Ekati to produce 4M carats in 2021 under new owners, Arctic Canadian Diamond

After a roller coaster of a year that almost forced an early end to the Ekati diamond mine, the operation’s new owners, Arctic Canadian Diamond Company, are hoping that the recovering diamond market will give Canada’s first diamond mine a more solid foundation.

The mine’s future was put in doubt last March, when operations were suspended in response to the pandemic-related shut down of diamond markets. Then its owner, Dominion Diamonds — which had been bought by Washington Companies in 2017 for US$1.2 billion — filed for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) in April.

A planned $126 million sale to an affiliate of Washington Companies fell through in October, when it failed to win the support of the mine’s environmental surety bond insurance issuers.

That’s when a group of Dominion’s creditors stepped in. A sale of Ekati to DDJ Capital, Brigade Capital, and Western Asset Management received court approval in December, paving the way for a restart of the mine, and the resumption of full production in late January 2021.

The sale of Ekati to Arctic Canadian Diamond, which is owned by DDJ, Brigade and Western Asset, was finalized in February. The price for the asset was the assumption of US$70 million in debt, the assumption of indemnity and related obligations under Dominion’s $279 million in environmental surety bonds, and the provision of an US$85-million working capital facility.

The purchase does not include Dominion’s 40% stake in Diavik, operated by Rio Tinto, or any liabilities associated with the operation. Also of note, Stuart Blusson retains an 11% stake in the main “Core zone” mining area at Ekati.

The restructuring has reduced the company’s debt obligations, and provided needed liquidity to fund operations and to invest in growth, said Arctic’s CFO Kristal Kaye.

Kaye, whose employment contract was transferred from Dominion (where she was also CFO) to Arctic Canadian, says she believes the operation will be economic post-restructuring. “When you look at what happened with Covid, that’s just something you can’t plan or predict, but we’re in a much better financial situation to weather any type of issues that occur,” she said in an interview in late May. “It’s dependent on the market, but from what we’ve seen, the market has held and has come back quite strong.”

Ekati, which first opened in 1998, is expected to produce 4 million carats this year, says Kaye, who adds that the diamond market has exceeded expectations since reopening in September.

“It was almost at pre-Covid levels. Since then, we just completed our first sale and we found the market to be very strong. High demand, and better than anticipated pricing,” she said. “The one unknown for everybody right now is Covid in India. Their situation is not improving as fast as other countries, and a number of the manufacturers are operating at a reduced capacity. That hasn’t impacted demand yet, but it could.”

With just under 900 employees and long-term contractors back at Ekati, the company has also recorded several Covid-19 cases onsite (one in December, and another three in late May).

Arctic Canadian is also still on the search for a CEO; Rory Moore, Dominion’s vice-president of exploration, is serving as interim president.

The current mine plan at Ekati, including open pit mining at the Pigeon and Sable deposits and underground mining at the Misery deposit, extends to 2028. The mine plan also includes the Point Lake development, which consists of one large pipe and two smaller ones, and is currently in the permitting process. The site of the initial discovery of diamonds at Ekati by Chuck Fipke and Stuart Blusson’s Dia Met Minerals, open pit mining at Point Lake is expected to sustain mining for four years. Development of a 500-metre access road is anticipated to begin this summer with dewatering and fish removal following next summer, then site preparations by the end of next year. Mining would start in January 2023.

Kaye says the company is looking at new technology to reduce costs and environmental impact of further development to extend the mine life, but doesn’t expect to fully understand the potential until 2022/23.

Sable Deep, Fox Deep and Jay are not included in the mine plan, but could offer longer-term potential.

As for the new ownership group, Kaye says they have been involved with Dominion and now Arctic for about four years and are very “hands on.”

“They have a history with us, they know us and our business well. They’re very supportive for the long-term future and growth of the Ekati mine,” she says. “We meet every two weeks and I get calls pretty much daily, so they’re very vested in our performance and want to make sure we have what we need to get it done.”

They’ve also brought in a new board of directors with a wide range of experience and depth, including in mining and diamond mining specifically, marketing, and finance, with one member who’s a former financial executive from Goldman Sachs.

While the pandemic pushed Dominion into filing for bankruptcy protection, court filings show that Ekati had been struggling for years – with Dominion recording losses in 2018 and 2019 totalling US$332 million.

“The ability of Dominion to conduct business and generate revenue and liquidity prior to the commencement of these CCAA proceedings had been constrained by the company’s highly leveraged capital structure (which includes the US$150 First Lien Lenders’ facility and the US$550 million in second lien notes),” read filings from December. “These financial woes were exacerbated and materially impacted in the first quarter of 2020 by Covid-19, cash calls by Dominion’s joint venture partner at the Diavik mine, increasing trade debt owing to suppliers, and finally an impending US$20 million interest payment due May 1, 2020 to the holders of the second lien notes…”

The filings also note that Dominion had been through three strategic review processes in the past five years — 2015, 2016, and then in 2017. The last one led to Washington acquiring it for US$1.2 billion, but did not produce any other suitors. Leading up to the arrangement with Arctic Canadian, the company had been canvassing the market for more than five months without generating any interest.

Peter Rubin, a partner at Blakes who represented Dominion in its efforts to restructure under CCAA, says a bankruptcy of Ekati would have been devastating to the Northwest Territories’ economy. The mine is the second-largest non-government employer in the N.W.T., and Rubin notes that in 2018 and 2019 combined, Dominion spent more than $500 million with northern businesses alone.

“You can imagine the importance of this business to northern residents and the north in general,” Rubin says. “When we went into CCAA, one of the things we looked at was [the mine’s] impact on the community.”

From the loss of employment, to the impact on contractors and aboriginal businesses, as well as on the impact benefit agreements Dominion held with local Indigenous groups, the consequences of an out-and-out bankruptcy would have been stark. According to figures released by Statistics Canada last month, the Northwest Territories experienced a 10% drop in GDP last year — the the largest decline in Canada — partially because of the Ekati suspension.

The importance of Ekati to the Northwest Territories economy motivated the various stakeholders involved to find a way to keep the mine going, and find a ‘going concern’ solution, Rubin says.

Part of that solution was the willingness of some contractors who were owed money to negotiate lower or delayed payments.

“There were a number of northern contractors who had lien rights, and had a high priority over the assets of Dominion,” Rubin says. “In a liquidation, there was a very good argument that they had a level of priority and they may have received full payment if there was a liquidation or shutdown of the business and the assets were simply sold.

“However, a number of them were prepared to accept less than 100 cents on the dollar, notwithstanding their lien rights, to help Dominion find that going concern solution.”

While the deal has avoided a worst-case scenario, Kevin O’Reilly, a member of the Legislative Assembly representing the Frame Lake district in Yellowknife, has been critical of government disclosure around the restructuring process, noting that it flies counter to the international trend of increased transparency in the extractives sector. For example, O’Reilly says, the government has not disclosed if it was owed any royalties.

“It was very difficult to get a clear picture of what was at stake for our government in terms of financial obligations,” he says.

There has been some concern around the use of surety bonds, rather than irrevocable letters of credit, as reclamation securities for Ekati.

Surety bonds have been issued in other jurisdictions in North America and globally as reclamation securities, but it’s the first time they have been used in the territory, says O’Reilly.

Arctic Canadian plans to replace the surety bonds with cash over time.

O’Reilly, who served as executive director of the Independent Environmental Monitoring Agency – a watchdog set up to monitor environmental performance at Ekati – for 10 years, says the company has generally done a good job with their environmental responsibilities.

Still, he says it’s the government’s responsibility to keep a close watch over the mine — especially given that workers and suppliers are last in line when financial difficulties arise.

“When properties start to change ownership over and over again in a short period of time, I think it starts to send off some signals that it’s something that needs more attention from the government to ensure that there are no public liabilities, that workers have their pensions and rights protected,” he says. “As this mine gets closer to the end of its life, the government needs to pay more attention.”