Stornoway Diamond Corp. is a Canadian diamond exploration and producing company that developed the Renard mine over the course of two decades from a grassroots exploration project to a world-class diamond mine - the first in Québec. The massive project, built for $774 million - under their budget of $811 million - sparked enthusiasm across the diamond industry, which has seen few new mines open in recent years. Stornoway delivered the first ore to the processing plant in July 2016 and achieved full production in the summer of 2017.
Shortly after opening, however, the project ran into some difficulties, which Patrick Godin, then Chief Operating Officer and now President and CEO, had to contend with. The first was a high frequency of diamond breakage during processing, which impacted their output. Having solved that, the miner faced other production issues as they transitioned from open pit to underground mining, and then the global diamond market went into a recession. Pricing issues have hit the industry hard this year, with an oversupply of smaller stones sending prices tumbling and significantly weakening demand for these types of diamonds, which constitute the majority of Stornoway’s production by weight.
The corporation and its major financial parnters have worked this year to right the ship and stabilize the company, first by increasing production efficiency and eventually through a business and financial restructuring. Stornoway is now on the verge of becoming a private company owned by four investors: Osisko Gold Royalties (35.4%), Investissement Québec (35%), La Caisse de dépôt et placement du Québec (CDPQ) (14.8%) and Triple Flag Mining Finance Bermuda Ltd (14.8%).
The Diamond Loupe caught up with Mr. Godin in Antwerp as he introduced Stornoway’s new ownership to tender house Bonas Group and the wider Antwerp diamond industry. He discussed the development and financing of the Renard mine, addressed current issues and shared his focus on the future. Along the way, he revealed himself and his company as strong proponents of corporate social responsibility and as fully committed to protecting the environment.
To read the full interview, click here.
The Diamond Loupe: You joined Stornoway as Chief Operating Officer in 2010, were appointed to the board of directors in 2011 and became President and CEO in January 2019. You have been largely responsible for developing the Renard diamond project from feasibility to operation, on time and under budget. That must be a first for a diamond mine. Where does that rank on your list of accomplishments?
Patrick Godin: I had some past experience because I built a few mines in Canada, in West Africa and in the arctic. It takes teamwork, but mainly it takes a lot of discipline. It is rather complex to fund a diamond project because it is not well known by investors. The majority of project financing in Canada is done in Toronto, with the TSX being the main source of finance and public equity. But diamond mining is pretty uncommon for this crowd compared to gold or base metals. It is a niche product. As you know, Canada has only been producing diamonds for about 20 years. De Beers was successful with the Victor mine, Ekati and Diavik were a success too, Gahcho Kué, Kennady and a few others the same. But at the end of the day, the investors are not used to it.
With this in mind, it was very important for us to explain the diamond business. If you are an investor and you want an opinion on a gold project, it is easy because you can get the gold price immediately. Diamonds are more complex, and it was important for us to invest time to educate our investors about our processes. We made use of this time to better define all the elements of the project and to be ready to start construction. The detail engineering was sufficiently advanced and we had a good understanding of our costs. I put in place a structure with a high degree of discipline, cost management and scheduling.
The DL: It took 20 years to transform Renard from a grassroots exploration project in 1996 to commercial production. Is this a typical amount of time for a Canadian mine?
Patrick Godin: In the beginning the mine was not connected with the road. We had to use float planes and helicopters to go the mine, so it was really expensive. The majority of the investment was in logistics, which was really complex. In fact, exploring for diamonds is more complex than for other minerals, and developing diamond resources takes longer than all other commodities. By definition, progress is slow. It takes a long time to explore and the logistical aspect slowed our progress. The second thing is, it takes an enormous effort just to find kimberlite. You need to be patient. Finding a kimberlite pipe containing diamonds is exceptional. Having an economic amount of diamonds in the pipe is extraordinary. You need to have a sufficient volume of resources to be profitable, because it is an expensive operation.
We designed the construction schedule in function of the seasons, so we built inside during winter, while the digging and drilling was always in the summer. This reduced the costs and facilitated the development of the project. The discipline and detail are in the preparation. In the mining sector, only 2% of projects are done under budget and on time. In our case we achieved that five months in advance.
One has to realize that the cost of simply keeping the door open at Renard is $50 million annually. We have to maintain the roads and an airport, as we are 400km (250 miles) away from the closest city. This means we also need to have a sufficient inventory on site, we have a hotel on site, we need a sewage treatment system, potable water, we have all these facilities just to be able to work. Added to that, we have to respect Canadian regulations and mitigate our impact, not to mention the insurance and the taxes. These are just the fixed costs above and beyond the mining and processing costs. To manage all that, you need to build a significant mineral resource inventory, build up the reserves, and it took time.
In general, I would say we are producing our diamonds with respect. I am not going to tell you we have zero impact. If someone would sit in front of you and say they are not having any impact - sorry to say it this way - it’s not true. So, we need to reduce our impact, and we invest heavily in that. It is a challenge, because when we financed this project, the price on the market for diamonds was healthier. Our financial structures were not initially designed for the current market conditions, for such a profound down cycle.
The DL: I wanted to ask you about that. Your initial price model in 2014 was at $190 US dollars per carat, which dropped to $155 per carat in 2016. Then you achieved $93 per carat in 2018 and it has continued to drop in 2019, as you are facing a perfect storm of issues.
Patrick Godin: But the mine is actually performing very well. We are delivering what we are supposed to deliver, except in the coarse fraction. Compared to the resource model, the coarse fraction is less than anticipated. The thing is, when we financed the project in 2014, the exact same diamonds we are producing now – the smalls, the mid-range, etc. - were priced at US$147 per carat. Today we are selling for under US$75 per carat. The market has really impacted our small diamonds in particular, and because of that strain on the asset, we have not been generating enough cash to reimburse our loan deal. So, we looked at our options and put the company up for sale.
The DL: Did you receive interest from serious buyers?
Patrick Godin: We received only one non-binding expression of interest, which reflects the condition of the market, and was not acceptable to our senior creditors. They decided to take over the asset themselves. The fact that it was not sold is a reflection of the market being so depressed. Here you have an asset that is already built and operating, so all the investment risks are behind you, and our best years are in front of us. We expect improvements in the quality of goods and the grade will improve at depth - so we will produce more goods of better quality. That’s where we are now. We can see that even if others could not, and we are reconciling the resource with the estimates, which is excellent.
The DL: Everyone knows it is a difficult market for miners that produce your type of product. Is there anything different you can do in the near future to speed up revenue generation, or is it simply a matter of waiting for the market to improve?
Patrick Godin: We have the potential to increase the throughput of the mine or improve the quality of the feed that we are processing. Both are possible for us to do, just not right now. In any event, producing more would not make sense in this market. If everyone did so it would kill the market by reducing prices even further. But we have been rather successful in exploration to add value to the pipes we already have. We will have the potential to tap multiple sources, mix the feed and improve the quality of the product that we deliver here in Antwerp.
In short, we have the ability to be well-positioned if and when the prices improve. We will be able to improve the quality of goods we can offer to our clients. That is going to be the case next year, and it will improve going forward. We also have the ability to produce more in the near future if the market can handle it.
The DL: If I hear you correctly, given the possibilities you have, Stornoway still has upside.
Patrick Godin: We still have upside. Stornoway is a cluster of nine diamond-bearing kimberlite pipes. We are currently extracting diamonds from three pipes. The main one, R2, represents 83-84% of our diamond reserves. It’s a nice pipe and the quality of the goods is improving the deeper we go. If the price comes back, we will restart R65, an open pit. We also have two pipes that are really close to production, R4 and R9, also good pipes. R4 is part of our reserves and we will initiate drilling as soon as we can on that, as well as a couple others we have already successfully explored - like R7 - or are planning explore underground this year - like R8.
As I said, we have multiple possibilities to increase production or improve the mix, and at the end of the day, to process more or less the same tonnage while improving the quality and number of diamonds we put on the market. And to extend the mine life, actually. We have reserves for 10 years – rock solid, you can take that to the bank – excluding all the exploration work I’m talking about now, which lead to a resource estimate that pushes the life of the mine to 15-20 years. So, we can extend the mine life or reduce the impact of the fixed costs to produce more and generate more margin.
I am here, in Antwerp, with three of our four new shareholders that together are controlling more or less 85 percent of the company. These guys are long-term investors in Stornoway; they believe in the asset, they believe in the quality of the mine and the people. They put in place a credit facility to support the operation and they believe in the future of natural diamonds. They decided to keep the mine running and are aware that the end of this year and next year will be difficult in terms of price and the market.
But we all expect that by the end of 2020 - as the inventory in the market depletes and the rough supply decreases enough with the closure of a few mines - we will be in a better position to have a healthy market for rough producers, the midstream, the diamond polishers and retail. The retail sector is not so impacted now, but we need to be healthy across the three stages of the chain. I hope we will all learn from that and make sure we find a balance so all the people in the chain will be healthy.
The DL: 100% of your diamonds are marketed in Antwerp through Bonas tender house. Why did Stornoway choose Antwerp?
Patrick Godin: I think it’s the place to go if you have enough volume. First of all, the tendering process is a fair way to sell diamonds. I will not say that the other ways are not fair, but I think that given our price-taker strategy, and given the financial structure we put in place, it is a fair and efficient way to sell the diamonds from a marketing point of view. When discussing this with our clients, they really appreciate this way of doing it.
The size of our company enables us to sell at tender. If you are a larger producer it might be different, but the size of our production, which can be combined with others, provides enough attraction to motivate people to go to Antwerp and look at the goods. We have many viewers and they are satisfied with the process. Also, the rigorous and honest process that Antwerp has put in place is a big factor. It is a benefit when you sometimes obtain a better price than you had expected for your goods, but at the end of the day, the client is not coming back if he is not feeling respected.
What I really appreciate is that their rigorous process is based on honor and respect for the tendering process. The fact that Antwerp is the place to be - provided you have enough volume – makes it the best place for creating value. The buyers are all around, clients are coming in to view the goods, so it’s easier for us. We do not have this type of facility in Canada, and that is not really the intent. Some of our fellow producers are doing the same as us and I believe it is more valuable for us.
The DL: One of the selling points Antwerp promotes is that the tendering system here enables producers to obtain the highest value for their goods. Do you agree with that?
Patrick Godin: Yes, I agree and for both parties. Very much so. The parcels are designed in function of the clients. At the end of the day, Bonas Group, our tender house, has a deep understanding of the market as well as the clients, so the client is not forced to buy something he does not want to buy because the parcels are designed according to the specificity of the goods they need, which is helpful.
The DL: In 2018, you began processing with the Tomra XRT technology. Did that immediately start delivering results for you and will it help you unlock some of Renard’s potential?
Patrick Godin: I’m an engineer and I strongly believe in new technology to extract minerals. Tomra XRT is a spectral sorter with infrared reading. The company Tomra is specialized in sorting. It’s their core business. It is the same type of technology they are using to separate garbage for recycling, and for us, this technology reduces the waste rock in the feed to the plant. As a result, for the second and third stage of crushing we have less waste, less dilution in contact with the diamonds. It is helping us to reduce the breakage of the product. That’s one thing.
Secondly, it is reducing our energy costs because we previously had to crush all of the waste rock, which consumes a lot of energy. Furthermore, we can valorize this waste, not by selling it, but by using it for gravel and roads. In short, we are saving energy and money. As for the diamonds, it is having a positive effect on breakage and that has a positive collateral effect in terms of our recoveries. Additionally, less crushing means you can reduce the size of your equipment and reduce your capital expenditures. Personally, I’m sold.
If Tomra can make improvements it can be a game-changer in our industry. It could make even low-grade deposits viable and enable potential miners to receive authorization to extract minerals from them. The technology is also beneficial because the world is changing. Everybody is worried about climate change, as is the mining community. We have no choice but to assume our responsibility concerning the environment, and for me, environmentalism is waste management. Measures taken to reduce the energy used in mining comes down to waste management. You need to look to the bottom line of your financial statement. When I think about the environment, I am looking for savings, and a good way to achieve this is waste management.
The DL: Given the nature of your product, its size and so forth, how concerned are you about synthetic diamonds impacting your business model?
Patrick Godin: We are concerned because we are producing smalls. What gives me comfort is that Asian consumers do not want to buy synthetics. They are really concerned about fake products. It is the same in India. The issue is the US market. We welcome the competition, and there is nothing wrong with lab-grown diamonds as a product, but it can also be dangerous, because the day you have a mix of synthetic and natural diamonds it can kill the market. If consumers do not know what they are buying, their confidence will tank. The day the industry loses its discipline, the day someone blows up the system by mixing the products, we will lose credibility, and that is really scary. Doubt is not what we need.
The DL: Nowadays, consumers want to know where a diamond comes from, its history. Was it mined with respect for people and the environment, and so forth. Is it realistic for a miner to provide that information?
Patrick Godin: For us it is pretty easy. But I do hear this question as CEO of a diamond company. People ask me if they can know where their diamonds come from. I tell them they don’t know where the gold is coming from, but they want to know about the diamond. A diamond is an experience, a history, a family legacy, something to pass down. You won’t have a story if you buy it at Target or Costco. If you are buying it for a loved one, you want to know if it is from a nice mine in Botswana that supports the economy and the local population; if it is from Renard, they should know we respect natives, create business opportunities for others, and that we are taking care of our people and respecting the environment.
Our mine is on a native land, it’s called Eeyou Istchee, or the Land of the Cree, who have the largest native land in Québec. We invest a great deal to fulfill their expectations regarding environmental quality, water treatment and all those aspects. We generate our electricity with natural gas which reduces our greenhouse gas emissions by 42%. Combining this altogether, we gain credibility with them environmentally as well as socially, in terms of employment and support of their businesses. We see them as friends and partners rather than people we are forced to deal with. They represent more than 20% of the work force at the mine and are a big part of the solution. They are very important to us and they are really committed.
Photo: Shruti Mehta@DiamondsAndAntwerp