CANADIAN MINING PERSPECTIVES: Losing money on Canadian diamonds

At the end of January we learned that mining had been suspended at the Jericho diamond mine in Nunavut. Now comes n...
At the end of January we learned that mining had been suspended at the Jericho diamond mine in Nunavut. Now comes news that De Beers has written down the value of its Canadian assets by almost a billion dollars.

When BHP BILLITON opened the first Canadian diamond mine, Ekati at Lac de Gras, NWT, in 1998, the outlook was more than optimistic. The mystery of where Canadian diamond-bearing kimberlites might be found was beginning to be solved at last. Canadian diamonds provided a guilt-free alternative to "conflict" or "blood" diamonds. The strong global economy created a large pool of potential consumers.

How is it possible to lose money mining diamonds in Canada?

Toronto-based TAHERA DIAMOND CORP. opening its Jericho mine in Nunavut in 2006. The small, low-capital-cost mine suffered start-up problems, including lower grades than planned and failure to meet production targets. Improvements were made, but they were not enough to turn around the operation, and the company was losing money on every carat it produced. Share value plummeted to pennies.

South African giant DE BEERS GROUP is opening its first mine outside southern Africa in Canada, namely the Snap Lake diamond mine near Lac de Gras. Commissioning is underway and full production is expected later this year. De Beers is also readying the Victor mine in Ontario for production later this year and is working on the Gahcho Kue advanced exploration project in the Northwest Territories. The company made an impairment charge of US$965 million against these assets for the year ended Dec. 31, 2007.

Several factors affect mining costs in this country. The expenditures necessary to extract Canadian diamonds are driven up by high labour and fuel costs, as are all mines. And, as far as De Beers can see, it is the strength of the Canadian dollar in world markets that tips the bottom line into the red. Nor are diamond mines the only ones affected by foreign exchange losses; gold and base metal mines are reporting the same problem.

De Beers is in no danger of going bankrupt from its Canadian diamond investments because it is a huge player in world diamond markets. Not so Tahera. It is a small enterprise with only one mine. Reliance on a single operation means that the fortunes of that mine can make or break the company.

So much for any romantic notions of the diamond industry. No matter how perfect the stones, that fact won't make up for red ink at the end of the year.


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