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Thursday, 28 July 2016 16:06

Hunting For Diamonds

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On the semi-frozen surface
of Faraday Lake in Canada’s subarctic,
two diamond rigs are
drilling around the clock. It’s
spring breakup north of the 63rd
parallel, which means the Kennady
Diamonds Inc. exploration team is
running out of time.
“It’s starting to candle,”
says geologist Martina Bezzola,
scuffing her rubber boot over the
fast-melting ice where vertical tunnels,
or “candles,” have recently
appeared. The thaw means the
team has two weeks to extract kimberlite
samples from beneath the
lake before they’re banished to
drilling onshore. “Basically it’s like
sticking a needle into a haystack to
determine what’s in the haystack.”
Twenty-five years after the
first diamonds were found in
Canada’s Northwest Territories, it’s
still a game of hurry-up-and-wait.
For every thousand grassroots exploration
projects, only one becomes
a mine. Snap Lake, one of
three operating mines in the region,
was shuttered by De Beers last
year, a casualty of harsh geography
and falling diamond prices. Government
attempts to add production
value with a cutting industry collapsed
years ago; all that remains
of “Diamond Row” in the territorial
capital Yellowknife is a line of
derelict buildings behind barbed
wire.
Gahcho Kué
And yet the dream lives on.
At a time when global miners are
shedding assets, De Beers is about
to open the largest new diamond
mine in the world, Gahcho Kué,
280 kilometers (175 miles) northeast
of Yellowknife. A little further
north, Rio Tinto Group last year
found—and just sold—the largest
gem-quality diamond ever
recorded in North America at its
Diavik mine, the 187-carat Foxfire.
Dominion Diamond Corp. last
week agreed to extend the life of
the neighboring Ekati mine beyond
2020.
“The return in diamonds is
fantastic, but you need the patience
of Job,’’ says Jonathan Comerford,
chairman of Kennady Diamonds,
on site at the Kelvin Camp on
Faraday Lake to represent the interests
of Irish billionaire Dermot
Desmond.
Desmond owns almost a
quarter of Toronto-based Kennady
and 23 percent of its former parent
company, Mountain Province Diamonds
Inc., which these days is focused
on developing Gahcho Kué
with De Beers. Canada has a couple
of marks in its favor that keep
the majors interested amid a grim
market, says Kim Truter, chief executive
officer of De Beers
Canada.
Engineering Challenge
Prices for rough stones
have rebounded 10 percent this
year after plunging 44 percent in
the five years ending in January.
The country is politically stable
and has a long mining history, mitigating
the snail’s pace at which
projects proceed; Gahcho Kué took
21 years to bring into production.
And Canada’s diamond deposits
tend to be predictable, with high
concentrations of bridal-quality
gems.
Canada produces approximately
10 percent of world diamond
output by volume but about
15 percent by value, said Truter,
51. “The price we receive for the
diamonds in Canada is actually
quite high compared to other regions
of the world.”

Ice Road
So is the cost to produce
them. Gahcho Kué’s billion-dollar
price tag could have been 30 percent
less elsewhere in the world,
Truter says. In seven years of operation,
Snap Lake never made
money, crippled by the costly engineering
challenge extracting diamonds
from beneath a subarctic
lake.
The best way to understand
what it takes to mine diamonds in
this part of the world is to view it
from above. The landscape, for
hundreds of miles in all directions,
is almost entirely binary: snowcovered
rock and too many lakes to
count. The temperature ranges
from minus 50 degrees Celsius (-
58 Fahrenheit), to plus 35 in the
summer. Scattered aboriginal communities
inhabit the area, along
with caribou and grizzlies.
Each winter, mine operators
spend three months constructing a
350-kilometer ice road across this
terrain. Once the ice is thick
enough to support the movement of
heavy equipment, a convoy of
trucks crawl along at one-kilometer
intervals to avoid stressing the ice.
This year, the road was open eight
weeks before it started to melt.
After that, the only way in is by air.
Irish Billionaire
Historically, diamonds in
Canada have tended to be found by
lean and nimble junior exploration
companies, although De Beers continues
to invest heavily in exploration.
Those that go broke scare
off future investors, making a
benefactor like Ireland’s Desmond
and his private equity money invaluable.
“Without the support of the
Irish we would be up the creek,”
says Patrick Evans, 60, Mountain
Province’s CEO and, until this
April, also of Kennady. It was
Desmond’s team that insisted Kennady
be spun off to maximize the
value of both companies. The Irish
billionaire, who made his fortune
in software and betting shops, has
done well this year with diamonds:
Kennady’s stock is up about 40
percent in Toronto. Mountain
Province has gained about 60 percent.
Neither company has any revenue.
Friendly Debate
Evans, Comerford and
Kennady’s new CEO, Rory Moore,
have flown into Kelvin Camp to go
over the geological data. It’s a
spare but cozy operation: two neat
rows of red-walled sleep tents surrounded
by an electric bear fence.
There’s also a plywood office,
communal washroom (hand sanitizer,
no sinks), carb-heavy kitchen
and a core shack. The latter is
crowded with executives, a handful
of camp personnel and Tom Mc-
Candless, an independent director
of Kennady.
A geologist, McCandless,
61, has been wheelchair-bound
since a desert bike accident in
1975. That’s never kept him out of
the field; he’s spent the day gamely
wheeling through snow. At frequent
intervals Evans and the others
step in to lift his chair in and
out of buildings, vehicles and aircraft,
at one point jury-rigging a
sled to drag him through a challenging
patch of slush.
Inside, crowded between
tables of kimberlite samples and
geological maps, this esprit de
corps morphs into a friendly debate
between McCandless and Moore as
they grill Bezzola’s fellow geologist
David Cox, 31, on the team’s
progress. The discussion is technical
but the underlying question is
clear: could Kelvin Camp be sitting
on the kind of deposit De Beers is
developing a stone’s throw away?

Kelvin Camp
Kelvin Camp is located just
up the road from Gahcho Kué (or
would be, if there
were a road). How
Ireland’s Desmond
came to have a foot in
both camps is a story
Evans and Comerford
never tire of telling.
The area was
discovered by Mountain
Province in the
early ’90s. Like most
exploration companies,
to fund development
it ended up in
bed with a major, in
this case De Beers.
‘What Fools’
Back in 2005,
as Evans recounts it,
De Beers was focused
on developing Gahcho
Kué and balked at paying
C$10,000 ($7,600) to extend permits
on the surrounding land. “I sat
in the meeting and thought: my
God, what fools,” he said. Mountain
Province leapt in to take over
the mineral rights for free and
when it got around to drilling in
2011, Evans’s instinct was validated.
“It was clear from the results
we were getting that they’d put
their holes in the wrong place and
we asked the question: what the
hell is going on?”
The Mountain Province
team tracked down a geologist who
solved the mystery: A builder
changed the height of the building
on which the radio beacon was located
without alerting the geologists
and the company ended up
drilling the wrong coordinates.
How Chuck Fipke and
Stewart Blusson, two prospectors
down to their last nickels, found diamonds
in this part of the world
back in 1991 is also the stuff of
legend. The discovery started a
frenzy reminiscent of the 1940s
gold rush on which Yellowknife
was founded. Tom Hoefer, executive
director of the NWT &
Nunavut Chamber of Mines, remembers
the heady days well. People
mortgaged their houses and
every helicopter for miles around
was booked, ferrying prospectors
to remote areas. Above the tree
line, even the wood for the stakes
had to be flown in after Yellowknife
hardware stores ran out of
two-by-fours. Some 50 million
acres were staked, he says.
Strong Personalities
Since then, strong personalities
have persevered but also, at
times, got in the way of investors,
says Comerford. Consolidation
makes sense yet has been slow in
coming. Rio Tinto’s Diavik mine
and Dominion’s Ekati are on the
same lake and Dominion has a 40
percent interest in Diavik.
“We’ve been quite public
that if they were ever for sale,
we’re certainly interested,” Dominion’s
CEO Brendan Bell said in an
interview. He said it appears “Rio
Tinto is committed to the diamond
space and the asset isn’t for sale.”
In a recent interview in
New York, Rio Tinto’s former head
of Diamonds & Minerals, Alan
Davies, wouldn’t discuss the possibility
of consolidation other than to
say the company is looking at options
to extend Diavik’s life beyond
2024.
Not Aligned
“For whatever reason, the
stars haven’t aligned quite yet” for
consolidation, says De Beers’
Truter. “There’s probably a bit of
inevitability about it.”
Evans agrees but for now
he’s focused on more nitty-gritty
matters. Back at Kelvin Camp, the
Hagglunds all-terrain ground vehicle
has broken down and a helicopter
is being discussed as the best
option to ferry the executives to the
Twin Otter plane waiting a few
hundred meters out on the lake.
“Can’t we walk?” Comerford
demands impatiently. “Let’s
just walk.”
Given the melting ice, it
will mean a stroll through shindeep
water. David Cox looks at
him like he’s mad. “You can try.”
James Tarmy
and Vernon Silver
Bloomberg Business Week

Read 1850 times Last modified on Thursday, 28 July 2016 16:21

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