Diamond miners facing transition Down Under

Perth, Western Australia — Diamond production in Australia is approaching a crossroads as the future of the renowned Argyle mine will soon be decided by Rio Tinto (RTP-N). With open-pit reserves nearing exhaustion, a decision is expected in the coming months on an underground operation at the world’s largest diamond mine.

Mining at Argyle would switch from the massive open-cut benches at the AK1 lamproite pipe to large-scale underground block caving. The transition, if Rio Tinto’s board of directors gives the green light, will see continued output but with poorer results.

Production at Argyle began in the mid-1980s, and in 2004, the mine produced 20.6 million carats of diamonds from 9.6 million tonnes of ore. In 2005, first-quarter output witnessed 8.6 million carats produced from 2.3 million tonnes. Nevertheless, reserves in the open pit are rapidly depleting and will likely be exhausted in 2008.

In 2003, Rio Tinto launched a A$90 million initiative to build an exploration decline extending some 2 km beneath the centre of the operating pit. A positive feasibility study for the proposed underground operation would see the mine’s life extended to about 2020.

A Rising Star

A new producer, Aussie-listed Kimberley Diamond, is bolstering its diamond output Down Under. Since mid-2002, the company has advanced production from its Ellendale operation, located in the Kimberley Desert in northwestern Western Australia.

Over the previous decade, KDC targeted the diamondiferous Ellendale lamproite field, in the west Kimberleys, initially focusing on alluvial deposits in buried paleo-channels as potential pathfinders to new pipes. In 2001, the company took over the core ground from Argyle Diamond Mines for A$23.3 million, giving it the lion’s share of the field. Since then, more than A$100 million has been spent by the emerging gem-producer on exploration, development and infrastructure.

Initial production has come from Ellendale Pipe 9, having produced about 140,000 carats over its first two years, with average values in 2004 of about US$210 per carat. Pipe 9 holds a resource of around 25 million tonnes grading 6.2 carats per hundred tonnes, or about 1.55 million contained carats. Significant upside exists as the modelled resource has only been calculated to a depth of 120 metres.

The lamproites in the Ellendale field are well-known for producing abundant “fancy” yellow diamonds that fetch high prices.

Looking to benefit from long-term supply shortages of rough diamonds, KDC is scaling up its processing capacity through the addition of a larger processing plant at Pipe 9. Late last year, the company approved a major expansion to 7.2 million tonnes annually from 2.8 million tonnes. The increase should be in effect by the middle of next year.

Key to increasing KDC’s tonnage is production from a second lamproite orebody in the Ellendale field, Pipe 4, which is located about 16 km south of Pipe 9. Pipe 4, along with another smaller satellite pipe, hosts 43 million tonnes averaging about 8 carats per hundred tonnes, or about 3.4 million contained carats.

At full capacity, the proposed expansion could boost KDC’s diamond output to 700,000 carats annually from 120,000 carats.

Says KDC Chairman Miles Kennedy: “This will realize Kimberley’s vision to become a top five Western World diamond-producer within the next three years.”

At the end 2004, the company placed its money where its mouth is, awarding a A$36-million contract to expand the plant. Funding for project will come from French bankers Socit Gnrale which will provide credit facilities of up to A$48 million.

Underpinning any modern diamond operation are sales and marketing agreements, and on that front KDC recently negotiated contracts with a syndicate of diamond industry firms with cutting, polishing and manufacturing centres, as well as retail jewelers. The marketing group holds the right to buy half of KDC’s run-of-mine rough production from current and future output at Pipes 9 and 4. At expected levels of production, the purchases could provide KDC with annual revenue of about A$80 million. Of note, the cut stones will be sold under the brand “Ellendale Diamonds.”

The latest Ellendale production figures look good. A recent parcel of just over 9,400 carats from Pipe 9 yielded an average price of US$329 per carat. At Pipe 4, the initial block of ore was recently mined and processed (3,174 tonnes) producing 1,370 carats for a grade of over 43 carats per hundred tonnes. The stones were sold for an average price of US$121 per carat.

The company’s exploration efforts around its two producing pipes have proven fruitful. More than eight new pipes have been discovered in the vicinity of Pipe 9, and another 100 additional exploration targets are slated to be tested.

A Friendly Neighbour

Surrounding KDC’s 124-sq.-km mining lease is ground belonging to Aussie-listed junior explorer Blina Diamond. Holding access to some 1,800 sq. km of tenements covering the Ellendale lamproite field, Blina is one of the larger landholders in the area.

Blina poses no threat to KDC, though, as it was spun off from the latter in 2004, and in the process inherited 10 years of experience and data from previous exploration efforts at Ellendale. KDC holds a 54% stake in Blina.

Blina initiated a two-pronged exploration approach on its prospective ground. First, it evaluated the alluvial diamond resources that occur throughout the region in buried paleo-channels; then it examined the data to determine the source of the stones.

It was widely held that the abundant alluvial stones occurring throughout the property were sourced from known diamondiferous lamproites on ground belonging to KDC. But work by Blina has thrown a wrinkle into the theory with evidence that flow directions and sources do not exclusively point to the known pipes.

Most of the lamproite pipes in the Ellendale field are covered by a weathered lateritic horizon, effectively acting as a mask. Blina, like KDC and De Beers subsidiary Stockdale before it, has employed extensive ground-based and airborne geophysics plus surface geochemistry to unearth potential pipes. This has resulted in more than 50 pipes being identified on the property.

Blina’s spends most of its time on the Terrace 5 alluvial project, which has the potential to provide early cashflow for the junior. The company plans to excavate two large cuts across the paleo-channel extracting about 40,000 tonnes of gravel for processing. Blina expects to recover around 2,000 carats of diamonds (based on grades achieved to date) and use these for a run-of-mine valuation. Preliminary grades from about 160 tonnes of gravel have come in at just over 11 carats per hundred tonnes, including some larger stones up to 2.5 carats.

The junior also holds the rights to alluvial diamonds on KDC’s mining lease.

Magical Merlin

With the recent announcement that it intends to relaunch mining operations at the Merlin deposit in the Northern Territory, Striker Resources is poised to enter the fray as Australia’s third significant diamond producer by mid-2005.

The Merlin kimberlite pipe cluster was previously mined by Ashton Mining and Rio Tinto from 1998 to 2003, producing roughly 500,000 carats from nine kimberlites exploited by open-pit mining.

Striker acquired Merlin and the surrounding exploration ground from Rio Tinto in 2004 to hold 1,800 sq. km. The major retains a back-in right for 51% should the project’s in situ value exceed A$1 billion.

The junior recently received the results of a scoping study aimed at boosting the existing Joint Ore Reserves Committee-compliant (the Australasian code for reporting identified mineral resources, similar to National Instrument 43-101) indicated and inferred resource of 17.3 million tonnes grading 16.2 carats per hundred tonnes, or 2.8 million contained carats, in the Southern, Central and Nort
hern pipe clusters. The study identified a resource of 19 million tonnes grading 17.4 carats per hundred tonnes, for 3.3 million contained carats at a proposed staged open-pit and underground operation.

Striker’s development plan envisages initial production coming from reprocessing old sorthouse tailings and then open-pit mining remnant kimberlites. The next stage will see the deepening of the past-producing PalSac open pits followed by underground operations targeting the coalescing of the pipes at depth. These pipes are being drill-tested by Striker.

The Merlin mine lays claim to Australia’s largest diamond, a 105-carat gem-quality stone recovered in 2003 and valued at more than A$525,000.

Meanwhile, Striker is conducting a bulk-sampling program at its Seppelt project in Western Australia’s north Kimberleys. The company is evaluating the economic potential of the Seppelt 1, 2 and 5 kimberlites, which occur in a major corridor of diamondiferous pipes and dykes.

The three Seppelt deposits have a combined open-pit inferred resource of 553,000 tonnes grading 81 carats per hundred tonnes. Valuations range from US$30-45 per carat. A production decision for Seppelt is expected later this year.

As evidenced at the last World Diamond Conference in Perth, a number of aggressive junior exploration companies have picked up the baton in the hunt for Australian diamonds and are meeting with success, likely helping the country maintain its position among the world’s leading diamond producers.