Wednesday 26th October 2016

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Diamonds in demand

Supply can’t keep up so the quest continues for new deposits, says De Beers

by Greg Klein

Growing diamond demand “will almost certainly outstrip growth in carat production, given the lack of major new discoveries in the last decade and the projected slowdown in several existing mines.” That’s among the findings of the first annual Diamond Insight Report released September 17 by De Beers, the global giant of the gem’s mining and vertical integration. A moderate increase in supply will fail to match demand up to 2020. Then, “unless major new discoveries are made in the coming years, supply can be expected to decline gradually.”

Between 2008 and 2013, consumer demand for polished diamonds rose nearly 5% in compound annual growth, driven largely by China, India and the U.S., according to De Beers. The company estimates last year’s rough diamond production at 146 million carats globally, representing a 7% increase in volume over 2012 and a 3% rise in value to US$18 billion. Even so, volume fell far below the 2005 peak, which surpassed 176 million carats.

Supply can’t keep up so the quest continues for new deposits, says De Beers

Not surprisingly, exploration spending “is expected to remain high as the chase to find the next major source of diamonds intensifies,” the report states. Most diamond exploration now takes place “in historically underexplored African countries such as Angola, the Democratic Republic of Congo and Zimbabwe, as well as the vast swaths of arctic Siberia and Canada.”

Yet exploration for diamonds hasn’t kept pace with that of other natural resources, De Beers maintains. Although last year’s global spending hit 250% above the 2001 figures, that amount fell to “practically half the record levels seen in 2007, when the industry was spending almost US$1 billion per year on diamond exploration.”

“The trend here differs from the mining sector in general, where 2013 expenditure, although lower than in 2012, remains well above 2007/2008 levels.”

If there are more of the really big Tier 1 deposits to be found, they remain elusive. The world has only seven such mines currently. The largest of eight projects coming onstream has a relatively modest peak production estimate of five million carats a year. That’s the De Beers/Mountain Province Diamonds TSX:MPV Gahcho Kué joint venture in the Northwest Territories’ Lac de Gras region. Just one other projected operation, the Grib mine in Russia, comes close with an estimated four million carats annually. The other six, in Canada, Russia, India and Botswana, have estimates ranging from two million carats per year down to 400,000 carats.

But the report cautions that “no amount of investment in exploration guarantees the discovery of deposits on which sustainable mining operations can be built.” Furthermore new discoveries take considerable time to move into production. “From 1950 to today, it took an average of 14 years between the discovery of a diamond deposit and the start of production.” More recently, that timeline has been expanding. Gahcho Kué, slated to begin operations in 2016, was discovered in 1995.

Exploration will likely focus on “those areas where the prospectivity potential is highest and where the least exploration has been conducted to date, such as central Africa, Russia and Canada.” Additional carats might still be found in South Africa and Zimbabwe, despite their long histories of diamond mining, thanks to advances in geophysical technology.

The challenges of discovery and development “in some of the world’s most inhospitable places are astonishing feats of engineering and human ingenuity.” De Beers, active in both the NWT’s Gahcho Kué development project and Snap Lake mine, ranks the Canadian sub-Arctic among the world’s “more hostile natural environments.” But it’s also “home to some of the largest recent developments of diamond mines.”

[Diamond exploration will likely focus on] those areas where the prospectivity potential is highest and where the least exploration has been conducted to date, such as central Africa, Russia and Canada.—De Beers’ Diamond Insight Report 2014

“Such operations are inherently more complex to run and involve greater infrastructure investments,” the report continues. “Miners go to extraordinary lengths to bring diamonds to market. This has always been the case and supply will continue to increase as demand grows. However, this cannot happen without substantial effort and investment. The cost and complexity of mining diamonds will continue to increase, and diamonds will remain one of the most coveted of earth’s products.”

Apart from Snap Lake, Canada’s sub-Arctic hosts the Ekati mine (majority-held by Dominion Diamond TSX:DDC) and Diavik (Rio Tinto NYE:RIO/Dominion). All three mines, as well as Gahcho Kué, lie within the NWT’s Lac de Gras region, the site of substantial junior exploration activity.

De Beers also runs the Victor mine in northern Ontario as well as operations in Botswana, Namibia and South Africa. Last year the company, once a cartel that controlled most of the global diamond industry, handled 33% of the world’s rough diamond sales by value.

De Beers’ supply/demand forecasts generally echo Bain & Company’s Global Diamond Report 2013, which estimated supply growth of 2% annually for 10 years contrasting with demand growth of 5.1% as “existing mines get depleted and no major new deposits come online.”

Download the Diamond Insight Report 2014.

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