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OVERVIEW: The tangle of problems at Mir

09 august 2017

(INTERFAX) - A legend says that the geologists, who happened to be first to discover the Mir Diamond Pipe in Russia’s Yakutia in June 1955, stumbled upon the future flagship of the country’s diamond-mining industry thanks to a fox. The animal dug a hole under a larch exposing a layer of rock in which the geologists’ attention was attracted by minerals accompanying diamonds. Later on, at the site of the fox hole there emerged the world’s largest diamond quarry 1.2 km wide and 525 meters deep, which produced up to 10 million carats of high-quality diamonds in its best years.

The quarry was closed in 2001, as open-pit mining became inefficient due to the huge size of the "funnel". But the kimberlite pipe was explored to a depth of 1,235 meters, and its reserves at present grades are sufficient for mining up to 2052. To develop it further, an underground mine was commissioned in 2009, which reached its design capacity only at the end of 2016. This was due to complicated mining and geological conditions. The fox hole was dug in a rather dangerous place.

ACCIDENT

The accident that occurred on August 4, 2017 in the mine not only disabled one of the main production facilities of ALROSA (MOEX: ALRS) for an unpredictable period, but also put the diamond miner's management in front of a tangle of problems. After the rescue operation is completed, it is not enough just to pump the water out of the mine and repair the equipment, experts say – there should be guarantees that the disaster will not happen again. And not only at Mir, but also at other underground mines (the company has three more accounting for over 30% of carat production, and this share will grow).

The Mir Mine may stay idle for three months to half a year, and in the worst case it may be necessary to revise the mine development project, experts say.

From the point of view of sales, the situation does not yet look dangerous - on the contrary, ALROSA can even support diamond prices by cutting supply to the market. But if market demand grows, this restriction will result in a dip in financial performance, analysts believe.

The likely cause of the accident was an uncontrolled increase in water inflow from the pit of the spent quarry into the underground mine, which occurred as a result of a sharp deterioration in the geological conditions and erosion of the surrounding rocks in the quarry, ALROSA explained on the day of the accident. The company noted that the operation of the mine was carried out in full compliance with all technical and safety requirements.

A status source in the geological and mineral industry, who asked for anonymity while interviewed by Interfax, noted that the water prevention system at Mir suffered from a failure, the reasons of which are not clear. "No one thought that such an amount of water would accumulate in the pit of the quarry, so the pumps apparently did not have time to pump it out. The balance broke, the seal could not stand the pressure - and a giant pillar of water crashed down, smashing everything in its path. They knew there for a long time that pumps did not always manage to cope, and of course it was necessary to be extremely attentive to the state of the seal. There is a feeling that it did not have devices whose function was to let know about the proximity of the critical state," the source said.

THERE WAS NO RESERVE OF STRENGTH

"It's unlikely that what happened is a consequence of the "human factor" or an oversight or failure to meet the project's conditions. The project may not have had enough safety reserve and some extreme mining and geological conditions have not been taken into account," said Sergey Goryainov of Rough&Polished.

In this regard, he recalled the opinion expressed earlier by Professor, Doctor of Technical Sciences Lev Puchkov, the former President of the Moscow State Mining University. Back in 2009, Lev Puchkov noted that the accepted option for the construction of an underground mine with a ceiling (a seal between the quarry and the mine) to protect from the aquifer was dangerous and inefficient. "In the first place, it was to take some part of the ore body, “freezing” from $3.0 to $3.5 billion worth of diamonds. Secondly, it is very dangerous to work on such an area under a ceiling allegedly protecting you when the quarry has already been worked out 500 meters deep because this ceiling may one day subside crushing down all the mining works, together with everything there is in the pits," noted Lev Puchkov.

In addition, according to Lev Puchkov, it was fundamentally wrong in this configuration to work out the mine from the top down. "If you want to work under a ceiling, sink your shafts deeper and undercutting the diamond pipe go upwards till your reach the quarry – then enter the quarry losing virtually nothing at the final stage of mining. But going down from under the ceiling and putting backfilling above is a very dangerous pattern and this danger will increase in time. Of course, if you make a pure-cement backfilling merging it somehow with underground rock, it will stick in place, though in Yakutia, locally, there is no decent stuff to produce backfilling and if you bring it along including cement and other things, you won’t need any diamonds – underground mining will yield no profit," Lev Puchkov added.

Vladimir Dyukarev, who served as First Vice President - General Director of ALROSA from 1995 to 2002, does not exclude that errors were committed during the selection of design concepts for the Mir Mine. The company during this period was led by Vyacheslav Shtyrov, who later became the president of Yakutia. It was at this time that Yakut underground mines started to be designed.

Vladimir Dyukarev stressed that the geological structure in the area of the Mir Mine is very complicated. "Here you may come across cryogenic factors (permafrost and thawing), high saturation of rocks with methane, oil and bitumen occurrences, as well as aggressive salt and water brines in case of water intrusion. It is a very complicated ‘mountain,’" he said.

DANGEROUS MINE

Nevertheless, as Sergey Goryainov notes, the project of the Mir Mine has passed many examinations. Mining plans are controlled annually at every mine and mines are regularly monitored by supervisors, the expert of Rough&Polished said.

As a result of the inspection carried out by the Lensk Office of Russia’s Federal Environmental, Industrial and Nuclear Supervision Service (Rostechnadzor) in September 2012, the activities of Mir were already suspended for a month due to non-compliance with industrial safety requirements. Specialists of the department also drew attention to the fact that the mine was "under conditions of high water-cut, which is a consequence of the lack of a drainage complex and the presence of significant tributaries of brines from the Metegero-Ichersky aquifer through the safety seal from the abandoned quarry of Mir. Later, after explanations from ALROSA Rostechnadzor admitted that the situation at the Mir Mine was not qualified as emergency.

The new inspection of Rostekhnadzor is to be carried out at Mir on 4 to 29 September, and at the same time, three other ALROSA underground mines will be tested, two of which (Internatsionalny and Udachny) belong to the first class of hazard and another (Aikhal) - to the second class of hazard. In parallel, a special commission of Rostekhnadzor started its work to investigate the causes of the accident. The inspectors of this service will be sent to the mine after the end of rescue operations.

The management team of ALROSA will now face the task of analyzing the level of safety at all the company’s mines, Sergey Goryainov believes. The security forces became interested in the matter as well. On Monday, Nikolay Patrushev, Secretary of the Security Council of the Russian Federation, visited Yakutia and said during his conversation with Yakut leader Yegor Borisov that such accidents should be prevented and that there should be appropriate control.

The project of the Internatsionalny Mine, the most profitable of ALROSA’s mines, is also quite dangerous. It has two central shafts, though this system has long been discarded - for example, the Donbass coal-mining area abandoned it in the 1970s, as in case of fire in a shaft inset both shafts were usually closed trapping people in a “sack,” explained earlier Lev Puchkov.

"In Yakutia, this is a usual picture at all mines, everywhere there is a leakage of water. The area is saturated with underground brine waters that do not freeze even at minus 30 Celsius," an anonymous source told Interfax.

Nikolai Sosnovsky, Metallurgy and Mining Director at Prosperity Capital Management said that the water-cut situation at the Internatsionalny Mine is somewhat similar to that of the Mir Mine, while it is even a bigger money earner, because its ore is of a higher grade, having 6 to 10 carats of diamonds per ton against 3 carats per tonne at Mir. Mir and Internatsionalny, which is located 15 km to the south-west from it, belong to ALROSA’s Mirny Mining Division, whose director, Mikhail Lopatinsky had his powers suspended on Friday until the end of inspection. Internatsionalny and Mir account for 11% of ALROSA Group’s total diamond output.

PROSPECTS FOR RECOVERY

According to Vladimir Dyukarev, the Mir Mine is subject to recovery. "Right now, there is not much detailed information coming in, but what I see is that production at the mine can be restored, and we need to do this," he said. Vladimir Dyukarev found it difficult to assess how long it would take. While the safety threat remains, production will stay suspended, he said.

"The remaining diamond reserves of Mir are very large, the ore is rich - about 4 carats per ton - and its recovery, of course, makes economic sense. ALROSA does not have many deposits of this class," said Academician Nikolay Pokhilenko, Director of the Sobolev Institute of Geology and Mineralogy belonging to the Siberian Branch of the Russian Academy of Sciences. "The conditions at Mir are really very complex: aggressive mineralized waters corrode ice and cracks are being formed in the permafrost even at very low temperatures. It is probably the only place on the planet where diamonds are mined in such conditions," he added.

According to Sergey Goryainov, it will take at least half a year to restore production at Mir, as a full-scale revision of the project is needed. "Judging by the information available in the media, the return to full-scale production in previous volumes may take up to six months." First, it is necessary to eliminate the consequences of the accident, and secondly, a full-scale analysis of the causes of the incident is to be held, including discussion on how to avoid repetition of a similar situation," the expert of Rough&Polished said.

"The problem is not in restoring the mine and resuming production, but in guarantees to be given by project designers and executors that this will not happen again. If it turns out that it is impossible to provide such guarantees, the project will, of course, need to be revised. This is very expensive, but they still have to deal with it, because otherwise the company will be at risk of facing another catastrophe," Sergey Goryainov believes.

According to Nikolay Sosnovsky of Prosperity, Mir may be re-started more quickly - within three months. "If there are no serious cracks and equipment losses, and Rostekhnadzor will not issue an order to introduce a conceptually new safety system or to prohibit the work until the seal between the quarry and mine is repaired, the mine may resume operation in the foreseeable future - possibly within this quarter," he said.

IMPACT ON SALES

ALROSA has a high diversification of production, so the suspension of operations at Mir will not affect the company's performance with regard to its long-term contracts, assured the president of ALROSA, Sergey Ivanov.

There are no threats to sales of ALROSA, given the availability of stock and production at other mines, BCS believes.

"The company will have to sell part of rough from its stock in the third quarter, compensating for the drop-down at Mir," said Nikolay Sosnovsky of Prosperity. It had about 13 million carats in its stock in the end of the first half of the year, but most of this rough, if not all, is composed of technological stuff, that is of rough diamonds whose processing is not completed, due to which they are not ready for immediate sale.

In the third quarter, the company sells the smaller part of alluvial rough, Nikolay Sosnovsky said, and production during this period is usually much ahead of sales, so, most likely, the deficit will be avoided. ALROSA will even be able to maintain the level of prices for rough diamonds reached at the end of the first half of the year (4-percent growth), if it restricts supply to the market, especially in the absence of an increase in demand.

However, if market demand grows, there may be some shortage of rough, Nikolay Sosnovsky believes. In this case, the company can mobilize internal reserves and increase production at other mines using the availability of free processing capacities.

According to Aton’s estimates, ALROSA is losing approximately 1 billion rubles in EBITDA during every month of the downtime at the Mir mine. It is still impossible to assess the impact of the accident on the company's business, as too many questions remain unanswered: 1) How long will be the suspension of mining operations?; 2) What damage did the flooding cause to the equipment of the mine?; 3) Will the accident imply any actions on the part of state bodies?; 4) What will be the long-term consequences for the maximum levels of diamond output at Mir?

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