Canada’s new diamond mines are proving to be wildly profitable, but government-sponsored factories built to cut and polish the stones are struggling for viability in the face of high labour costs and increasing diamond prices.

Last year, two of the four existing factories in the Northwest Territories, Sirius Diamonds N.W.T. Inc. and Arslanian Cutting Works N.W.T. Ltd. of Yellowknife, were forced into receivership. Although both are back in operation under a common owner, the N.W.T. government took a $6.2-million hit when bankers called the government-guaranteed loan for Sirius.

“Sirius just didn’t have the money to import skilled labour or [to] buy the rough [diamonds] to get their production up to an acceptable level,” says Bob Bies, manager of diamond business development with the N.W.T. government. “If the [cutting and polishing centres] don’t have the throughput,
they have zero chance of success.”

The cost of cutting a stone in the N.W.T. is several times greater than in India and China, where labour is relatively cheap. And rather than providing jobs for northerners, the centres rely heavily on experienced foreign workers who are often unable to bear the living conditions in Yellowknife.
Turnover is high.

Prices going up

At the same time, purchasing costs are increasing. De Beers SA, the world’s largest supplier of rough diamonds, increased its prices by 14% last year and is continuing to jack up prices in 2005 in the face of strong consumer confidence and demand.
Producers in the N.W.T. are following suit.

When it was clear it would become a major diamond producer, the N.W.T. developed a policy whereby the proposed mines had to agree to supply local factories with up to 10% of their rough diamonds in exchange for government support for a mine.

The policy was an attempt to establish a secondary industry that would add value to N.W.T. diamonds and provide jobs for northerners.

But the companies that are supposed to supply the rough diamonds say the government’s insistence that they sell high-quality stones locally is undermining their profitability. The stones from the Ekati and Diavik mines would probably reap much higher prices in Antwerp, where there is a strong and competitive market for rough diamonds.

Although BHP Billiton Diamonds Inc. of Vancouver, operator of the Ekati mine, did not respond to queries about its position on the matter, an industry report released in response to the development of a national diamond strategy by Canada’s provincial and territorial governments is unequivocal.

“A diamond-mining company is seriously disadvantaged if a government edict creates a situation whereby the company loses control of its right to market its product,” says the report.

Having to supply high-quality stones to local cutters also reduces the overall quality of the remaining rough diamonds that can be sold on the open market, potentially damaging the price and demand for the parcels of diamonds BHP Billiton and Diavik offer to their regular customers.

And, according to the report, any economic analysis of government policy would paint a “stark picture.” While the two diamond mines employ about 6,500 people and provide annual GDP of more than $1 billion, the report says three of the polishing factories employ only 156 people and provide $14 million in GDP. So much for value-added.

There are currently four cutting and polishing factories in Yellowknife: Arslanian, Polar Bear Diamonds, Canada Dene Diamonds Ltd. and Laurelton Diamonds Inc.

Arslanian, a subsidiary of Arslanian Cutting Works of Antwerp, Belgium, set up shop in Yellowknife in 2000. The N.W.T. government, the guarantor of a $9-million loan to the company, forced Arslanian into receivership last year when the bank called its loan.

Montreal-based Basal Diamonds rescued Arslanian by paying its bank loan and taking a majority share in the company. Arslanian has subsequently purchased the Sirius plant from the government for $4.5 million.

Sirius, a Canadian-owned company that opened in 1999, was the first large-scale cutting facility in Canada. It established the Polar Bear brand of diamonds popular in both Canada and the U.S., but was never able to buy the throughput required to stay afloat. Polar Bear Diamonds is the new name for the Sirius factory controlled by Arslanian.

Canada Dene Diamonds, established in 2000, is owned by Denton’cho Corp. and operated by Schacter and Namdar Group, an Israeli diamond company.

The most recent arrival on the scene, Laurelton Diamonds, is owned by Tiffany & Co., the New York-based jewellery manufacturer/retailer that has a diamond-purchasing agreement with Aber Diamond Corp., 40% owner of the Diavik mine. Production from Toronto-based Tahera Diamond Corp.’s Jericho mine will also be cut and polished at Laurelton.

@page_break@Hilary Jones, manager of the Arslanian plant, is looking forward to ramping up production now that the company is again on solid financial ground.

“We got out of receivership in record time, restructured our company and we’re profitable now,” she says. She is satisfied with the amount of rough diamonds producers supply to the plant.

But there remains confusion about just how much the producers are, or should be, providing to the plants.

No written agreement

“There are no real written agreements. It’s more of an understanding between the government and the mines that they will provide a certain percentage of diamonds,” says Bies. “I don’t want to mention percentages because there is a difference of opinion between the government and the mines on that.”

Production percentages can vary wildly, depending on whether the amount is measured by volume or value. BHP, for instance, says it provides about 2% of its rough diamonds by volume, but 7%-10% by value.

Bies says BHP is currently providing 2,500 carats every five weeks to each of three factories, for a total of 78,000 carats a year.
Bies has no figures for the amount Diavik supplies or Snap Lake (currently under construction) will supply to local polishers.

Is the secondary diamond industry in the N.W.T. a new business with huge potential — or another white elephant? It depends on who you canvass.

The N.W.T. government says early difficulties were the result of growing pains typical of new industries and that the factories will soon be viable. The mining industry, on the other hand, believes attempts to establish a secondary industry in the N.W.T., where costs are high and skilled labour scarce, is futile.

Producers are adamantly opposed to the N.W.T. policy spreading to other potential diamond-mining districts in Canada, such as Nunavut and Saskatchewan. They believe the only way to encourage a vibrant diamond industry is to allow producers the freedom to solicit customers.

But one thing is clear, Bies says: “If it wasn’t for the government’s insistence that miners provide rough diamonds to the N.W.T.’s cutting and polishing plants, it wouldn’t have happened.” IE