Toreach the diamonds of sub-Arctic Canada, miners must drill throughfrozen rock in a desolate environment almost devoid of roads. A mine inthe region can take a decade or longer to bring into production.
Yetwhen the process takes 15 years, investors in any climate might beginwondering what is going on – especially if the miner in question is DeBeers.
Thecompany has deeper pockets and more expertise than anyone in theindustry. In the case of a diamond deposit the size of Gahcho Kue inCanada’s Northwest Territories, De Beers would seem to have anincentive to unearth the stones as soon as possible.
However,perceptions of De Beers’ power, and what the company does with it, arebehind the dispute over Gahcho Kue as much as geology or budgets.
Ithas been 12 years since Mountain Province Diamonds entered a jointventure with De Beers to develop Gahcho Kue, with De Beers as projectoperator holding a 51 per cent stake.
But the bonanza remains atinitial stages of development and the soonest it could reach productionis 2012. Meanwhile, everyone in the diamond industry warns that no bigdiscovery has been made in a decade, creating long-term expectations ofsupply shortages.
“This is a source of tremendous frustrationfor us,” said a shareholder of Mountain Province, which discoveredGahcho Kue in 1995. “At the heart of the [joint venture] was De Beerscommitting to a proper and timely development of the project, and, 12years later, there has been nothing proper and nothing timely aboutit,” said the shareholder, who asked not to be identified.
Someshareholders say it is not inconceivable that De Beers, which in anearlier era stockpiled diamonds to prop up the price, is delayingGahcho Kue to control the entry of so many diamonds on to the market.
DeBeers dismisses such claims, saying the project was taking a long timebecause its economic viability was still not determined. The caratvalue of the deposit’s diamonds is relatively low, said Jim Gowans,chief executive of De Beers Canada, so more testing is needed to decideif it is economical to bring them out of the ground. “We’re excitedabout Gahcho Kue,” he said, “but we’re going to do thingssystematically.”
Mountain Province says the diamonds are worthmore than De Beers’ estimates, and it disputes the rationale for delay.It is considering legal options to have De Beers dismissed as projectoperator.
The dispute is likely to end in settlement. De Beersenjoys less market share and room for tough tactics than ever before.Its posture in recent years has been conciliatory.
In October,De Beers settled a dispute with its joint venture partner AfricanDiamonds, a junior miner. The company claimed De Beers, with a 71 percent stake, was trying to delay development of the AK06 mine inBotswana to arrange terms for the diamonds to be sold through De Beerschannels.
De Beers claimed its primary concern in requesting a project delay was unreliable power supplies.
In a compromise, De Beers agreed to start mine production onschedule but also won approval for the stones to be sold throughDiamond Trading Company Botswana, its marketing arm, which ishalf-owned by Botswana’s government.
Threatening De Beers withlawsuits – as both African Diamonds and Mountain Province have donethis year – is a sign of the reduced influence of De Beers as its shareof global diamond production declines, according to one industryveteran.
The company under Gareth Penny, managing director, hastaken pains to clean up its image. It has poured money into theKimberley Process, outlawing “conflict diamonds” from strife-tornregions.
It has also spearheaded diamond beneficiation, or thesharing of diamond revenues with producer countries such as SouthAfrica and Botswana.
De Beers’ handling of the Mountain Provincedispute could change attitudes in an industry where negativeperceptions of the company linger. But it appears less likely than everto give Mountain Province an answer the junior company wants to hear.
“We are going to have to do a lot more work on capital costs to find an economical deposit [at Gahcho Kue],” Mr Gowans said.
Diamondprices are falling, he said, making Gahcho Kue’s cost effectivenesslower and further delays possible. On Tuesday, he told Reuters that DeBeers Canada was cutting production by 10-20 per cent at its two fullyowned mines in Canada.
De Beers, which has invested $180m in Gahcho Kue to date, has no intention of resigning as project operator, he added.