By NIALL MCGEE
Monday, September 17, 2018
De Beers Group has high hopes for a small Canadian diamond project, as the world's biggest diamond producer by value seeks to redress a global dearth in new discoveries and further diversify outside of its African base.
Last week, De Beers, which is controlled by global diversified miner Anglo American PLC Group, closed its acquisition of Vancouver-based Peregrine Diamonds Ltd., owner of the Chidliak project in Nunavut. De Beers paid $113-million for the junior, which was founded by Eric Friedland, brother of famed mining financier Robert Friedland.
Chidliak has 74 known kimberlite formations, a rare type of rock that can contain diamonds. According to a preliminary economic estimate (PEA), the inferred resource, contains about 22 million carats, about two-thirds of De Beers annual production. It's not yet known whether the resource can be profitably developed, but the PEA pegs the cost of building a mine that would last 13 years at $521-million. "When you look at what we've acquired here up at Chidliak, it looks like several [kimberlites] could be economic," said Kim Truter, chief executive of De Beers Canada Inc., in an interview.
De Beers, which was founded in 1886, held a virtual monopoly on the diamond market in the early part of the 20th century. But over time, African countries, where most of its mines are located, started demanding a significant portion of the profits, which is one reason the company has looked to Canada to diversify its business. "Particularly in Africa, the economics that you retain as an operator are getting slimmer and slimmer," said London-based diamonds and uranium analyst Edward Sterck with BMO Capital Markets Limited.
Another challenge is the paucity of new diamond discoveries. "No one's found anything of significance in 20, 25 years," Mr. Sterck said.
By buying Peregrine, De Beers adds another asset to its Canadian portfolio, which also includes the Victor mine in Northern Ontario and the Gahcho Kué mine in the Northwest Territories, a joint venture with Toronto-based junior Mountain Province Diamonds.
While De Beers has had success in its more than 50 years in Canada, it also encountered some stumbles. Production at its Snap Lake mine in the Northwest Territories ceased prematurely in 2015 after persistent water problems.
De Beers is a major miner, but it also has a large retail business. Earlier this year, it caused a minor earthquake in the market by announcing it was entering the synthetic diamond jewellery market. The company will soon start selling diamonds made in a laboratory at US$800 a carat, about a 10th of the price of a natural stone and about a fifth of what competitors are charging for synthetic diamonds.
"This is either a stroke of absolute genius or total folly," said Mr. Sterck about De Beers' aggressive pricing strategy, which is not expected to be profitable - at least initially.
Mr. Truter says De Beers wants to draw a clear line in the sand through the pricing strategy, so consumers recognize that synthetic diamonds are essentially a commodity - relatively inexpensive to produce and identical to each other.
"The whole appeal of natural stones is the fact that they're different," he said. "Every single stone is unique."
While DeBeers may end up obliterating its competitors in the synthetic market, its legacy business in mined stones is still its focus. Its investment in synthetic diamond jewellery is relatively minuscule - about US$100-million - when compared with the US$10-billion it plans to spend on its mined diamonds business over the next five to six years.
Anglo American owns 85 per cent of De Beers, with the government of the Republic of Botswana owning the rest. While diamonds constitute the largest individual product component of Anglo American's revenue, lately the segment has been sluggish. In the first half of the year, De Beers sold US$3.19-billion worth of diamonds; in the same period last year, it sold US$3.13-billion. The price of rough diamonds is trading about 13 per cent below the high-water mark set in 2011, according to data from New York-based independent diamond analyst Paul Zimnisky. In 2008 and 2009, anticipating a collapse in consumer demand in the aftermath of the financial crisis, diamond companies drastically cut back on production. But that eventually led to a severe supply shortfall, which caused prices to skyrocket into bubble territory. Over the past few years, rough diamond prices have come down to levels that better reflect the true supply-demand picture.
"Through mid-2018, the downward trend in prices appears to be shifting as global supply dries up, and a strong U.S. economy and greater Chinese consumer market pushes prices higher," Mr. Zimnisky wrote in an e-mail to The Globe and Mail.