Friday 2nd December 2016

Resource Clips


Casualty in Lac de Gras

The NWT looks to Gahcho Kué diamonds as Snap Lake goes on care and maintenance

by Greg Klein

Bad news can have a way of sounding sudden, even when it’s not surprising. De Beers had publicly discussed Snap Lake’s possible closure last March and again just one day before the December 4 official announcement. It comes as the global giant revamps operations in response to faltering rough diamond prices.

The company’s first mine outside Africa and this country’s only fully underground diamond mine, Snap Lake is unique in Canada. The kimberlite “is a dyke that averages about 2.5 metres thick and slopes down beneath Snap Lake at an average of 12 degrees, making it challenging and complex to mine,” according to the company. It’s a fly-in/fly-out operation for all but six to eight weeks a year, when heavy equipment and supplies arrive via ice road.

The NWT looks to Gahcho Kué as Snap Lake goes on care and maintenance

“Even the gains made this year are not enough to overcome
the market conditions and put us in a profitable position,”
lamented De Beers Canada chief executive Kim Truter.
Photo: De Beers

De Beers said it “will evaluate market conditions over the next year to determine the potential of the ore body as a viable mine.” Its capacity was 1.4 million carats annually.

The company, owned 85% by Anglo American and 15% by Botswana, recently announced a number of restructuring moves. The same day as the Snap Lake announcement, Bloomberg cited anonymous insiders who said Anglo might cut this year’s dividend. While the company has been selling assets to raise money, Anglo might get as much as $10 billion if it sold its stake in De Beers, according to an HSBC note quoted by Bloomberg last month.

Also last month Dominion Diamond TSX:DDC reported an approximately 8% drop in rough prices this year. RoughPrices.com pegs the year-on-year decline at 18%. Rapaport Group chairperson Martin Rapaport has called on De Beers to slash rough prices another 30% to 50% and replace CEO/diamond newbie Philippe Mellier with an experienced diamantaire.

Rapaport’s news service predicted De Beers’ revenue will fall approximately 44% this year. The company that once ran the global diamond industry has missed out on the sector’s more sensational recent news, such as Lucara Diamond’s (TSX:LUC) announcement of the world’s second-largest diamond find. President/CEO William Lamb has said it might fetch more than $60 million. The stone came from Botswana’s Karowe project, in which De Beers sold its 70% stake to Lucara in 2009 for US$49 million.

The NWT looks to Gahcho Kué as Snap Lake goes on care and maintenance

The NWT’s Lac de Gras region hosts Snap Lake,
two remaining mines and mine-to-be Gahcho Kué.
Map: De Beers

Putting 434 people out of work immediately, Snap Lake’s closure deals a heavy blow to the Northwest Territories, now down to two mines with the October shutdown of the Cantung mine as operator North American Tungsten TSXV:NTC sought creditor protection.

Last year the three diamond mines provided 3,234 jobs, 47% of them going to northerners, and spent $979 million in purchasing, with $653 million on northern companies, according to figures from the NWT and Nunavut Chamber of Mines. Direct and indirect benefits contribute nearly 40% of the territory’s GDP, making diamonds the largest private sector contributor to the economy, the chamber added.

But Snap Lake contributed less than the other mines, with a total of 747 jobs and $182 million in purchasing. By comparison the Rio Tinto NYE:RIO/Dominion Diavik JV created 948 jobs and spent $332 million, while Dominion’s majority-held Ekati operation created 1,539 jobs and spent $465 million.

Still, chamber of mines executive director Tom Hoefer said, “We’re hoping that this kind of devastating action on our economy is something that will make governments take notice.” That would depend on the response from people elected federally in October and territorially in November. Among the NWT’s specific problems are the lack of infrastructure and high cost of living.

“The new federal government has spoken about investing directly in infrastructure, but that was a Canada-wide statement, so we need to see how that affects the North,” Hoefer said. “On the territorial government side, it’s pretty early to tell.” Of 19 MLAs elected, 11 are new to the legislature. Not formally aligned by party, the MLAs have yet to choose a premier or form a cabinet.

An optimistic development for both De Beers and the NWT would be Gahcho Kué, a JV with Mountain Province Diamonds TSX:MPV that’s scheduled for H2 2016 production. Heralded as “the world’s largest and richest new diamond mine,” it would more than make up for Snap Lake’s loss.

“Certainly having Gahcho Kué in the wings is a positive thing for us,” Hoefer acknowledged. But he’s waiting to see if guidance will be adjusted. “The other two mines are more resilient operations than Snap Lake, but they’re still facing the challenges of declining revenues, so what do you do about costs?”

Yet Canada might be the jurisdiction most likely to withstand the diamond downturn, according to analyst Paul Zimnisky. Speaking to Mining Weekly Online last month, he said Ekati and Diavik “are still quite profitable projects, even in a weaker price environment.” He suggested Dominion might pull in “$250 million in free cash flow next year and almost double that the following year, using what I would consider a conservative diamond price.”

Zimnisky also pointed out that financing’s fully in place for Gahcho Kué and Stornoway Diamond’s (TSX:SWY) Renard project in Quebec, slated to begin production late next year. With its Kennady North project surrounding Gahcho Kué on three sides, Kennady Diamonds TSXV:KDI expects its successful $48-million infusion to carry the company through 2017.

De Beers also runs the Victor mine in Ontario’s James Bay region. In February 2013 the company warned the mine could close if natives continued to block the ice road during the approximately 45-day period that trucks can reach the site.


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