The Grib Diamond Mine: Geology, Ecology and Industrial Safety

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The "Jubilee" Speeches

03 december 2018

The renewed “long-term” strategy of ALROSA for 2018-2024 gave rise to a lively discussion, which was pro-actively joined by the CEO of ALROSA itself.

The key issue was the lack of any plans among the company's management to restore the flooded underground Mir mine.

Sergey Ivanov Jr., having called nonsense the opinion of "some" analysts, who drew attention to the fact that the published version of ALROSA’s Strategy does not provide for the restoration of Mir, clarified that as soon as such a project is agreed, it will immediately appear in the same Strategy.

I am a conservative person and do not know how to interpret the meaning of the word "strategy" in such a wide way. It seems to me that the strategy of mining companies intends to give a vector of business development for years to come, which, of course, includes planned key projects of their investment programs. The construction of a new Mir mine as a way to reanimate the effective business unit with its own super-rich reserves is either part of ALROSA’s Strategy or not. The Strategy in the form in which it was presented, allows us to conclude that the company’s management does not consider it a strategic task to spend tens of billions of rubles to restore mining operations at Mir. If the company had set such a task for itself, then the issues of project development and its coordination would be left as tactical tasks at the level of current management problems, indicating that Mir remains a part of the strategic development plan of ALROSA Group in the medium term.

Let me remind why this question seemed to me extremely important. ALROSA’s Long-Term Strategy for 2013-2023 approved before the company’s IPO, was based on one fundamental principle suggesting the engagement of new high-grade ore at the old mines through investments in underground mining of diamond reserves located below the open pits, which would ensure the cost efficiency of new projects with poor-grade ore, such as Severalmaz, Zarya, Zarnitsa and Verkhnyaya Muna.

In essence, the company’s Strategy said: There are no new geological discoveries and they are not expected in the future, so we - ALROSA – will inevitably “eat up” the old diamond fields using the open-pit mining method, and as long as our free cash flow allows it is necessary to invest in underground mining to stay with rich ore in the future. Delivering high-margin goods from underground projects will compensate for low-margin projects whose main task is to preserve production volumes and jobs in the backbone settlements of Aikhal, Mirny and Udachny. In addition, the company made a prognostic assumption about an inevitable increase in the value of rough diamonds, which would allow transferring zero-profit projects into the category of money-earners and not just subsidizing them from revenues garnered at diamond pipes with higher-grade ore.

Such assumptions regarding growing consumption of their product are made by all companies operating in the public market. Otherwise they would just fail to have a market capitalization. Whether such forecasts come true or not is another question. But the pricing environment after the 2008 crisis allowed ALROSA to invest heavily in underground mining, which in strategic terms partly hedged the risks associated with a possible long-term negative change in the value of rough diamonds in the future.

The dropout of one of the main “bricks” in this foundation - in our case, this is the Mir mine - breaks all the logic of the ALROSA Development Strategy itself. Sometime ago, sitting for an interview with a former employee of ALROSA, I learned that the most popular joke, or meme as they would call it now, at the company's economic department was the expression “planned loss-making.” And no matter what it was. Any project that required a number of assumptions and most likely was unviable, was affectionately called a “planned loss-making target,” so as not to hurt the feelings of shareholders.

I think the company’s new Strategy for 2018-2024 in the form it was presented is exactly about this, the planned loss-making. And here are my arguments.

The absence of Mir in the Strategy may somehow be attributed to the emotionality of those who compiled this document and did not want to touch upon the tragic episode in the history of ALROSA and huge capital investments in the construction of a new mine, which would adversely affect the company’s dividend flows and its long-term financial pattern. At this point, it would be possible to put an end to the discussion if there were no “plans” for the construction of an underground mine at the Jubilee (Yubileinaya in Russian) diamond pipe in the same document.

And here let's elucidate the situation.

Discovered in the 1980s, the Jubilee diamond pipe is located about 30 km from the village of Aikhal and is in fact the last major Soviet project in the diamond industry.

According to eyewitnesses, the management of Yakutalmaz (the predecessor of ALROSA) was skeptical about this project from the very beginning because of the large investments involved and its inability to pay back even within the economy of Gosplan (the Soviet State Planning Committee). There were questions regarding the diamond grade and diamond quality. Factory No. 8, which was catering for the Aikhal quarry at that time, could not “swallow” the estimated volumes of ore and besides, the processing technology of this old factory did not provide appropriate diamond recovery rates. The issues of ore transportation gave rise to a series of fantastic projects, including even the seriously discussed construction of a separate railway to Udachny (for synergy, speaking in modern terms), where at the peak of production there was functioning Factory No. 12, an antique monster being the largest ore concentrator at ALROSA.

As a result, the company’s top management made a volitional decision to implement parallel projects deepening the Aikhal quarry and extending its life, as well as starting the construction and commercial development of the Jubilee diamond pipe in 1988 for future reproduction of the raw material base at the disposal of the newly created Aikhal Mining and Processing Division. For this purpose, the company additionally built Ore Concentrating Factory No. 14. However, the most difficult task facing the design and construction teams was the severe hydrotechnical environment complicating the development of the diamond deposit. The diamond pipe was actually “escaping” under the water, which required to divert the local river bed, create a system of complex waterworks and move a whole lake.

This determined the future of Jubilee. This quarry has a specific feature, which is a compact production site. Practically, there is no room for miners to maneuver while deepening the quarry and spreading its walls wider for safe mining operations - it is no longer possible to transfer the waste rock dumps or move the man-made reservoir bed. But in 1988, there were no scientists who thought that someone might have ideas to resort to underground mining to develop this diamond pipe having such a geology and a quarry more than 450 meters deep in the future.

Now about the geology. The Jubilee diamond pipe can be compared with a multilayer “cake” shaped as a narrow “carrot”, where the most delicious filling is in the middle. In other words, blocks of rich ore are mixed with poor grade breccias and tuffits of contact areas. According to experts, if at the start of mining works Jubilee’s diamond ore grade was “normally low,” that is usually between 0.5 to 1 carat per ton, later on, as mining operations reached the “middle” of the deposit, it increased to “highly remunerative,” and this, according to professional estimates, may range from 2.5 to 3 carats. Then again, there comes a slump in the grade and quality of extracted diamonds at lower levels of the deposit, including the sub-quarry reserves.

According to the Russian geological science and in the opinion of Andrey Kirillin and Evgeny Cherny, the discoverers from the Amakinskaya Geological Exploration Crew, this is generally logical for the Aikhal Diamond Cluster. The diamond grade of the Aikhal pipe was considered high by world standards; therefore, it can be assumed that it was about 4-5 carats per ton of ore, but the deeper the mining operations, the lower the diamond grade and quality, which was confirmed during the operation of the underground mine.

This specific feature of Jubilee has always tempted ALROSA to use it as a “cushion” to “level” the performance indicators of annual production using selective extraction of rich ore. In essence, they “grabbed” valuable ore blocks to the detriment of the stripping works required by the project. As a result of this, the eastern wall of the Jubilee quarry collapsed in the mid-2000s bringing down several million cubic meters of rock mass.

If the selective excavation at Jubilee is still practiced due to the need to replace the dropped-out Mir mine, then the remaining rich blocks of ore will be “eaten up” very, very quickly. And to build an underground mine on the remains is a solution, which at the very least has no commercial logic.

The company said it was conducting additional geological exploration of the Jubilee diamond pipe using a new highly-trumpeted French drilling technology for large-diameter exploration boreholes equipped with telemetric “trees” of core sampling to understand the setting morphology of the kimberlite body and its diamond grade. ALROSA assured that the applied exploration technologies indicated a certain increase in the diamond grade at lower levels of the deposit. However, any geologist will say that the quality of geological material to prepare and uphold a feasibility study of a project depends on large volumes of geological material and representative samples, not on technologies for their extraction. The problem is simply that it is expensive, that's all. At the time of the USSR, Yakutalmaz was able to finance geological surveys in the country’s diamond provinces to the maximum. Their result is obvious - no one even planned to build an underground mine on the Jubilee diamond field at that time, and therefore the sub-quarry reserves were opened nominally – by a single borehole. Accordingly, there is no reliable data on the grade and value of diamonds from the depth.

In addition, ALROSA announced plans to deepen the Jubilee quarry to a level almost exceeding 700 meters.

It seems to me that even a simple engineering analysis points to the impossibility of reaching such levels. ALROSA’s largest and the world’s deepest open-pit diamond mine, Udachny is about 640 meters deep. But it is actually "carved in stone." The Jubilee mine is "entirely another matter." Its quarry has unstable walls after repeated collapses and difficult hydro-technical conditions. Jubilee is also known for its adverse wind diagram, which is the most destructive factor for mining at ultra-deep quarries. After a massive explosion, mine workings may stay idle for weeks closed in extreme concentrations of hazardous substances. As I have already said, the mine’s compact production site with huge overburden dumps surrounding the quarry results in serious gas pollution. At such a depth, it simply will never be ventilated, and it is dangerous for blasters and operators of mining equipment.

It is difficult to make forecasts with the available information but taking into account the geological pattern of this field, it seems to me that 2025-2026 will be the last years in this mine’s life. The future will tell.

Undoubtedly, ALROSA, having full information, knows what is going on much better than me. Apparently, this is why the idea of ​​building an underground mine at the Jubilee diamond field has been “shaded” by an essential remark about the required financial assistance from the State.

And here we turn to the concept of planned loss-making as a strategic choice. Recently, the company launched the Verkhne-Munskoye diamond field, which is a low grade and logistically expensive deposit to develop. It requires incredible driving skills to transport diamond ore for hundred and fifty kilometers along a narrow technological driveway proudly called a “road.” There are not enough rest stops, repair boxes and emergency aid options. The simultaneous presence of 60 technological vehicles on the road (not counting the auxiliary transport) is a continuous stream. But, as they say, “the best-laid plans of mice and men…” – What if a truck breaks down on the way there, or even worse, if a 90-ton road-train derails and there is an accident? However, these are technical details, whereas strategically it is important for us to understand that this diamond mine was commissioned with the direct financial assistance from the State.

Such assistance is appropriate for a shareholder in the company; after all, ALROSA is not just a diamond producer, but also offers tens of thousands of jobs in Yakutia. However, it is very important that new projects will not become a stone dragging down the company's economics to the bottom of “planned loss-making” without taking into account that its shareholders always count on ALROSA's generous dividends and not only on increasing the fair value of its shares. But without the rich ore of Mir, Internatsionalny and Udachny, the poor-grade mines of Severamaz, Verkhnе-Munskoye and the Jubilee underground mine will be turning from a tool to maintain production volumes and jobs into such a stone to the detriment of the entire ALROSA Group and virtually the State.

None of the mines, except Internatsionalny and Aikhal, has so far reached its design capacity. And it is highly unlikely that we will see the news that this has happened. The Internatsionalny mine itself stood idle throughout the summer this year for technical reasons.

By the way, as part of the program to get rid of non-core assets in February of this year, ALROSA sold its gas producing subsidiaries, Geotransgaz and Urengoy Gas Company, to NOVATEK for 30.5 billion rubles. The company said that it expected to spend this money on restoring Mir; however, the funds received were spent to buy quasi-treasury shares of ALROSA-Nyurba from Yakutia and pay interim dividends.

What is remained to ensure the performance and resource base of the company for at least 5 years, which is nothing by the standards of long-term planning for a mining business? Is it one small diamond field, which is Nyurbinskoe-Botuobinskoe, as well as Nizhne-Lenskoe and Almazy Anabara, which are alluvial deposits developed by 70%? Or maybe Angola, which also forces to buy rough with a planned loss? Or maybe the projects involving polished diamonds worth several tens of millions of dollars against the backdrop of Mir with losses of billions in its reserves and a “joyful” perspective to fundamentally move from high-grade to low-grade ore? And in addition to all this, the company may well purchase Smolensk-based Kristall...

The development strategy of a mining company implies a long planning horizon for mining projects and clear understanding of its own resources and the reality in which this strategy will be implemented. ALROSA today is not the De Beers of the diamond monopoly period when the latter used to pick customers and set prices for its goods. At that time, Yakutalmaz pursued its business strategy solely as a mining company like ALROSA is doing now, selling goods first to De Beers and later to the market not subordinate to ALROSA. Currently, De Beers has taken the lead in creating a new jewelry market - the market for synthetic diamonds. Sooner or later, this market will enter into an obvious conflict with natural diamonds within the respective price and size category it is catering for. Most likely, it has already entered. Hence the sharp decline in prices for small-size goods.

In this environment – while shifting to a low-margin business model – it is possible to compete only having low production costs, high-grade deposits (it is also desirable to have major investments made in the “fat” diamond-mining years) and technologies for the most sparing extraction of diamonds from the ore to preserve the maximum amount of large stones. It is large diamonds of natural origin that will grow in price in the long term due to their rarity.

Otherwise, the grim joke about the project planned to be loss-making as a strategic choice of the company will become a bad reality.

However, there is still hope for a breakthrough geological discovery. The Soviet Union "auscultated" the bowels of Yakutia as far as its potential allowed. The last major discovery took place 22 years ago and it was the Nyurba diamond pipe. And there were no significant diamond deposits revealed over the past 10 years.

But we all should believe in a miracle.

Sergey Goryainov, Rough&Polished