Rio Tinto’s $850 million commitment to ramp-up underground development at the Argyle diamond mine signals a fundamental shift in diamonds that will have major ramifications in WA. John Phaceas reports.
BRIDES and fiancées may not have noticed, but diamonds have been sadly out of fashion in recent years as the onset of the global financial crisis put the industry into a tailspin.
American buyers in particular, who typically account for more than 40 per cent of global retail sales, put their chequebooks away as the downturn bit deep.
Prices subsequently plummeted, forcing miners worldwide to curtail output to put a floor under the market.
But after two years in the doldrums, demand is back on the rise largely thanks to the power of the emerging middle classes in China and India.
The impact on Western Australia has been rapid with Rio Tinto reactivating a $1.5 billion underground development to extend the life of its massive Argyle mine, 120km south of Wyndham, by at least seven years to 2019.
The program was largely suspended last year due to the global downturn but resumed last week with approval to invest the outstanding $850 million needed to complete the development.
Meanwhile WA’s only other diamond producer, UK-based Gem Diamonds, hopes to re-open E4 pit at its Ellendale mine, 150km south-east of Derby, which was also suspended last year.
The change of heart largely reflects resurgent economic growth in the world’s two most populous nations – China and India – which is fuelling a massive expansion of an aspirational middle class in both countries.
It also reflects a growing recognition in both countries of diamonds’ potential as a store of wealth in difficult times, a role typically filled by gold.
According to the Diamond Administration of China, the nation last year overtook Japan as the world’s second biggest consumer market for diamonds as China’s total diamond trade surged 16.4 per cent to more than $US1.5 billion for the year.
With similar growth also evident in India, South African diamond giant De Beers now expects that China and India will together account for 20 per cent of world demand for polished diamonds by 2020, compared to just 5 per cent in 2000 and 11 per cent in 2009.
Significantly, Rio last week held its first ever showing of exclusive pink diamonds from Argyle in mainland China, a year after holding the first such showing in India.
Compounding such demand factors are waning discovery rates, with mine reserves slumping to 15 years of global supply compared to 80 years in the 1980s and no new mines planned in the next 10 years.
Consequently, prices generally are now approaching pre-crash levels.
That has huge implications for WA, which despite its scarcity of diamond operations remains a globally important player in the world diamond trade.
Rio’s Argyle mine, opened in 1983, remains one of the world’s three biggest diamond mines by volume at current production of around 10 million carats a year, even though production is less than half of the levels of a few years ago when Argyle was the world’s biggest producer.
Production has since been wound back to enable Rio to prepare for the shift from open pit to underground production.
Nonetheless, Argyle remains the world’s biggest supplier of coloured diamonds, especially its pink diamonds, widely considered among the world’s most valuable stones.
Less then one in 10,000 diamonds are coloured, and Argyle supplies over 90 per cent of the world’s pink diamonds, all of which are cut and polished at its West Perth headquarters.
Rio does not disclose the prices achieved for its diamonds, which are sold at private tender, but its best pinks have fetched up to $1 million per carat, and can cost up to 50 times more than comparable white diamonds.
Gem’s Ellendale mine is tiny compared to Argyle at 200,000 carats a year, but it also has global significance as the world’s biggest single biggest producer of fancy yellow diamonds.
Gem acquired Ellendale through its $300 million takeover of Miles Kennedy’s Kimberley Diamond Co in 2007, and sells all its fancy yellows to iconic diamond retailer Tiffany & Co.
Gem last month revealed the average price for Ellendale yellows had risen from $US2509 per carat to $US2588/ct in the June 2010 half, while prices for its typical stones almost trebled from $US51/ct to $US144/ct.
Consequently, revenue from Ellendale’s surviving E9 pit surged 67 per cent to $US33.6 million in the half, for an operating profit of $US3.3 million.
Critically, Tiffany & Co last week agreed to pay 25 per cent more for Ellendale pinks from the start of October, and the company now expects to decide whether to re-open the E4 pit by the end of the year.
According to new figures released by the WA Department of Mines and Petroleum, the volume of WA diamonds sold in the 2009-10 financial year surged 78 per cent to 16.3 million carats. As a result, diamond sales rose 16 per cent to $304 million.
Of that, Gem produced around 193,000 carats worth $90 million, meaning Argyle sold just over 16.1 million carats worth $214 million.
The mine yielded only 10.6 million carats last financial year, but Rio has been supplementing sales from stones that were stockpiled to help smooth out revenue during the transition to underground operations.
Speaking from Hong Kong as part of the China showing of pinks, Argyle Diamonds chief Kevin McLeish said Rio’s decision to proceed with the Argyle underground development was “big vote of confidence in the industry as a whole”.
“Certainly 2009 was a very difficult year for the industry as a whole … we saw our prices drop by 60 per cent in two months,” Mr McLeish told WA Business News.
“Thankfully since the middle of last year, we’ve seen the diamond market recover much more strongly than we expected, to the point where Rio Tinto has decided that now is the right time to finish off the underground mine. The industry has excellent fundamentals.”
Mr McLeish said there were two main drivers to the decision to reactivate the underground development.
“If there is an advantage in having some economic challenges is that people tend to trade down in their jewellery choices toward the lower quality end of the spectrum. That obviously helps us because that’s where the majority of our product is positioned,” he said.
“But I guess the real story … is the phenomenal growth we are seeing in India and China.”
Mr McLeish said the rise of Indian and Chinese diamond demand would be especially significant in reducing undue dependence on the US.
While Argyle pinks are among the world’s most valuable diamonds, over 80 per cent of Argyle production is of lower-value diamonds.
By establishing a cutting division in India – which provides work for over 250,000 workers – Rio has been able to sell Argyle’s lower quality stones as “near gem quality” diamonds.
“That’s a huge industry that we helped build … because clearly if you have low value stones you have to have a low-cost and capable cutting industry,” Mr McLeish said.
That has been critical to Argyle’s success in creating a thriving mass jewellery market utilising cheaper coloured stones that had not previously existed and which has been especially successful in the US and Japan.
“We are looking to do exactly the same thing in China and India,” Mr McLeish said.
Back on the ground at Argyle, the underground development will return mine production to levels above 25 million carats a year from 2013 until 2019. The company is also confident that reserves will continue at depth, enabling the mine to continue well beyond 2020.
Gem is also revving up work at Ellendale, reviving a stalled $US5 million exploration program to identify additional reserves at the mine that would support the re-opening of E4 and potentially mine the E7 and E11 pipes.
But such enthusiasm has not yet begun flowing through to broader diamond exploration in the state, with the Australian Bureau of Statistics figures estimating the total spend at only $200,000 last financial year.
WA government records also show that barely a third of the state’s 30-odd diamond exploration ventures are “live”, with activity largely limited to Argyle, Ellendale and the surrounding tenements held by Gem affiliate, Blina Diamonds.
But Mr McLeish said that was likely to prove only a temporary lull given shrinking mine supply and rapidly growing demand.
“I suspect that there will be a lot of people looking more seriously at diamonds as a way of adding shareholder value,” he said.
Diamonds may yet become more than just a girl’s best friend.
