Diamonds, NWT and how the Polar Bear got in there
The Gahcho Kué Project in the Northwest Territories is the world’s largest and richest new diamond mine. In joint venture with De Beers, Mountain Province Diamonds is developing the mine, which is progressing according to plan and budget and is on track for first production in H2 2016. It is expected to produce an average of 4.5 million carats a year over a 12 year mine life and has the potential to become one of Canada’s major high-grade and long-lived diamond mines. Financial close was reached on April 7, 2015 and was backed by a syndicate of Canadian and international lenders.
The Diamond Policy Framework
Gahcho Kué is subject to the NWT government’s Diamond Policy Framework, which aims to develop and support the local secondary diamond industry. For example, the government of the NWT has committed to the certification of NWT diamonds as being mined, cut and polished in the NWT to verify the origin of the diamond (one of the popular tools used to signify the origin of the diamond as “conflict free” is to laser engrave the diamond with a microscopic-sized polar bear logo). The Framework was first adopted in 1999 and most recently updated in 2010.
To the extent that one of the objectives of the Framework is to grow and diversify the NWT secondary diamond industry, the NWT government has taken steps to ensure that local manufacturers have a steady supply of incoming rough stones. Each developer of a project in the NWT must sign an agreement with the government of the NWT undertaking to sell a percentage of its rough stones to local manufacturers. After signing the agreement with the NWT, developers then negotiate a commercial agreement directly with the approved manufacturer of their choosing and that has been approved by the Minister of Industry, Tourism and Investment. The Minister may monitor, audit and inspect the manufacturer to ensure that the sorting and polishing is actually done within the territory, by companies that employ local residents.
The premise seems simple enough; however, the issue is complicated by the fact that currently there is a very limited number of diamond polishers in the territory.
In 2007, Mountain Province Diamonds Inc. signed such an agreement with the NWT government. Under the agreement, Mountain Province agreed to operate a sorting facility in the NWT and “establish a mechanism” for the sale of a percentage of its rough diamonds from Gahcho Kué to the local secondary industry.
At the time the agreement was signed, the diamond manufacturing market in the NWT was burgeoning, marked by the opening of several new sorting and polishing facilities. However, by 2015, many of those facilities had closed as a result of deteriorating market conditions.
Agreements under the Framework place developers in a challenging situation if the market changes drastically. Where there is only one provider, developers’ ability to negotiate the terms of the polishing agreement may be weakened due to the lack of market dynamics. Where there are no providers, developers risk breaching their agreement with the government altogether.
At its inception, lenders and developers surely viewed the Diamond Policy Framework as a reasonable and desirable initiative. However, due to an unforeseen shift in the market and the commercial reality that such arrangements have to be bankable, the Framework has resulted in some additional considerations for both lenders and developers.
Canadian mining companies need to be mindful of these limitations and hurdles when entering into these kind of agreements, think through all of the contingencies and prepare reasonable mitigation strategies while drafting the initial agreements, at all times understand and be mindful of the rigorous scrutiny lenders will bring to the project and make sure you have answers for all of the important commercial questions.
All stakeholders need to work together throughout the financing to carefully consider the risk profile of these issues and properly allocate the risks to the party who is most capable of managing them in the long term.
Geoffrey Gilbert is a partner at Norton Rose Fulbright, Ottawa.