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The need for significant capital investments will be the main trend in the diamond mining industry in 2021-2030

06 july 2020

Image credit: TheDigitalWay (Pixabay)

mityukhin_sergey_xx.pngThe prospects of the diamond industry in the post-crisis period are discussed by the Rough&Polished correspondent with Sergey Mityukhin, Candidate of Geological and Mineralogical Sciences, Honored Geologist of the Russian Federation, who was Chief Geologist at ALROSA-Nyurba in 1994-2000; Chief Geologist at ALROSA in 2000-2010, and Director for Project Development in Africa at ALROSA in 2011-2017. At present, he is an expert at Almazintech Consulting and Engineering company.

World diamond production in 2009-2019 amounted to about 1,400 mn carats. In your opinion, how will it develop in the next ten-year cycle?

Diamond mining in 2021-2030 will decline year-on-year from 130 mn cts to 120 mn cts by 2030. With an average annual output of 125 mn carats in the coming decade, the industry will decrease the average annual production by 15 mn cts by volume compared to 2010-2019, or by 11%. The dynamics are as follows. The closure of the Argyle mine means the reduction by 15 mn cts. After 2025, Canada will gradually show a decline in the production from 22 mn cts to 12 mn cts. Zimbabwe will add 3 mn cts to its average annual output in 2010-2020. Angola will add another 3 mn cts to its 9 mn cts. Total production by 2021 will make 130 mn cts, it will drop to 125 mn cts by 2026 and to 120 mn cts by 2030 taking into account the year-to-year decline dynamics. Thus, over 10 years, 1,250 mn cts will be produced compared to 1,400 mn cts in the previous ten-year cycle. It should be remembered that carry-over excess stocks at the end of 2020 will amount to 50 mn cts.

And how will such dynamics look like by value measured in the 2010-2019 prices?

The share of the Argyle mine that is to be shut down is insignificant and equals to a $200 mn. Canada will decline its production gradually, and the loss will amount to $900 mn. Totally, it will make $1.1 bn. Taking into account the growing figures in Angola and Zimbabwe, the total decrease will be by $450 mn. The total decline will reach about 3%.

Are these estimates conservative?

It is for sure that the figures will not be lower. Upward dynamics is theoretically possible as Zimbabwe can increase its production up to 10 mn cts per year, which will add about $600 mn measured in the 2010-2019 prices. DRC can increase the production from 23 to 45 mn cts. If Angola launches its factory in Luele (Luaxe), it will bring $400 mn to the market. No one else can act as a ‘troublemaker’ in the existing raw material base scene.

How can the state of the mineral resource base be characterized in the countries that are main rough diamond producers?

The available raw materials should be understood as the total amount of mineral resources taken into account by existing investment projects. In other words, this is the volume of rough diamonds within the existing quarries and mines requiring no additional investments for their operation. This type of mineral resources refers to the category ‘Measured’ of the CRISCO codes with an allowance for the harmonization tolerances of the CRISCO parametres and the RF State Commission on Mineral Reserves’ standards.

The total amount of the ‘investment-ready’ mineral resources in the Russian Federation is estimated at 550 mn cts, which will allow diamond miners to maintain the diamond production at the level of 40 mn cts per year, or 400 mn cts over 10 years.

The Republic of Botswana will keep on ranking second in the world by volume. The volume of roughs accounted for in the ongoing investment projects is estimated at 340 mn cts. This will keep diamond mining at the level of 23 mn cts per year, or 230 mn cts over 10 years.

Canada should keep the diamond production at 15 mn cts per year taking into account a possible decline at the Diavik project and the simultaneous increase in production at the Gahcho Kué project.

In the next decade, the Republic of Angola’s diamond production will grow up to 12 mn cts per year based on the ‘investment-ready’ reserves thanks to the government efforts to support the industry. This will amount to 120 mn cts over 10 years. It should also be assumed that the South Africa’s diamond production will remain at 8 mn cts per year, or 80 mn cts over 10 years.

The main diamond producers will ensure the production in the next decade in the amount of at least 1.0 bn cts, and taking into account other countries, the figure of 1.25 bn cts is quite realistic.

What are the most significant problems facing the diamond mining companies in the post-crisis period?

Comparing two indicators - the volume of the ‘investment-ready’ reserves and the diamond production, it is easy to see that in the next decade, the existing raw material base of the industry will be depleted by 80%. Accordingly, the industry and all companies - the main producers of diamonds - will face the challenge of increasing their investments in the rough diamond sector. Otherwise, the production will collapse in the next decade. We are talking about building new quarries and the construction of mines to shift from open pit diamond mining to underground operations, as well as to the reconstruction of existing mines and the investments in the geological exploration.

At least 3 mines are to be built in the Russian Federation - at the Yubileynaya, Mir, and Grib deposits. In Botswana, the construction of underground mines at Jwaneng and Karowe deposits should be expected. In Angola, a beneficiation plant at the Luele (Luaxe) deposit with a capacity of 10.0 mn tonnes, or 8-10 mn cts per year, will be constructed. Also, it is necessary to increase the investments in the construction of underground mines at some operating mines.

It is this trend - the need for significant capital investments - that is the main component in the activities of the diamond mining industry in 2021-2030, which is the main difference between the coming decade and all previous periods. The solution to this problem does not seem to be simple. Operational figures as one of the main sources for an investment maneuver are objectively decreasing as the volume of rock mass per unit of production is growing. This is mainly due to going deeper in the quarries at the primary deposits that account for more than 80% of the rough diamond output. At the same time, one cannot expect an increase in rough diamond prices. The question is whether all diamond miners can find opportunities to make investments using their own profits and whether all of them have the opportunity to increase their loan portfolio. The risk zone is the financial stability of the second-tier diamond mining companies, such as Petra Diamonds, Dominion Diamonds, Gem Diamonds, Firestone Diamonds, as there is a possibility of a number of bankruptcies in the post-crisis period.

How likely is it to discover large diamond deposits in the next few years?

The probability of discovering deposits that are significant by volume of rough diamonds remains very high within the boundaries of all diamond-bearing provinces. However, the reserve for replenishing the resources due to geological exploration is associated with the prospecting of areas with very thick overburden. As a result, the exploration technology uses drilling to take deep-level geological samples. Accordingly, the cost of a work unit rises many times relative to the traditional geological exploration by means of the surface sampling of geological samples.

In this regard, we should turn to the role and importance of junior companies. The statistics show that the main contribution to the diamond deposit discoveries in the 20th century was made by junior companies. This includes the discovery of diamondiferous kimberlites of the Ekati, Diavik, Victor, Saskatchewan and others clusters in Canada, and the Finsсh, Venetia, AK 6 (Karowe) deposits in South Africa, the Argyle, Ellendale ones in Australia, and Diamang company in Angola.

Significant discoveries - Jwaneng and Orapa clusters - were made by the geological department of the leading diamond mining company De Beers. However, this is the end of the list of the diamond deposit discoveries made by the large companies, while Rio Tinto and ВНР have no successful exploration experience at all.

The upcoming transition to prospecting the areas with thick overburden, which means a high cost of work, virtually eliminates the role of low-budget junior companies in the exploration. Accordingly, in the coming decade and beyond, the role of large companies in replenishing the mineral resources is increasing. The strategy to acquire the assets - newly discovered deposits - from junior companies is no longer justified.

During the crises like those experienced by the diamond mining industry today, a discussion intensifies in the geological exploration sphere about the so-called ‘new’ exploration methods. The aim is to replace costly methods based on drilling, first of all, with the approaches providing the adequate information. Is this possible in principle?

It is necessary to clarify this issue to avoid confusion. The exploration methods in the diamond industry - like in searching any kind of minerals - include a set of technologies based on the petrophysical, mineralogical and geochemical properties of the rocks of a deposit. These properties are known, studied in detail, and there is no reason to believe that it is possible to find new, previously unknown, basic characteristics of the objects under exploration. Accordingly, the list of methods used cannot be expanded in principle.

The situation with technologies that are used within the framework of traditional methods is different. The technologies are constantly being improved as the resolution of geophysical methods becomes higher, the sensitivity of laboratory equipment increases, and methods of computer data processing are improved. The technological advancement leads to an increase in the information obtained in the geological observation, for example, from samples, minerals, trace elements, every geophysical observation bit.

The technological improvements used by the applied traditional methods certainly reduce the cost of work through increasing the information efficiency of each target of geophysical and geological investigation. However, the main costly burden in the general geological exploration is in the geological primary sampling or the geophysical observation directly in the field. For this reason, the shift of searches to the so-called ‘closed’ areas where the objects sought are overlapped by younger geological formations leads to a rise in the cost of work as the depth of deposits from the ground surface increases.

Can an anticipated decline in the production increase rough diamond prices?

The well-known paradigm - ‘a decrease in the rough diamonds production results in higher prices’ - is true in theory, but in practice, the pricing mechanism is much more complicated. Moreover, in recent years, it has got features that were not previously characteristic of the classic ‘diamond pipeline’.

In 2014-2019, the diamond production by volume and by value was stable but the average rough diamonds prices declined steadily, that is, the mining companies’ margins dropped. Cutting companies, despite the fact that they bought the roughs at lower prices from year to year, did not increase their margins, either, as the polished diamond prices declined. The operating profitability of diamond jewellery manufacturers and retail chains remained almost flat over this period, with diamond jewellery sales steadily increasing, at least from 2016 to 2019.

That is, the lower rough diamond prices brought no benefits to diamond miners, diamond cutters, jewellers or sellers ... Who had the benefits?

One can assume that in the movement of diamond material of all categories (rough diamonds, polished diamonds, diamond jewellery) there are players who independently make the added value. These are sightholders, traders, dealers - wholesalers-buyers of rough diamonds, polished diamonds, diamond jewellery. It is this group of participants in the process that absorb the margin lost by miners due to lowering the prices of their rough diamonds. Equally, this group of players absorb a share of margins of other participants in the process. Therefore, ideas such as ‘rough diamond overproduction leads to lower prices for rough and polished diamonds’ and vice versa ‘a decrease in the production of rough and polished diamonds leads to higher prices’ lose their relevance today when speculative intermediaries dominate. And the current movement pattern of all categories of the diamond products does not allow us to hope that after the crisis, the rough diamond prices will cease to decline; equally one should not hope that the stability of the cutting and polishing sector, the most vulnerable in the diamond pipeline, will be higher.

Will the diamond jewellery market lose its current position due to the reorientation of the consumer interest from the millennials towards other sectors?

The diamond jewellery market will grow at a moderate pace compared to the last decade. First of all, it is necessary to take into account the relatively low sales of this product, for $85-90 bn a year. For comparison, the sales of sports services (fitness, swimming pools, etc.) amounted to $450 bn in 2019. The global gadget market is estimated at $250-300 bn, and luxury items - in the range of $200-250 bn. Given the growth of the global economy’s GDP - and accordingly, the growth of consumption possibilities of the population of most countries, there is no reason to suppose a decrease in the diamond sector that is very insignificant by volume. This refers to the millennials who are entering their marriage age and gaining financial sufficiency in the next decade.

How serious is the threat to the natural diamond jewellery market from the synthetic diamond jewellery market?

As the modern history shows, the development of the man-created diamond jewellery market does not pose a threat to the natural diamond market. Five to seven years ago, an active discussion of this problem began and the apocalyptic scenarios dominated that did not come true. This is evidenced by the market statistics and a significant loss of media’s interest in the issue. The synthetic diamonds will find their niche in the luxury fashion jewellery market, but this category of goods is not an alternative to natural diamonds.

Sergey Goryainov, Rough & Polished