December 3, 2014 / 5:40 PM / 5 years ago

Rio Tinto diamond bet adds sparkle to junior miners' prospects

TORONTO, Dec 3 (Reuters) - Rio Tinto Plc’s re-commitment to diamonds with a $350 million Canadian mine expansion has highlighted the prospects for a handful of smaller players boasting one of the sector’s rarest commodities - new mines.

After two decades without a big discovery, the $18 billion diamond mining industry will need fresh resources to feed a growing consumer appetite for the elusive stone, industry forecasters predict.

They say demand has been boosted by marketing aimed at convincing couples in China and India that diamonds are forever and single women to treat themselves to a right-hand ring.

Global consumer demand for diamond jewelry is forecast to grow at 4 to 5 percent annually, to $31 billion in 2018 from $25 billion last year, Anglo American Plc-owned De Beers said in a presentation last month.

De Beers, the world’s biggest diamond producer by market value, has also said it expects global supply to decline after 2020, with demand outstripping supply in the next 10 years.

BMO Research forecasts rough diamond prices will increase 5-7 percent annually from 2015 through 2017, helped by solid retail sales.

That outlook contrasts with sinking prices for commodities ranging from oil to iron ore, which have forced natural resource companies to scale back production and exploration.

Only a few new diamond mines are due to open in coming years, including junior-backed developments in Canada and Firestone Diamonds Plc’s Liqhobong mine in Lesotho. Russian state miner Alrosa also plans a handful of new operations.

Stornoway Diamond Corp, which is building Quebec’s first diamond mine, was worth just C$120 million ($105.21 million) in April when it secured nearly C$950 million in financing.

The mine, which starts commercial production in 2017, is expected to produce 1.6 million carats annually.

“We were the litmus test for whether or not the diamond supply and demand thesis ... was a good investment,” said Chief Executive Matt Manson.

It will cost C$690 million to build the mine, but the Montreal-based junior had to “finance for sins of the past,” such as industry-common cost overruns, Manson said.

Last month, Anglo-Australian diversified miner Rio said an expansion at its Diavik mine in Canada’s Northwest Territories, jointly owned with Dominion Diamond Corp, will bring fresh production online in 2018.

Rio’s decision may foster support for juniors and help spark merger and acquisition activity among mid-tier players, said Dundee Capital Markets analyst Matthew O’Keefe.

Patrick Evans, chief executive of both Mountain Province Diamonds Inc and Kennady Diamonds Inc, says small explorers may not necessarily end up as takeover targets.

Mountain Province sold De Beers a 51 percent stake in Canada’s Gahcho Kue project. It is expected to be the world’s largest new diamond mine when it comes online in 2017, producing some 5 million carats annually.

Evans is determined that Kennady “go it alone” with any discovery it makes on its land alongside Gahcho Kue.

“The juniors make the discoveries and the majors then try to swoop in. They caught us unawares last time round,” he said.

“That won’t happen again ... We have the knowledge, we have the skills and importantly, we have the financial resources to be able to build Kennady Diamond as an independent diamond mine.”


To be sure, the industry’s prospects are not entirely sparkling. Raising capital remains challenging, particularly for juniors. It took Stornoway two years to finalize its funding.

In the last 140 years, geologists sampled nearly 7,000 kimberlite pipes, the distinctive volcanic rock formed hundreds of miles below ground that transports diamonds to the earth’s surface.

Of those pipes, just 60 had enough diamonds to make mining economical and only seven were ‘Tier 1’ deposits, with more than $20 billion in reserves.

As the hunt for diamonds grows increasingly remote, complex, and costly, some have pulled out. BHP Billiton Plc, the world’s largest miner, exited the sector in 2012.

“Diamond deposits are very hard to find and you’ve got to spend an awful lot of money to get to even the starting line,” said BMO Capital Markets analyst Edward Sterck.

“But humans are magpies. We like nice, shiny things and it’s got a certain allure. So people keep on trying to succeed.”

$1 = 1.1406 Canadian dollars Editing by Jeffrey Hodgson and Marguerita Choy

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