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File photo of the entry point for Diavik diamond mine in the Northwest Territories.

JOHN LEHMANN/The Globe and Mail

Canada's diamond-mining sector looks that much brighter after a big vote of confidence from global mining giant Rio Tinto PLC.

The Anglo-Australian diversified miner is investing $350-million (U.S.) in the expansion of the Diavik diamond mine in the Northwest Territories, a decision that is a coup for Diavik because Rio Tinto has slashed its capital-expenditure budget in a slumping commodities market and said it will only invest in high-potential projects.

Diamonds continue to dazzle consumers the world over, and growth is particularly strong in markets where a large middle-class is emerging, notably China and India. Meanwhile, economically viable diamond mines are that much harder to find as the established supply thins out and digging deeper becomes prohibitively expensive.

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Canada offers a strong outlook for decades to come, as well as a reputation for high-quality diamonds in a stable political and economic context, absent of the taint of so-called blood diamonds from conflict or war zones in Africa.

"Our decision to invest in the Diavik A21 project reflects our strong confidence in the diamond sector and in our ability to compete in the industry," Rio Tinto Diamonds & Minerals chief executive officer Alan Davies said on Thursday.

Diavik is a 60/40 ownership partnership between Rio Tinto and Toronto-based Dominion Diamond Corp. The expansion plan is to develop a fourth diamond-bearing kimberlite pipe – A21 – at the remote site about 220 kilometres south of the Arctic Circle.

"I love diamonds," Rio Tinto CEO Sam Walsh said earlier this month in an interview, before Thursday's announcement. "It's an asset that I would like to nurture."

Production is expected to begin in late 2018. The new project means output at Diavik will continue at existing levels, Rio Tinto said. The current plan estimates that production at Diavik will end in 2023.

"Based upon my supply-and-demand model of very constrained supply, something coming on stream by the end of this decade would potentially fit into a market that is rather undersupplied," BMO Capital Markets analyst Edward Sterck said about Diavik's expansion in an interview from London.

"Brownfield investment doesn't cost that much – we like diamonds structurally," London-based Bank of America Merrill Lynch analyst Jason Fairclough said about the Diavik expansion on already developed land.

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Diavik is close to Canada's first diamond mine, Ekati, which Dominion – formerly known as Harry Winston Diamond Corp. – bought from BHP Billiton last year.

And southeast of Diavik and Ekati is Gahcho Kué, a significant deposit that is expected to be one of the biggest and richest diamond mines in the world.

Quebec is about to join the club with its first diamond operation, the Renard mine in the remote James Bay region being developed by Stornoway Diamond Corp.

Demand for diamond jewellery reached a record high of $79-billion last year, according to a recent report by De Beers Group of Companies.

Global rough-diamond production in 2013 was up 7 per cent in carat terms over the previous year's levels, for a total of about 145 million carats, below the peak of about 175 million carats posted in 2005.

New production in coming years is not expected to offset the forecast reduction in supply from existing sources, De Beers said.

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The world's diamond supply is forecast to reach a plateau in the second half of the decade before decline sets in as of 2020, the company said.

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