Diavik surpasses 20M carats

In the little over three years since startup, the Diavik mine in the Northwest Territories has produced just under 20 million carats of rough diamonds to the end of 2005.

It’s the country’s largest diamond producer and plays a key role in making Canada the world’s third-largest diamond producer by value, after Botswana and Russia. Owned 60% by Rio Tinto (RTP-N) and 40% by Aber Diamond (ABZ-T, ABER-Q), Diavik produced close to 8.3 million carats of rough diamonds in 2005, up 9% over 2004, by treating 2.2 million tonnes of kimberlite ore averaging 3.72 carats per tonne at a cash cost of US$23 per carat.

Production rose, but grade was slightly down compated to 2004, reflecting the processing of a higher proportion of lower-grade ore from the A-154 North pipe. Ore blending was used to increase throughput, which allowed the process plant to comfortably exceed design capacity on a consistent basis. Pit geometry and mine sequencing dictated the mining and processing of a higher proportion of lower-grade ore from the A-154 North kimberlite pipe and fewer tonnes of higher-grade ore from the adjacent A-154 South pipe.

The mining of A-154 North is now halted so that a step-back can be done in the pit to allow full recovery of the reserves from underground. A-154 North will still contribute somewhere between 20% and 40% of blended production in 2006 from stockpiled ore.

During the year’s final quarter, Diavik churned out over 1.8 million carats by processing 497,000 tonnes of ore averaging 3.68 carats per tonne, sourced from both the A-154 South (60%) and A-154 North kimberlite pipes (40%). This represents a 20% decrease in carat production from the third quarter, but a 9% increase over the same period a year earlier.

Diavik operates in the harsh Arctic climate, 300 km northeast of Yellowknife, N.W.T. Open-pit mining is influenced by seasonal weather conditions and slows down during the winter months, which correspond to the first and fourth quarters.

“The reliance on a single open pit has meant that it has been a challenge to manage seasonal operating difficulties as well as other operational variables,” says Aber chairman Robert Gannicott. “In accordance with the mine plan, we are now entering the last year in which the Diavik mine will be reliant on mining from a single working face, and one open pit.”

London-based Rio Tinto is the operator of the mine, which entered production at the start of 2003 based on a feasibility plan to mine four kimberlite pipes over a life of 20 years. The pipes — A-154 South, A-154 North, A-418 and A-21 — lie just offshore of East Island under the waters of Lac de Gras, 30 km southeast of BHP Billiton’s (BHP-N) Ekati diamond mine.

The feasibility-stage mine plan was based on kimberlite reserves of 27.1 million tonnes grading 3.9 carats per tonne, equal to 107 million carats averaging US$62 apiece. 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 later on. A series of three water-retaining dykes will eventually be built around each of the kimberlite bodies to hold back the pristine waters of Lac de Gras so that open-pit mining can occur. The first of the dykes was built around the A-154 South and A-154 North pipes, which, at only about 100 metres apart, are being mined from the same pit.

The A-154 dyke structure is almost 4 km long and was built over waters averaging nearly 12 metres deep. The water is as deep as 25 metres on the north side.

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$70-per-carat valuation used for the pipe in an independent study done for the company in 2000. Since then, neither Rio Tinto nor Aber will disclose realized carat prices or volumes.

However, Aber’s 40% interest in the Diavik mine accounted for US$314 million in diamond sales for the fiscal year ended Jan. 31, 2006, versus US$253 million in the previous year. Based on Aber’s share of production of some 3.3 million carats in calendar 2005 and a US$2.6-million increase in its rough diamond inventory for the year, Canaccord Adams’ Steven Butler estimates the Diavik diamonds commanded an average price of US$96 per carat in 2005.

Favourable outlook

“Diamond prices have improved over the year, driven mainly by demand in better quality diamonds in both large and small sizes,” Gannicott explains.

The diamond market continues to experience a scarcity of large, better-quality white goods.

“The diamond market remained strong in 2005, particularly in high-quality, top-end diamonds and smaller, cheaper goods,” agrees Guy Elliot, finance director for Rio Tinto. “Rio Tinto Diamonds achieved price increases during 2005 which delivered an additional fifty-five million (U.S.) in earnings. Looking ahead, the market outlook is favourable, with demand forecast to rise faster than available supply over the next decade.”

At the end of 2004, the Diavik partners approved a revised mine plan that would accelerate production, and embarked on a 2-year, $363-million capital investment program that includes $103 million on underground feasibility studies and plant optimization. The revised mine plan calls for the A-418 pipe to come on-stream more quickly than first planned. The construction of a new 1.3-km-long water retention dyke surrounding the A-418 kimberlite body is on track, at an estimated cost of $260 million. A crushed rockfill embankment was built out from East Island and closed around the A-418 pipe by October 2005. It joins the larger A-154 dyke and takes advantage of small islands and shallow water wherever practical. Parts of the A-418 dyke have crossed waters somewhat deeper than the first dyke, at about 35 metres.

Work in 2006 will focus on completing an impermeable concrete cutoff wall through the centre of the rock embankment to make the dyke watertight. The Diavik partners are using the same engineering and construction techniques that were applied successfully to the first dyke around the A-154 South and North bodies.

First, a dredge was used to remove lake-bottom sediments along the dyke’s footprint. A firm foundation on the underlying glacial till is required to support the massive rock embankment. A filter blanket of crushed granite was precisely placed along the inside footprint of the dyke to ensure that the integrity of the foundation would be preserved from any seepage. Then a massive and stable rockfill structure was created using three different rock sizes.

A plastic silt curtain was hung in Lac de Gras to surround the construction area and protect the water quality — akin to distilled water. A water treatment plant removes suspended solids from inside the curtained-off area before returning the water to Lac de Gras.

Watertight

Diavik and its engineering team developed a unique process to create a watertight dyke. First, a vibrating core is used to compact the fine crush rock in the core of the dyke, making it very dense and stable. Next, specialized equipment cuts a trench along the centre of the dyke. A bentonite slurry is pumped into the trench to keep the walls from collapsing as the trench is cut deeper.

An 80-cm-wide, impermeable concrete wall is then poured into the trench. To make sure the base of the concrete wall is securely bonded to the often irregular bedrock contact beneath the dyke, additional concrete is placed there by jet grouting. Vertical holes are drilled through the dyke and cement is pumped through a rotating bit. This creates overlapping cement columns at the base of the dyke, bonding the cement wall to the bedrock below. Finally, smaller angled holes are drilled through the dyke into the bedrock. Under high pressure, grout is pumped down the holes filling any cracks in the rock and making the dyke even more secure.

Thermosyphons will be installed at four abutments to maintain permafrost and the dyke will be instrumented to monitor performance. Over 1,600 instrumentation points wer
e placed in the A-154 dyke to measure core pressure, temperature and other information.

Finally, in 2007, the fish will be removed from inside of the dyke, the lake water will be pumped out, and the pre-stripping of lake-bottom sediments and glacial tills will lead to open-pit mining of the A-418 kimberlite pipe.

Diamond quality

“The diamond quality (of A-418) is very good, but because the rock is very soft it liberates a lot more small diamonds,” says Gannicott. “Basically the stuff washes through the mill and all the small diamonds liberate very easily; they don’t end up being entrained in small pieces of rock that end up in the waste drain. So if you recover a lot more small diamonds, that pulls the size distribution, which offsets the fact that the diamonds are of higher quality.”

In addition, Rio Tinto has launched a feasibility study to determine the best underground approach for mining the A-154 South, A-154 North and A-418 pipes. A production-sized decline is being driven to provide access to the three bodies in order to test underground stoping methods and assess ground and water conditions. Crews had advanced the main decline about 800 metres, or one-quarter of the way by year-end. The feasibility studies are to be completed by early 2007, with the objective of having underground working faces ready in 2008.

Diavik is using a drill blast cycle to tunnel towards the orebodies. A series of long holes are drilled ahead of the face to intercept potential water inflows. Grout is pumped into these holes under high pressure to fill any fissures and limit the flow of water into the decline. Groundwater is the key technical challenge to this project.

This is not the first time Diavik has gone underground. In 1995-1996, the Diavik joint venture built a decline to conduct underground bulk sampling on the A-154 South and A-418 pipes. It was the success of this sampling program that convinced investors that the deposits were rich enough to support both open-pit and underground mining.

At the end of 2005, proven and probable reserves in the A-154 South, A-154 North and A-418 pipes totalled 28.2 million tonnes grading 3.2 carats per tonne, equivalent to 90.2 million recoverable carats. Inferred resources contain an additional 23.4 million carats in 7.8 million tonnes averaging 3 carats per tonne, of which A-21 holds 4.8 million tonnes grading 3 carats per tonnes for a total of 14.6 million carats.

The A-21 kimberlite, originally part of the reserves and mine plan, was downgraded to the resource category pending the evaluation of a larger underground bulk sample.

“The reason it’s not in the reserve is because we don’t have a reliable diamond price estimate,” Gannicott says.

Diamonds from the A-21 pipe were originally valued at only US$28 per carat, based on a limited 90-carat parcel of stones recovered from a mini-bulk drill sample of just 30.5 tonnes.

Optimistic

The Diavik partners are highly optimistic regarding A-21 based on the higher-than-expected valuation of the diamonds from A-154 North. A large 19,342-tonne production-scale bulk sample was mined in 2003 from the top of A-154 North, and the quality of the diamonds proved to be a lot better than originally assumed. A recovered parcel of 11,771 carats was valued at US$82 per carat, compared with the original price estimate of US$33 per carat, which was based on a limited parcel of only 157 carats recovered during prefeasibility-stage, large-diameter drilling.

“In the kind of size and value distribution that the Diavik orebodies have, larger samples have so far always meant to us improved diamond prices,” Gannicott explains. “So A-21 is based on a small sample; my view is that looking at the diamond population, it is at least as good as the rest of the orebodies.”

Diavik is driving a smaller decline or tunnel into the A-21 pipe so that an underground bulk-sampling program in 2006 will better define that resource. At year-end, the A-21 decline had advanced some 200 metres.

Diavik is continuing to pursue ways to optimize throughput as mining proceeds in the A-154 pit. Elliot says the plant is operating well, and at a stable level. Efforts are being made in the mill to enhance the recovery of smaller stones and to reduce breakage of the larger diamonds. If successful, the initiative would have a positive impact on prices. Other plans designed to improve production will include the underground testing of a continuous mining machine that could reduce diamond breakage by avoiding the drill blast cycle.

The mine plan calls for an expanded throughput of 2.5 million tonnes per year by 2008. Going forward, Rio Tinto expects Diavik to produce in the range of 8-10 million carats per year through to 2010. In the coming year, production is forecast to be around 8.5 million carats.

“Given the nature of the Diavik orebodies and the sequencing of the mine plan, there is likely to be some variability in production in future years due to grade,” Elliot cautions.

The Diavik partners are in the second year of a US$10-million exploration program. Three new kimberlites were found in 2005, bringing the total number of kimberlites on the Diavik holdings to 67, half of which are diamondiferous.

“The ongoing exploration program hasn’t turned up anything that looks as if it could be economic,” Gannicott says. “There are still some questions to ask about some of the pipes that have been discovered.”

The Diavik land package covers nearly 2,400 sq. km in the Lac de Gras region.

Aber earned US$83.1 million (or US$1.40 per share) for its fiscal year ended Jan. 31, 2006, compared with US$53.1 million (US92 per share) in the previous year. The company’s sales revenue totalled US$505 million in fiscal 2006, versus US$385 million for 2005. Operations generated a cash flow of US$162 million, compared with US$150 million in 2005. At the end of the year, Aber held US$148.1 million in unrestricted cash and cash-equivalents.

“Fiscal 2006 has been another year of significant sales growth, robust margins and record earnings from both our mining and retail segments,” says Aber’s chief financial officer, Alice Murphy.

Aber’s 52.8% interest in high-end jeweller Harry Winston accounted for US$191.2 million in sales, representing a 22% increase over the comparable period a year earlier. The jeweller contributed US$11.8 million in operating profit for the 12-month period, more than double the previous year, during 10 months of Aber’s ownership.

Aber president Thomas O’Neill attributes the sales growth, spearheaded by a new management team at Harry Winston, to new design and product initiatives, a dynamic new marketing campaign, a revitalization of the company’s current stores, and an expanded store network.

Harry Winston’s fourth-quarter (peak holiday season) sales, were US$63.4 million, up 7% over the same period a year earlier. During the fourth quarter, Harry Winston opened two new retail salons in Florida and Hawaii, bringing the number of stores around the world to 10. In addition, its Beverly Hills, Calif., salon was relocated to a new flagship store on Rodeo Drive in January. The new year has already seen one new store opening in Tokyo, with plans to open others in London by mid-year and Chicago in 2007.

In the U.S., luxury and on-line jewelry retailers performed well over the Christmas period, whereas other jewelry retailers experienced only moderately increased sales. The luxury goods segment of the retail jewelery industry, comprising mainly jewelry and high-end watches, posted strong sales and outperformed low-price items. Prices for polished diamonds have risen in most categories but larger and better-quality stones have had the most significant increases. A robust luxury market ensured that demand for high-end polished goods remained strong throughout the year. The vigorous growth in Internet sales has been positive for the polished-diamond market but the unpredictability of sales has required the diamond manufacturers operating in this segment to hold a broader range o
f inventory, thus increasing their financing costs.

“Our strategy focuses on maintaining the premium position of the luxury brand through one-of-a-kind, high-end jewelry pieces in bridal categories while providing diamond-focused jewelry in more modest price points, relative to our most expensive pieces,” O’Neill says, adding that the store’s entry-level prices are just under $4,000.

“This has been the year that the Aber-Harry Winston team has demonstrated the economic synergy between jeweller and rough-diamond marketer,” Gannicott says. “We now have the opportunity to capitalize on that synergy in a marketplace that is expected to increasingly demand the high-quality rough diamond and jewelry products that Aber supplies and understands.”

Rio Tinto

Rio Tinto, through its diamond group, holds a 60% interest in Diavik, a 100% interest in the Argyle mine in Western Australia, and a 78% stake in the small Murowa mine in Zimbabwe. In 2005, diamonds accounted for 7% of Rio Tinto’s group operating assets. The diamonds group contributed US$281 million to underlying earnings, an increase of US$93 million from 2004, assisted by a strong diamond market and a much-improved operational performance from Argyle.

The Argyle mine, in Australia’s Kimberley region, produces more diamonds than any other mine in the world, accounting for about a quarter of the world’s diamonds by volume. However, Argyle produces inexpensive, small, coloured goods that have commanded less than US$15 per carat in the past.

Earnings at Argyle rose strongly as carat production recovered in 2005 to more historic levels, aided by stronger prices for the Argyle stones. Argyle brought in US$117 million in earnings in 2005, representing an increase of some US$77 million. Carat production, year on year, was 48% higher.

The mine’s performance improved considerably over 2004, despite tight mining conditions in the deepening pit and a highly competitive labour market. In 2005, Argyle produced 30.5 million carats from the processing of 9 million tonnes of lamproite ore grading 3.4 carats per tonne.

Since operations began in the mid-1980s, Argyle has mined more than 700 million carats. In late 2005, the Rio Tinto board approved the US$760-million development of an underground block cave mine under the AK1 open pit, which will extend the mine’s life until at least 2018. Later-stage, sub-level caving could potentially push out the mine life to about 2024. It will take three years to bring the underground operation fully on-stream.

In addition, Rio Tinto will spend US$150 million on a new open-pit cutback that will help maintain Argyle’s production levels in the transition period and beyond, as production from the open pit winds down and the new underground mine is ramped up.

Proven and probable reserves at the end of 2005, both open pit and underground, totalled 111.7 million tonnes grading 2.2 carats per tonne, equal to 247 million carats of rough diamonds. Additional underground resources contain a further 224 million carats in 83 million tonnes averaging 2.7 carats per tonne.

“The Argyle project is challenged by being in an environment of high capital-cost inflation, however this is offset by significantly improved outlook for its diamond market segment, and by the support of the Western Australian government for changes in the royalty regime and local processing requirements,” said Rio Tinto chief executive Leigh Clifford during a year-end review.

Once in full production, output from the Argyle underground mine will be about 20 million carats per year.

Production at Rio’s 77.8%-owned Murowa mine in Zimbabwe began in late 2004 after US$11 million was spent building a 220,000-tonne-per-year plant and supporting infrastructure. The small-scale operation is currently focused on treating 1.3 million tonnes of weathered material containing 140,000 tonnes of enriched ore. This operation reduced the initial investment required so as to allow confirmation of marketing and regulatory arrangements prior to expansion.

“We saw good initial earnings contributions from our new Murowa diamond mine — a very small operation and very high-value stones,” Clifford said. Murowa contributed US$21 million in net earnings and produced 251,000 carats for the year by treating 178,000 tonnes grading 1.4 carats per tonne.

Reserves amenable to open-pit mining are currently estimated at 22.9 million tonnes grading 0.7 carat per tonne, or 16 million carats.