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investing in mining

Gahcho Kué mine, operated jointly by Mountain Province Diamonds and De Beers, in the Northwest Territories, about 280 kilometres northwest of Yellowknife. The mine went into commercial production last year.Terry Kruger

For investors scratching their heads about the future of volatile world markets this year, David Whittle offers an alternative: Say it with diamonds.

"We're the largest new diamond mine in the Northwest Territories," says Mr. Whittle, interim president and CEO of Mountain Province Diamonds Inc. (MPVD).

His Toronto-based company is a 49-per-cent joint venture partner with mining giant De Beers Canada Inc. in the mine called Gahcho Kué, a remote fly-in/fly out operation 280 kilometres northwest of Yellowknife.

"De Beers is the operator. They run it hands-on, and we're fully involved with the oversight and management. We take a fulsome role in the decision-making," Mr. Whittle says.

The mine started pre-commercial production in 2016 and went into commercial production in the middle of last year.

"We've been at what's called full-rate production since last May," Mr. Whittle says. "The diamonds we produce are 'split in kind.' We take our 49 per cent and DeBeers takes its 51 per cent and we go off and sell our diamonds separately."

The rough diamonds extracted and eventually sold by Mountain Province after processing are used for jewellery, and marketed around the world. China and other parts of Asia are considered important primary markets.

The most prized diamonds extracted are known as "fancy" and "special" stones. "A fancy stone is one with colour in it, say yellow, pink or red. A special stone is simply one that is 10.8 carats or bigger. It has nothing to do with appearance. It can be the biggest ugliest stone, but if it's that size, it's special," Mr. Whittle says.

Industrial diamonds, used for drill tips and precision machinery, are increasingly supplied by synthetic diamond manufacturers, he adds.

In December, Mountain Province completed its 10th diamond sale, selling 364 carats at US$53 per carat for proceeds of US$19.1-million in the sale. The price per carat was down – in the second quarter of 2017 it reached US$91.

But the company said in a statement that this partly reflects that in the production split with De Beers for the 10th sale, De Beers won the bid for the fancy and special diamonds in that round.

"Notably, the last production split of 2017, which will supply the January tender sale, saw significant volumes, an improved size frequency distribution and the largest parcel of fancy and special diamonds produced to date, both in value and volume terms," the company said.

"Our 10th sale saw further stabilization of rough prices and strengthening of competition, with more than 150 companies attending the tender, the highest to date," said Reid Mackie, the Mountain Province's vice-president of diamond marketing.

"This combined with solid holiday sales results reported by the retail sector, bodes well for a positive market in January."

Is this a good time to invest in diamond mining, though? Mr. Whittle obviously thinks so, though he acknowledges that investors might take a pause with world markets roiling.

"If the overall economy really were to take a hit, it would have an effect [on investing and the retail diamond market] but if it's short term, I don't think it will," he says.

Des Kilalea, mining analyst with Canaccord Genuity in London, explains that while the fancy and special diamond market has its obstacles, and the industry sometimes has structural challenges, the widespread desire for diamond jewellery remains enduring, perhaps even timeless.

"In diamond mining, there's a belief that diamonds are forever. There's a solidity to the product," Mr. Kilalea said in a talk at a natural resources forum held in London late last year.

It's true that to a great extent the "forever" belief comes from decades of effective marketing, particularly by De Beers, but it remains valid.

"As product, they go back to about 4 B.C.," Mr. Kilalea says. "The desire to wear a diamond as a symbol of love still exists, though perhaps not as much as it used to, but diamonds have become more plentiful."

There has also been a persistent myth that diamond prices will go up forever, Mr. Kilalea adds. But this is mitigated by the fact that even though mines like Gahcho Kué are productive, the supply of newly mined diamonds is about to go down.

"From about 2019, diamond production will start falling. That's certain," he says.

Richard Hatch, analyst with RBC Capital Markets in London, agrees. In a presentation last year, he noted that exploration for new diamond sources is focused on regions (including Canada) where previous ore bodies have been found.

"But the new ones have been discovered," Mr. Hatch says.

This doesn't necessarily mean that the diamond mining sector will face a completely smooth ride, Mr. Kilalea adds. Diamond producers face a number of challenges, including difficulty getting credit for those in the midstream who cut and polish the diamonds, resource nationalism in some producing countries, tax changes and cyclical slowdowns among consumers.

Mr. Whittle says the sector took a hit, for example, when India imposed capital controls on its currency in 2013. "A lot of cutting and polishing is done in India, and that disrupted the industry," he says. Similarly, the diamond market tends to wobble when Chinese consumer demand goes down from time to time.

But the outlook is good right now, even if stock markets are shaky. And Mr. Whittle notes that a proven supply of diamonds from a conflict-free zone like Canada will make it more valuable if supplies do reduce. As the Economist noted recently, despite the stock dip, the world is in an unusual situation where economies in virtually all regions are growing, albeit at different speeds.

"There's a fair amount of disposable income in the system right now," Mr. Whittle says. Which is often an opportunity to buy someone a diamond.

Diamond output to fall

– Diamonds may actually be forever, or close to it. The youngest diamond deposits are believed to be 900 million years old, and diamonds discovered in Canada are more than 3.5 billion years old.

– They are formed up to 400 kilometres below the earth's crust – one of the reasons diamonds are rare and hard to extract. In fact, less than 250 tonnes of rough diamonds have been mined since the first big discovery at Kimberley, South Africa in 1869.

– The first rough diamonds were discovered in southern India in 4 B.C., at the source of the 700-carat (rough) Koh-i-Noor diamond and the 45.5 (polished) blue Hope Diamond.

– There was a major increase in output in 2016 and 2017, thanks to production in Lesotho, Russia and in Canada at the Renard and Gahcho Kué mines (the latter jointly operated by Mountain Province and De Beers).

– Despite the production boost, output is likely to start falling from next year onward, experts say. There are only 30 mines operating now, all getting older, with several slated to close in the next 10 years, and of the 6,000 kimberlites discovered, which are the sources of diamonds, fewer than 1 per cent are economically viable to mine.

Source: Natural Resources Forum, presentation by Des Kilalea and Tim Huff, Cannacord Genuity, November, 2017