Canadian Diamond Miners Best Positioned To Weather Price Storm

In-depth
24/11/2015 16:20

In an interview with Mining Weekly Online addressing the current state of affairs and future outlook throughout the diamond industry, analyst and consultant Paul Zimnisky says he believes Canada was the best-positioned country in the industry given the quality of the current projects. “Looking at the NWT’s Ekati and Diavik mines, for instance, they are still quite profitable projects, even in a weaker price environment. I think Dominion Diamond, which owns 89% of Ekati and 40% of Diavik, could generate almost $250 million in free cash flow next year and almost double that the following year, using what I would consider a conservative diamond price. The company’s market cap is only $750 million,” he noted. The two diamond mines currently being built in Canada, De Beers/Mountain Province’s Gahcho Kué in the NWT and Stornoway's Renard project, in Quebec, are already fully financed, meaning they would not need to raise money in the weaker investment environment.

Driven by Gahcho Kué, Renard and Ekati’s Misery pipe, as well as several growth projects moving up the value curve, Zimnisky believes that Canada could represent about one-quarter of global output by 2018, putting it in line with the world’s two largest producers, Russia and Botswana. Canada currently represents about 15% of global production by value, compared with Russia and Botswana’s 25%, each. He regards the diamond exploration industry in Canada as being relatively healthy, and discusses the state of current projects by miners Petra Diamonds, Kennady Diamonds, Peregrine Diamonds, Shore Gold, North Arrow and Crystal Exploration.

Market Recovery

While the current weak price environment lasted longer than expected, the three largest producers, responsible for almost two-thirds of global output, have all taken action to support prices this year. This leads Zimnisky to expect average rough prices for 2016 to rise above current levels, and he also sees demand growth starting to pick up again, though at a more modest pace. He further identifies two significant risks to the industry: firstly, “If China weakens the yuan again, which it may have to in order to meet its [GDP] forecast, a consequently stronger US dollar could further hurt global diamond demand in the coming year”; secondly, “I think the biggest risk to the industry is the Millennial and younger generations in the West not accepting diamonds as an essential component of the engagement process.” He concludes by noting that in the wake of the commodities crash, diamonds could again become a sought-after addition to major miners’ assets.