 90-carat parcel of stones recovered from a small bulk drill sample of just 30.5 tonnes.
About US$3 million has been set aside for exploration in each of the next five years. This past summer, six targets were drilled, resulting in no discoveries. In total, 64 kimberlites have been found on the Diavik holdings, which comprise 2,640 sq. km in the Lac de Gras region.
“The underlying robust cash flow and the company’s strong financial position give us confidence to approve capital expenditures to enhance production, while, at the same time, embarking on a program to return value to shareholders through dividends and a share repurchase plan,” says Aber Chairman Robert Gannicott.
Aber dividend
Aber has adopted a dividend policy to provide shareholders with an annual dividend of US60 per share, paid quarterly starting Jan. 14, 2005.
Aber realized net earnings of US$8.5 million (or 15 per share) in the recent quarter, compared with US$12.3 million (21 per share) in the second quarter and US$13.5 million (25 per share) in the third quarter of 2003. Third-quarter earnings were hampered by a stronger Canadian dollar. Operations generated a cash flow of US$44 million for the recent quarter, versus US$15 million in the preceding 3-month period. Aber’s 51% ownership of diamond jeweler Harry Winston accounted for US$35.1 million in retail sales and a loss of $411,000 for the quarter, or US$73.4 million in sales and a profit of US$218,000 for the nine-month period. Harry Winston operates eight high-end retail salons.
The diamond market is strong. Demand is being driven by the U.S. market, which accounts for more than half the world’s retail diamond jewelry sales, as well as by a tightening supply following completion of the sell-down of significant stockpiles by
Adds Gannicott: “The fundamentals of the diamond market remain particularly healthy, with no substantial new production on the horizon, while demand continues to grow on the core markets, as well as the emerging markets in China and India.”
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