Gold producers, Indian cutters might fund Canada’s newest diamond mines

30th May 2012 By: Matthew Hill

JOHANNESBURG (miningweekly.com) – With positive feasibility studies in hand, companies aim to start building at least three new diamond mines in Canada by the third-quarter of next year, at a combined cost of around $3.4-billion.

First the hopefuls, including Mountain Province, Shore Gold and Stornoway, need to raise the finance to do so, and analysts say they may have to look to non-traditional sources, given the rocky shape global markets are in.

Despite glowing prospects for diamond demand and prices, Canadian juniors readying to start developing their mines have been receiving a cool reception.

The European financial institutions that traditionally provide project funding to build gem mines have been whacked by both new European banking rules upping the reserve ratios they are allowed, as well as the broader market funk in the continent, and the continuing fears of a Mediterranean State’s default.

And, with share prices dwindling near two-and-a-half-year lows, equity financing is mostly out of the question for Stornoway and Shore Gold.

National Bank Financial analyst Eldon Brown said that the three diamond pretenders would likely have differing fortunes.

“Shore Gold is in a bit of a jam. I think they’re blocked out for this cycle for the time being,” he said in an interview.

The biggest problem for the company is the whopping $2-billion its Star-Orion South diamond project will cost to build. Given that it is a super-sized openpit project in Western Canada, where the company will be competing for skills with burgeoning oil, potash and uranium sectors, cost inflation is likely.

Star-Orion South would be Saskatchewan’s first diamond mine, with Shore Gold in a race to find funding before the planned construction start date in the third quarter. The mine is set to produce an average 1.72-million carats yearly, starting in 2017.

In March, the company took the drastic step of cutting its headcount by around one-third to 15 people in a bid to conserve cash.

The TSX-listed firm said at the time it had been in advanced talks with a potential partner, before the European debt crisis came along and derailed the deal.

Mountain Province, which has diamond giant De Beers as a partner at its Gahcho Kué project in the Northwest Territories, and Stornoway, boasting the Quebec government as a 25% shareholder, are, perhaps, not faced with such an uphill battle.

“For projects with shorter payback periods the prospects of raising money are probably going to be a little easier,” BMO Capital Markets analyst Edward Sterck said in an interview, adding that having a strong joint venture partner would also greatly assist.

Gahcho Kué is set to start producing in 2014, at a capital cost of C$600-million – though Mountain Province’s share, with its 49% ownership, sits close to C$300-million.

The project, located 280 km north-east of Yellowknife and 80 km east of De Beers’ existing Snap Lake mine, will produce around 4.5-million carats yearly, with preconstruction work under way this year.

Stornoway’s Renard project, which would be Quebec’s first diamond mine, has a higher capital figure of $800-million, and will produce an average 1.7-million carats yearly, according to the results of a feasibility study the company announced in November 2011.

First output is pencilled in for 2015.

Both Stornoway and Mountain Province outlined plans this month to start spending millions of dollars on predevelopment at their projects.

OFFTAKE

Where will these companies likely find the money to build their mines?

Indian cutting and polishing centres and large jewellery retailers, Sterck said.

Diamond processing firms in India, particularly small and medium sized ones that are not De Beers sight holders, can find it difficult to get their hands on rough stones.

Providing financing to build either Stornoway’s or Mountain Province’s share of its mine in return for offtake could be of mutual benefit, he commented.

Indian cutters and polishers recently visited Canada scouring for opportunities to secure rough supply, as they also compete with an emerging Chinese industry.

Retailers such as US-based Tiffany’s have also in the past injected capital into diamond mines to ensure supply.

Stornoway CEO Matt Manson told Mining Weekly Online in September the company would consider selling marketing rights to help fund Renard.

The other doors juniors should be knocking on are those of gold producers, said Brown.

Toronto-based Agnico-Eagle Mines already owns 10.8% of Stornoway, making it the second-biggest shareholder, and Canada’s number-three producer Kinross in 2009 bought into Harry Winston and took on part of its stake of the Diavik mine it owns with Rio Tinto.

Harry Winston subsequently bought the ownership back in two separate deals in 2010 and 2011.

Some gold companies have been looking to diversify into copper, such as leading producer Barrick, but the market has punished them for doing so. Diamonds, as a luxury good, may make more sense for investment, as long as gold miners “don’t bet the farm” on a deal, Brown commented.

Harry Winston itself has expressed interest in increasing its exposure to Canadian diamond production through investing in projects.

There are also other potential contenders.

“The dark horse is De Beers and Anglo American,” said Brown, referring to the deal whereby Anglo American agreed to buy the Oppenheimer’s 40% stake in the diamond giant for $5.1-billion.

“Obviously Anglo has an interest in increasing exposure to the sector.”

There has been speculation as to whether anti-trust authorities would allow De Beers to make diamond acquisitions, given its historical market dominance, though the dynamics have changed in recent years.

Russia’s Alrosa is now the biggest-volume diamond producer, while De Beers holds the title of being the biggest producer by value.

“De Beers is not, and never has been, prevented from buying producing diamond assets by the EU anti-trust laws,” spokesperson Lynette Gould told Mining Weekly Online in March. That implied the company could also snap up development projects.

Another significant factor in the market is that global mining gargantuans Rio Tinto and BHP Billiton have announced they are looking to sell their diamond mines, as they are too small compared to their other divisions.

Rio owns 60% of the Diavik mine and BHP 80% of Ekati, also located near Yellowknife.

Neither sale would likely sap capital from the juniors hoping to build their mines in Canada, Sterck and Brown said.

“I think there are different kinds of buyers [for Ekati and Diavik],” commented Brown.