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. Last Updated: 07/27/2016

Canadian Diamonds Threaten De Beers Cartel




LAC DE GRAS, Canada -- After an hour's flight from the nearest outpost, across 320 kilometers of frozen tundra, a sprawling, modern industrial complex suddenly appears on the horizon.


In addition to a lighted airstrip, there are six giant white satellite dishes, an electric generating plant big enough to power a small city, a tank farm holding a year's supply of fuel, a water and sewage treatment plant and a 375-room dormitory with indoor basketball and squash courts.


At the main five-story facility, access is strictly controlled, with magnetic passes, X-ray machines, double-entry doors and random strip searches. Inside, 900,000 tons of rocks are processed each day by a system so automated it requires fewer than 20 people to operate. Only a handful of carefully screened employees are allowed to touch the final product.


A set for the latest James Bond movie? Not exactly. It's the world's newest diamond mine, the first of several set to open in the Canadian Arctic over the next several years. The projects, involving nearly $2 billion of investment, not only will transform this barren and impoverished region into one of the world's biggest producers of high-quality diamonds, but also threatens to loosen the century-old grip on the industry held by London's De Beers organization.


Local leaders have moved aggressively to leverage their natural bounty by subsidizing development of a diamond-finishing center in Yellowknife, a city of 18,000 that serves as the commercial and political capital of the Northwest Territories. As a condition of receiving their permits, mine operators agreed to sell at least 10 percent of their raw diamonds to local cutting and polishing companies. And with the help of government loans and generous training grants, two such facilities are in operation, with a third scheduled to open this summer.


The diamond rush began here in 1991 after a pair of Canadian geologists, Charles Fipke and Stewart Blusson, going against conventional scientific wisdom, found evidence of rich deposits buried in the soft, black kimberlite rock under one of thousands of Arctic lakes. Once word got out, prospectors crisscrossed the tundra in helicopters, staking claims to an area the size of France.


With a head start and a claim to 153,600 hectares containing 100 kimberlite "pipes," Fipke and Blusson teamed up with Broken Hill Proprietary Co., the Australian steel, mining and energy conglomerate. After lengthy regulatory reviews, full-blown construction of the mine called Ekati (from the local Indian word for "fat lake") began here in 1997.


Materials, men and equipment were airlifted by military-style transport or shipped by truck caravan over a special "ice road" that winds over tundra and frozen lakes from Yellowknife during the winter months. Over the summer, entire lakes were drained and roads constructed to handle the giant 640-metric ton shovels that would cut through the granite and the 240-ton trucks that would transport the kimberlite from the open-pit mines to the processing plant. The $700 million project opened on time and under budget in October 1998.


Today, Ekati is an engineering and logistical tour de force, a round-the-clock operation in what may be the most challenging work environment in the world. Most of the 640 employees are flown in from Yellowknife for 14-day rotations of 12-hour shifts, many of them outdoors in the open pits. Average annual pay works out to about $45,000.


In the automated processing plant, the kimberlite moving on Rube Goldberg-style conveyor belts is crushed, scrubbed, cleaned, run through a high-pressure grinder, then spun around in a cyclone device to separate out the heavier minerals and diamonds. What remains f about 2 percent of the original material f is run under an X-ray that illuminates the diamonds, allowing a light-sensitive machine to blow them into the final recovery chute for cleaning, weighing and sorting. On a good day, the Ekati mine generates a coffee can full of high-quality diamonds, ranging anywhere from half a carat to a monster 69-carat stone recovered last year.


In its first full year of operation, Ekati produced 2.5 million carats of diamonds worth nearly $300 million. At current prices and production levels, that should work out to as much as $100 million a year in profits for Ekati's owners f BHP (51 percent), Fipke (10 percent), Blusson (10 percent) and the former Mrs. Fipke (5 percent), along with public shareholders. Within a few years, the governments of Canada and Northwest Territories also can expect about $100 million annually in royalties and direct taxes from Ekati.


Two more mines are set to open. Rio Tinto PLC, operator of Australia's giant Argyle diamond mine, plans to complete construction of the $800 million Diavik mine, next to the Ekati stake, by 2002. And British Columbia-based Winspear Resources Ltd. has an 85-person camp near Camsell Lake, where it is seeking permits to begin digging an underground mine later that year. Should both these projects come to fruition, government officials project Canada could generate 12.5 percent of the world revenue in rough diamonds, just behind Botswana, Russia and South Africa.


"These are the early days for what looks to be a long and profitable future for the Canadian diamond industry," said Thomas Beardmore-Gray, senior vice president of De Beers Canada Corp., which is desperate to get a foothold in the region with a more modest project, now in advanced exploration, near Kennady Lake, northwest of the Ekati property.


The emerging Canadian diamond industry, in fact, represents a significant threat to the De Beers cartel. Unlike most other mines in the world, Ekati is offering only 35 percent of its diamonds through De Beers' secretive central selling operation in London, auctioning off the rest on the open market in Antwerp, Belgium. And at Diavik and Winspear, officials say, part of the output has already been reserved for the retail jeweler Tiffany & Co., which took a minority stake in both ventures.


It's quite a change from only a decade ago, when De Beers controlled the sale of nearly 80 percent of the world's rough diamonds, extracting a hefty 10 percent fee in exchange for shielding producers from price competition and stepping in as the buyer of last resort when oversupply threatened to drive down prices. De Beers also promoted diamonds in worldwide advertising campaigns aimed directly at consumers.


But while diamonds may be forever, diamond monopolies appear more ephemeral. De Beers' market share has slipped to 65 percent as producers in Russia and then Australia decided to opt out of the cartel. And when diamond prices plunged after the Asian economic crisis, the company's shareholders took a beating as the value of De Beers' $4 billion diamond stockpile melted.


Recognizing the new realities, De Beers is expected to announce a fresh strategy later this year, one that Beardmore-Gray says will try to position it as the "seller of choice rather than the buyer of last resort" f in effect, renouncing much of its former role. The company is also moving to patch things up with the U.S. Justice Department, whose threat of criminal antitrust prosecution prevents De Beers' executives from visiting the United States and discourages U.S. investment in any diamond producer that cooperates with the cartel. So far, however, U.S. officials have rebuffed De Beers' overtures.


"Already, we can see that Canada has had a positive role in democratizing the diamond business and limiting the monopolistic power of De Beers," said Martin Rapaport, publisher of Rapaport Diamond Report in New York and operator of an online diamond exchange.


Up north, however, not everyone associated with the new industry is eager to see the breakup of the cartel just as Canada has a chance to join it.


"For our diamond mines and factories to succeed, we need a stable market and stable prices." said Franz Van Looy, a veteran of the Antwerp industry who recently moved to Yellowknife to start up a diamond and polishing firm with the Dene Indians. "To say we don't need De Beers, this is totally wrong."