AAL Anglo American Plc

By Chester Dawson 

GAHCHO KUÉ, Northwest Territories -- The world's biggest diamond producer is making an expensive bet on what lies beneath the permafrost in this desolate region of Canada's high north.

On Tuesday, De Beers, a unit of Anglo American PLC, officially opened the new diamond mine after nearly 20 years of preparation, a $1 billion gamble that the current decline in the market for high-end jewelry will reverse as older mines close.

Anglo American is counting on extracting 4.5 million carats a year as it sheds coal and other assets and focuses on diamonds, copper and platinum. The precious gems accounted for 42% of Anglo's earnings in its latest quarter and have emerged as a bright spot for a company struggling with a prolonged downturn in raw materials prices.

"We are building our long-term future with diamonds at the core of our business," said Mark Cutifani, Anglo's chief executive, at the mine's opening this week. Diamonds hold promise, he said in an interview, because there haven't been any major discoveries over the past two decades "and the industry is going into deficit."

Mr. Cutifani is scaling back Anglo's mining businesses to 16 from 45, and cutting its staff by half, as part of an aggressive paring of the company's debt, which stood at $11.7 billion on June 30. Mr. Cutifani has pledged to bring it below $10 billion by the end of this year.

Its Gahcho Kué mine is the world's first major new diamond pit since the Diavik project in 2003, a neighboring northern Canadian mine run by Rio Tinto Group. Industry analysts say the De Beers mine is one of the last mega-size properties set to open this decade.

The giant strip mine is located in a remote area with no paved roads about 175 miles northwest of Yellowknife, the territorial capital. Its name means "the place of big rabbits" in the local aboriginal language.

Work crews must be flown in and housed in on-site camps, blizzard condition "whiteouts" can shut down production and the mine's supply chain relies on seasonal ice roads to ship in fuel and heavy equipment. It is among the highest-cost diamond extraction operations in the world, along with those in Russia's north and off the coast of Namibia.

Canadian diamonds are typically top-grade rocks that can fetch premium prices. De Beers says its other mine in Canada, called Victor, produces some of the world's highest value diamonds.

Canada also offers De Beers geographic diversification from its historical base of operations in Africa, especially Botswana; that helps the company diffuse some consumers' discomfort with African diamond sourcing. While De Beers has vowed to avoid so-called blood diamonds, whose proceeds may be used by warlords, Canadian production carries no such stigma.

"Clearly, Canada is about as good as it gets from that point of view," De Beers CEO Bruce Cleaver said in an interview. "Everywhere we mine, ethical sourcing is a material issue and has always been for us," he said.

Weak demand from key markets in Asia, including China, has weighed on diamond prices, with prices for rough-cut stones dropping 18% in 2015 -- the steepest decline since 2008, according to credit-rating firm Moody's Investors Service Inc.

That gap between demand and supply is expected to continue to depress prices for at least the remainder of this year, before producers cut back allocations and output declines at mines that are headed for retirement next decade.

Still, diamonds have been shielded from the worst of a price slump affecting many other commodities, in part because just three companies control about two-thirds of the world's supply of rough cut, or unpolished, diamonds.

De Beers, with a 25% global market share by volume, is second only to Russia's PAO Alrosa and trailed by Rio Tinto.

Production at De Beers's newest mine began to ramp up in August, and will reach full capacity by early next year. Gahcho Kué's fleet of two-story-tall Komatsu trucks work 24 hours a day, seven days a week hauling diamond-rich ore from the open pit to a processing plant standing nearly 10 stories high on the barren horizon.

Inside, thousands of tons of ore pass through a series of chutes and filters, including De Beers's proprietary X-ray and laser-beam equipment in the final stages, to extract thousands of rough cut diamonds an hour.

De Beers owns 51% of Gahcho Kué and is the operator for junior partner Mountain Province Diamonds Inc., which staked the original claim in the early 1990s.

The mine's opening comes less than a year after De Beers closed another diamond mine nearby, called Snap Lake, ending production years earlier than originally planned at the money-losing facility.

Company officials say that project was doomed by an uneven distribution of diamond-rich ore and a waterlogged subterranean mine. Based partly on that experience, De Beers decided not to dig under a lake at Gahcho Kué, but instead drained it -- and donated its 18,403 fish to feed local communities.

--Scott Patterson contributed to this article.

Write to Chester Dawson at chester.dawson@wsj.com

(END) Dow Jones Newswires

September 23, 2016 05:44 ET (09:44 GMT)

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