Canadian Diamond Finds Threaten Cartel

From Canada’s frozen Arctic depths a new threat is emerging to the fabled De Beers diamond cartel--rich new discoveries of gem-quality stones that could be sold onto the world market outside De Beers’ control.

Based on exploration successes, diamond mining is expected to begin in Canada in 1998. Analysts believe the country could produce 8% to 12% of the world’s rough diamonds by the turn of the century.

Those expectations were strengthened on Friday when a Canadian government-appointed review board recommended Ottawa approve a plan for the country’s first diamond mine.

Most industry insiders expect Canadian miners to sell a large part, or even all, of their diamonds outside De Beers’ London-based Central Selling Organization (CSO), which has controlled the world market and kept prices stable for more than 100 years through tight pacts with producers.

These agreements currently give the secretive De Beers Consolidated Mines Ltd., controlled by South Africa’s wealthy Oppenheimer family, an iron grip over 65% to 80% of the world’s uncut diamonds.

The loss of Canada’s diamonds alone would not topple the CSO, but it would certainly weaken De Beers’ position.

“It would lessen [De Beers’] overall control, no doubt about it,” said Jack Jolis, Antwerp-based marketing manager for South African diamond producer Trans Hex Group Ltd.

The CSO, which maintains a huge diamond stockpile in London and regulates supply through a “pipeline” to carefully chosen dealers and cutters across the globe, has survived many previous challenges. Diamonds from De Beers’ own mines ensure a solid base for the CSO’s operations, it says.

“We obviously hope they [Canadian producers] will market through the CSO. . . . But if eventually they decide not to do that, it’s not going to be the end of the world,” De Beers London spokesman Roger van Eeghen said.

De Beers expects the diamond market to absorb Canadian stones because some other large deposits will be depleted by the time Canada’s mines come on stream. Demand is also anticipated to grow, especially from Asian consumers.

But serious cracks in the cartel have already appeared. Russia, a huge producer, recently signed a sales pact with De Beers but won the right to sell more of its diamonds independently. And it has ambitions for greater autonomy.

The world’s biggest diamond mine, Argyle in northwest Australia, controlled by RTZ Corp. Plc-CRA Ltd., also delivered a blow to De Beers this month by pulling out of cartel.

Argyle produces mainly low-quality stones that are in oversupply, so the move is not seen as a major threat to the CSO. But the departure of Argyle, famous for its pink diamonds, is symbolically important.

“The diamond world is changing,” said Marty Hurwitz, president of Market Vision, Argyle’s U.S. marketing representative. “Argyle is the first major corporate power to say no to the CSO. That leaves the door open to other companies. . . . It’s a significant challenge.”

The companies most likely to stand up to the CSO are active in Canada--Australia’s giant Broken Hill Proprietary Co. Ltd. and Anglo-Australian mining powerhouse RTZ-CRA.

A prospecting frenzy has swept Canada’s Northwest Territories since a prospector named Chuck Fipke announced a promising 1991 diamond discovery at Lac de Gras, a desolate region of rugged tundra and small lakes.

If all goes as planned, the company Fipke founded, Dia Met Minerals Ltd., and joint venture partner BHP will start building a C$1.2-billion ($879.5-million) diamond mine there in October. The project is expected to receive final approval from the Canadian government this summer and begin producing in 1998.

More recent diamond finds in the same frozen terrain, notably a discovery developed by Canada’s Aber Resources Ltd. and the Canadian unit of RTZ-CRA, are also expected to yield mines early in the next century.

“My belief is BHP wants to market independently of the CSO,” said Jordan Ethans, a director of Aber Resources. Moreover, “RTZ . . . has made it clear they would like to set up their own marketing.”

BHP, whose Lac de Gras mine is expected to produce 3 million to 5 million carats of diamonds a year, including many gems, confirms it is investigating independent sales but says no decision has been made.

“We are researching selling outside the CSO. . . . Our objective is to sell rough diamonds to world markets at world prices,” said BHP spokeswoman Karen Azinger. BHP has 51% of the Lac de Gras project, which analysts forecast will have revenues of about $400 million a year over 25 years.

The CSO’s supporters, who praise the cartel for stabilizing the market in tumultuous times by buying up excess supply and stockpiling the diamonds, contend that Canadian producers will simply find it too daunting to sell entirely on their own. They expect at least some of the Canadian diamonds to be sold through De Beers.