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Betting on the Future of Natural Diamonds

Paul Zimnisky, Diamond Analytics
0 Comments| 4 days ago


North Arrow Minerals is Opportunistically Betting on the Future of Natural Diamonds at a Time when Activity in the Space is Sparse.


Despite narratives circulating that the diamond industry has been perinatally disrupted by falling marriage rates, changing consumer preferences and competition from low-priced man-made diamonds, recent investments in the future of natural diamonds by the industry’s largest players paints a different picture.

In March of this year, De Beers said it is moving forward with plans to expand two of the company’s largest mines in Botswana, Jwaneng and Orapa, which will extend their life-of-mine by as much as two decades, a financial commitment worth upwards of US$4 billion split between the company and its government partner. The move follows the recently competed expansion of the company’s Venetia mine in South Africa which will extend production beyond 2040 --also a billion-dollar-plus investment. Lastly, De Beers, along with its government partner, have committed to a $468 million expenditure to build a new mining vessel that will operate the coast of Namibia in the coming years.

 

(Net new store openings with projections by China’s largest jeweller, Chow Tai Fook, by fiscal year.)
 

Last year, a representative from the second-largest diversified mining company in the world, Rio Tinto, said “(the company) really likes the business of diamonds, we think it is a very good industry to be in…we want to stay in the business.” Rio’s Argyle mine in Australia is set to close next year, removing an estimated 10-15 million carats from annual global supply, representing a high-single-digit percentage of the world’s output. The company recently indicated that it is currently investing upwards of 20% of its global exploration budget on diamonds, despite diamond production currently representing only ~2% of the company total revenue.

Looking downstream, Chow Tai Fook, Greater China’s largest jeweller, opened a record number of new stores during their fiscal year ended in March, a bid of confidence in the future of China’s jewelry consumer and the industry’s second-largest and fastest growing market. The company opened 549 net new stores in the period, more than double the number of openings in any one year going back to at least 2010, bringing the company’s total store count to over 3,100. Further, the company said it wants to continue its aggressive growth strategy which “may amount to 1,500 to 2,000 (additional net new stores) in (the next) 3 years.” Worthy of note, Chow Tai Fook has also said that the company has no plans to sell man-made diamonds adding “we only sell real natural diamonds…we believe each natural diamond carries abundant emotional appeal and heritage with its unique experience and life journey.”

 
(A sample of rough diamonds recovered by North Arrow Minerals at the company’s 100%-owned Naujaat project in Nunavut.)
 

Canadian explorer North Arrow Minerals (TSX-V: NAR) is also opportunistically betting on the future of natural diamonds at a time when junior activity in the space is sparse. Outside of Canada’s operating mines, the company’s 100%-owned Naujaat project in Nunavut hosts the second largest diamond resource in the country; it is also the largest independently-owned diamond resource in Canada without a strategic partner.

Naujaat was discovered by BHP in 2003 and acquired by North Arrow in 2013. It contains an inferred resource of over 26 million carats and hosts a population fancy diamonds ranging in colour from yellow to orange. These coloured diamonds are not only an interesting and unique aspect of the project but integral to the economics as they can be worth multiples compared to that of conventional mined colourless stones.

For instance, a nice example of a fancy vivid orangey-yellow mined diamond can be worth upwards of US$20,000 a carat and as much as US$70,000 with a fancy vivid yellow-orange designation, note the latter colour being predominant. The same stone with a fancy vivid orange designation, with no yellow or brown hue, can be worth as much as US$700,000 a carat. For context, an average natural, colourless 1-carat stone sells for around US$4,500 polished.

(A polished, GIA certified, fancy vivid orangey-yellow diamond recovered by North Arrow Minerals at Naujaat.)
 

In May, North Arrow said it is planning on conducting a bulk sample at Naujaat, the next conventional step in advancing the project by determining the quantity and quality of fancy diamonds in the deposit. The aim is a 10,000 tonne sample and North Arrow is considering onsite diamond recovery via a mobile plant equipped with TOMRA’s XRT diamond sorting technology targeting stones greater than 0.5-carats in size, with a focus on demonstrating a coarse-population of the fancy coloured stones. An on-site diamond recovery plant would also allow for faster results and flexibility to expand the sampling program if results are positive.

Conventionally, the cost of a sample of this size in an environment such as Nunavut can run many $10’s million, however North Arrow hopes to leverage a planned “community access trail,” providing much more economic access to the site, potentially reducing the cost by as much as 20% or more.

The local community has approached territorial and federal government entities to help finance the trail in an effort to stimulate economic activity in the area. The trail would run within 1.5 kilometres of the North Arrow deposit and could be completed as early as summer-2020 which would ideally align with North Arrow’s timeline for the sample.


(An image of the Naujaat project site with magnified kimberlite samples.)


Given the commercial scale of Naujaat and the cost of advancing a project of its size at this stage, it would be reasonable for the company to align with a strategic industry partner that could not only share the costs of advancing the project but also provide later-stage project expertise.

Aligning with a major to advance a large project at the bulk sampling stage is seen as a common strategy within the industry. De Beers originally had an option arrangement with Peregrine diamonds to jointly advance the Chidliak project in Nunavut before acquiring the company outright in July 2018. Further, Rio Tinto struck an earn-in deal with Star Diamond in June 2017 to advance the company’s Star-Orion South project in Saskatchewan.

Outside of partnering with a major, North Arrow could also potentially find support within the company’s current insiders. Gren Thomas and Chris Jennings of diamond exploration fame sit on North Arrow’s board and Lukas Lundin via Zebra Holdings, Electrum Group and Ross Beaty are major shareholders. North Arrow’s management, directors and advisors hold 24% of the shares outstanding, and Zebra, Electrum and Beaty hold 10%, 10% and 9%, respectively.


Disclosure: Paul Zimnisky has been compensated by North Arrow Minerals to produce the above content. This content includes views that are based on estimates, analysis, observations, discretion and opinions. Effort to ensure the accuracy and reliability of the information above has been made, however, accuracy cannot be guaranteed. Information above is strictly for informational purposes and should not be considered investment or financial advice. Consult your investment professional before making any investment decisions. None of the parties involved accept culpability for losses and/or damages arising from the use of this content. At the time of writing Paul Zimnisky held a long position in North Arrow Minerals as well as diamond companies Lucara Diamond Corp, Mountain Province Diamonds Inc and Signet Jewellers.

FULL DISCLOSURE: North Arrow Minerals is a client of Stockhouse Publishing.





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