‘No Major New Mines’ Answers the Wrong Question

Conventional wisdom holds that prices of polished diamonds are bound to go up because demand is rising and supply is shrinking. The idea of declining supply has several premises: 1. Diamonds are a finite resource. 2. The major mines are past their prime and slowly depleting, and 3. No new major resources have been found in the recent past.

Considering that it takes about 10 years between finding a diamond resource and the start of commercial mining, logic dictates that the expectation that a major mine will reinvigorate diamond supply anytime in the next decade is next to nil. However, herein lies the mistake. A major resource can come on stream much sooner than that and ensure steady supply for many years to come – and not because of a surprise find with a speedy ramp-up to production.

It must be stated right away that the three premises stated above are true and accurate. It must also be said that there is no De Beers-controlled conspiracy to mislead consumers into overpaying for polished diamonds by “gaming” supply, as some folk like to proclaim. De Beers has nothing to do with this at all.

The problem is not with the conclusion, either, but what it implies: That there are no known major resources left untapped. Sometimes, it’s not the answer given, but the question asked just as in this case, “Is there a major resource that is not being mined or developed?”

Several mines are in various stages of development and will come on stream in the next few years. They are, however, mostly not very large. Most of them will produce about 2 million carats annually. Such projects include Rio Tinto’s Bunder project in India, a 27.4 million carat resource expected to produce about 2.5 million carats annually when it comes on stream in 2017, and Stornoway Diamonds’ Renard project in Canada, a 27 million carat indicated resource with a production plan of 1.6 million carats annually starting in 2016.

But when talking about a major “world class” find, such 27 million carat or so finds are not what people have in mind – even though their contribution will be very worthy. A major resource is one that produces four to five million carats annually, and currently there are about 10 such mines producing those figures, including De Beers’ Orapa (around11 million carats), Rio’s Argyle (about10 million carats) and Catoca in Angola (approximately 7 million carats).

Look at Russia, See the Future
The issue isn’t that no major finds means no goods, the issue is that major finds have not been developed – yet. It’s true that no major finds have been made recently. The exception is Marange, a bountiful resource in terms of carats per tonne, yet of low cost goods. Apart from that, no major mines have come on stream in the past few years, and only a few are expected in the next couple of years. The important one is Gahcho Kue in Canada, with an expected annual production of about 5 million carats. Nevertheless, even this mine is not the Big White Hope.

So where is the next Orapa? Deep underground in Russia, is the answer. In its March 2014 investor presentation, Alrosa stated that it has no less than 657.5 million carats in indicated reserves. This is more than quadruple the average annual global production of diamonds. With another 308 million carats in inferred resources, Alrosa is sitting on nearly one billion carats of diamonds.

An indicated resource is one where the estimated quantity of the deposit is well established. With an inferred resource, the estimated quantity is less certain, but there is enough geological information and understanding of it to outline a deposit of potential economic merit. In Alrosa’s case, the question is not if there diamonds in the inferred resource, but how many hundreds of millions of carats.

Alrosa’s inferred resource is not a wild guess. In fact, this is a conservative estimate. The Russian diamond company, which mines about 34 million carats - 37 million carats annually, reported in 2011 an estimate of 1.28 billion carats in reserves and resources, and in 2012 it updated that estimate to 1.31 billion carats.

The company is far from exhausting those resources, and the world is still far from depleting this mineral beauty. This is not to say that the economics of future diamond pricing is erroneous. On the contrary. While demand is rising, the total volume of diamond mining is relatively steady, with some ebbs and flows expected in the near future, as Gahcho Kue and Renard come on stream – while others decline in volume.

As for the billion carat resources in Russia – they’ll be utilized in due time.

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