Aber: A Quick Study on the Market
Diavik, Canada’s second diamond mine, is now halfway through its first full year of production, and its 40%-owner Aber Diamond Corp. is learning fast how to market and sell diamonds.
The first diamonds from Diavik were delivered to Aber and its 60% joint venture partner, Rio Tinto plc, this past January. By the end March, Aber had received 156,708 carats, of which 42,619 carats were sold for proceeds of US$4.1 million. The first batch of stones was sold at an average of US$96 per carat. According to Robert Gannicott, president and CEO of Aber, “Diavik started earlier and is producing faster at higher values than we anticipated in the feasibility study.”
By July, Aber had received 481,000 carats and generated sales of US$19.2 million. Aber is now anticipating a long-term sale price of around US$90 per carat compared with US$79 per carat in the feasibility study.
Being a fledgling diamond producer and a new entrant into the less-than-transparent diamond market, Aber needed to deal with a steep learning curve. Before production began, the company hired experts in the field and established a sorting facility with a staff of more than 20 in Toronto. It also announced an arrangement with Tiffany & Co. by which the jeweler agreed to purchase 25% of Aber’s production valued at a minimum of US$50 million; the remainder would be sold on the open market at Antwerp. Increased prices per carat have led Gannicott conclude Tiffany’s share will “more likely be US$60 million.”
Aber’s share of production is collected in Yellowknife and delivered to its sorting facility where the stones are sorted based upon 6,700 grading points. The stones are then re-assembled into sales parcels to meet specific requirements of the diamond polishers. “Unlike most producers, Aber sells directly to polishers and not to diamond traders, thereby removing the middleman and extracting a better price for the tailored assortment,” explains Gannicott. The company sells its production ten times a year at five-week intervals, but does not disclose price per carat values, only the number of carats produced and the earnings for each quarter.
In order to set a price for the stones it sells to Tiffany, Aber sells 20% of these stones in the open markets of New York, Tel Aviv, Antwerp and Bombay. This process then determines the price to which Tiffany agrees.
Much has been made of whether people are willing to pay a premium for Canadian diamonds but Gannicott remains skeptical. “I guess you could say I’m kind of agnostic whether anyone will be willing to pay a premium in the world market. Certainly Canadian customers may be prepared to pay a little more but, at the end of the day, it’s just a piece of mineral and it’s not visibly different.”
Despite the cynicism, he would be willing to jump on the bandwagon under certain conditions. “I am quite willing to follow along if it can be demonstrated that they would.” After all, he concedes, “People do a pay a premium for Russian caviar that they won’t pay for caviar from a sturgeon from New Brunswick.” The problem in paying a premium for a Canadian diamond is demonstrating that in fact the diamond is Canadian. “Maybe somebody can make it happen but I’m not prepared to do the experimentation.”
Despite his views on premiums and origin determination, Gannicott believes Canadian producers must achieve higher sales prices to remain competitive and to enable the developing downstream diamond industries to survive. “I think it’s very critical to the success of the diamond polishing facilities being set up in the NWT that a better price be achieved. This is because labour and infrastructure costs in Yellowknife are much higher than traditional locales of India and Surat. If higher prices are not achieved, the only way to compete is to sell NWT diamonds cheaper, making it a burden on the producer.”
When it comes to the transparency of the diamond marketplace and determining a fair price Gannicott concedes it’s difficult to do, but Aber intends to become more knowledgeable about the marketplace following the retirement of its debt. “It’s our intention, once our debt is paid down, to go into the open market and buy parcels of stones because it’s only when you start buying that you know what the price is. When you’re selling to somebody, you don’t know if once he’s outside your office he’s jumping up and down clicking his heels with joy.”
The company’s second quarter results suggest Aber may be buying parcels sooner than they first thought. During the second quarter, the processing plant reached 68% capacity and processed mostly lower grade stones from the lake bottom-kimberlite contact. Now mining is occurring entirely with the ore reserves of the kimberlite.
The company also announced that increased efficiencies in Toronto and Antwerp have lowered the processing time and it expects US$20 million in sales that had been anticipated for fiscal 2004 will be brought into fiscal 2003. In addition, second and third quarter production numbers are ahead of target. As a result, Aber anticipates production of 1.3 million carats in 2003 compared with an earlier figure of 1 million. The company’s debt is expected to be paid off before the end of next year, well before the end of the five-year repayment term.
On the exploration front, the joint venture has recovered 11,771 carats from A-154 North pipe, which were valued at US$82 per carat, compared with estimates of US$33 per carat in the feasibility study. The joint venture will revise the mine plan based on sales of A-154 south stones and a reserve reconciliation of the south pipe, by the end of this year.