By Anthony dePalma
Formidable, but all that may be the easier part of working the Ekati mine. To sell the more than 4 million carats of diamonds they expect to painstakingly pick out of the ground each year, the Canadian miners have to deal with one of the most potent market forces in the world: the legendary De Beers diamond cartel.
Simply put, the Canadians need De Beers, a subsidiary of Anglo American Corp. of South Africa. Without it, they risk disrupting the cartel's tight grip on the market -- a grip that keeps gem prices high for all.
Last month, in fact, the mine's owners agreed to sell part of its production to De Beers. But that deal carries its own risks, for antitrust regulators in Washington take a dim view of De Beers, and if the owners get too cozy with the cartel, their American businesses could feel the heat.
For more than 65 years, De Beers has had a near monopoly on the world's supply of rough diamonds, in some years handling upward of 80 percent of the uncut stones sold to dealers and polishers around the world.
Formed during the Depression, the cartel -- sometimes called the world's most successful monopoly -- controls or influences nearly every step of diamond production, from the pace of extraction in its own mines and those run by companies with which it contracts, to the distribution of rough diamonds. It routinely stockpiles supplies when prices drop, and then restricts their release to help prices recover.
De Beers argues that this is a benign monopoly benefiting almost everyone, an argument similar to the one being made now by Microsoft. But the United States sees it differently. More than five decades ago, in 1945, the Justice Department initiated antitrust proceedings in New York against diamond cartel members. De Beers pulled up stakes, never to return.
The closest it came to an actual run-in with the Justice Department was in 1994, when General Electric, one of the largest producers of industrial diamonds, was charged with colluding with De Beers to raise prices. GE was acquitted. But to this day, De Beers has no business interests in the United States.
Yet Broken Hill Proprietary Co., the huge Australian mining company that owns 51 percent of the Ekati mine, does have businesses in the United States -- lots of them, in copper, coal and other minerals. And BHP, as it is known, does not want to jeopardize those operations.
BHP, with annual revenues of $22 billion, is new to the diamond industry, and is not used to dealing with anything like the De Beers marketing system. After spending years getting approvals from the government and local Indian communities, and 18 months of hectic construction, BHP finally began production in October and is eager to earn back its $700 million investment.
But even BHP acknowledged that the cartel system had kept diamond demand growing and prices continually rising even as most other commodities, like gold and silver, have been plagued by fluctuating conditions that undercut prices and forced mines to close.
"The important thing is that they want to market the stones in an orderly fashion," said John Lydall, a mining analyst at First Marathon Securities Ltd. in Toronto. "In the diamond industry, everybody benefits from prices being high."
De Beers says that includes the 70 percent of American women who own at least one piece of diamond jewelry and want to be assured of its value. The De Beers control of the market, and its relentless advertising -- through its 52-year-old "A Diamond Is Forever" campaign -- enhance the desirability of diamonds.
De Beers does not like to lose control over any source, especially one with the potential of the Canadian find. In 1997, Tim Capon, a De Beers director and head of the Central Selling Organization, which since 1930 has been the De Beers diamond buying and selling arm, told miners in Toronto that if there were too many independent producers, it would ruin the system that has helped the global diamond market grow from $20 billion in 1985 to $50 billion last year.
It all reached a crucial point early last month. BHP, and its Canadian partner Dia Met Minerals Inc., based in Kelowna, British Columbia, agreed to sell 35 percent of Ekati production for the next three years to De Beers, while marketing the rest itself. Significantly, De Beers will have no control over Ekati's production.
The compromise seems to have satisfied almost everyone. The Ekati miners hope that if they sell less than 50 percent of production to De Beers, the Justice Department will ignore the joint venture. So far, Washington has been silent. De Beers now has a foot in the door of what could in a few years be one of the world's top five diamond-producing regions. And finally, the global diamond industry seems pleased. Pleased to see mighty De Beers taken down a peg or two by BHP's independent stance. Yet pleased also to see the system that has protected prices for so long remain strong.
"To the extent that the Canadians were able to rattle De Beers' cage a bit, that's a healthy thing," said Martin Rapaport, publisher of the Rapaport Diamond Report, a New York industry newsletter and price service. "But De Beers is still pretty much the only game in town."
De Beers executives appear unconcerned. "Of course, we're keen to encourage producers to use the centralized system we have," said George Burne, managing director of De Beers Canada Corp., which has opened an office in Vancouver. But he said that even though Ekati could produce up to 4 million carats a year, that would be just a small portion of the 120-million-carat global production. "With that volume," he said of Ekati, "it's not going to bring the house down."
The existence of diamonds in Canada's rugged north had long been suspected but was hard to pin down. De Beers first prospected in Alberta 25 years ago, but did not find deposits rich enough to make mining feasible. Finally, a dogged Canadian geologist, Charles Fipke, in 1985 came upon telltale signs of diamonds in the Lac de Gras region of the Northwest Territories, 125 miles below the Arctic Circle.
Fipke's discoveries set off a diamond rush. What he found was that many small, shallow lakes in the area were actually the worn-down remnants of ancient volcanoes from more than 35 million years ago, when the area was a steamy tropic.
Deposits -- called pipes -- were widespread in Canada's north, but the secret was finding those likely to contain enough diamonds to make mining worthwhile. Over the 25-year life of the Ekati project, annual revenues are expected to average $400 million to $500 million, but that is just a small part of BHP's business.
The area may also soon get a second mine. Diavik, 60 percent owned by the mining giant Rio Tinto PLC of Britain, could receive final government approval by the end of the year. And De Beers itself, through its wholly owned subsidiary Monopros, is in a joint venture with Mountain Province Mining Inc. that is doing bulk sampling on what could be Canada's third diamond mine at Kennady Lake, not far from the other two operations.
Limited diamond mining and prospecting are done in the United States, primarily in Colorado, Wyoming and Arkansas. Little of the output is gem quality, so nearly all the production goes for industrial uses.
Ekati is now basically an open-pit operation, but first the lake above the pipe had to be fished out and drained. What used to be Panda Lake is now Panda Pit, said Brad Skeeles, mining manager at Ekati.
For 24 hours a day, seven days a week, through everything except blinding whiteout conditions, the surrounding granite rock is removed in layers to get at the diamond-bearing material called kimberlite. Once the kimberlite is out of the ground, the process is comparatively simple, said Michael Rylatt, manager of the processing plant, though made more complicated by the arctic conditions.
Because of the relentless cold, processing takes place inside one huge building, three football fields long and more than six stories high. Outside temperatures can drop to 50 degrees below. Inside, Rylatt often works in short sleeves.
Essentially, Rylatt said, Ekati uses a process developed by De Beers. The ore rock is crushed into smaller and smaller pieces, and then -- using natural properties of diamonds that make them heavier than other elements -- the ore is mixed into a slurry and the diamonds and other heavy minerals are separated from the rock by centrifugal force.
The remaining material is exposed to X-rays, which makes the diamonds luminescent. A light-detecting mechanism touches off powerful jets that eject the suspected diamonds.
Only then does a small group of sorters actually pick out the diamonds. For security reasons, this is the only part of the process when human hands touch the diamonds. The plant processes 9,000 tons of ore a day. The yield: roughly one coffee can full of rough diamonds.
The environmental review of the project was controversial and extensive, with the final agreement alone filling eight 4-inch binders. The local government required that a high percentage of BHP's 500 employees come from northern Canada, including Indians and Inuits. These jobs pay $40,000 to $50,000, on average.
And Ekati agreed to cover the costs of flying the 160 natives who work at the mine to and from their home communities at the beginning and end of every two-week shift.
The first Ekati diamonds offered for sale in Antwerp, Belgium, early this year brought about $125 to $130 a carat, excluding the largest stones, which will be sold later. The total came to $8.5 million, which Lydall, the First Marathon analyst, considered encouraging. But the world diamond industry is still recovering from the economic turmoil in Japan and the Far East; De Beers' earnings dropped 40 percent last year.
To avoid the enormous expense of building three processing plants so close to one another, Ekati and the other two prospective mines are expected to consolidate some work, said Vahid Fathi, a mining analyst with ABN Amro Inc., in Chicago. "There are a lot of economic and synergistic forces that are going to force a major consolidation sooner rather than later," Fathi said.
Burne of De Beers said the company had had no discussions with the other Canadian players. Even so, De Beers will not be content with its small percentage of the Canadian mines for long. "Who knows what sort of relationship we can have with them in the future?" Burne said. "I can tell you, we're not going to go to sleep on it."
