Diamond Mine on Tundra Has Canada All Aglow

What would possess anyone to dig a mile-wide crater in treeless tundra that even caribou herds flee in minus-40-degree winters? Why did businesses invest $700 million to build an adjacent factory, airstrip and dormitory 125 miles south of the Arctic Circle? And why are urban slickers from Vancouver, New York and Johannesburg making pilgrimages to this part of far northern Canada?

The answer is in the pit. Sprinkled inside its ancient volcanic ore are shiny pebbles that, cut and polished, will grace fingers, necks and wrists of jewelry lovers worldwide. As a result, owners of the first major diamond mine in North America expect to become very, very rich.

The mine, called Ekati after one of the many nearby glacial lakes, formally opened last month with a ceremony in the camp’s gymnasium. Canadian politicians spoke about strict environmental protection and forecast economic boosts for the region and its native peoples. Glass cases displayed bowls filled with diamonds, most notably a thumbnail-sized 12-carat rock that might please Elizabeth Taylor. Security guards pressed close as visitors joked about taking samples home.

What was left mainly unsaid, however, was the topic that most intrigues experts in the secretive world of diamond trading.

That was whether Canadian diamonds will be marketed through the cartel with which the South Africa-based De Beers Consolidated Mines Ltd. has controlled world prices and supplies for 64 years. Will Ekati join the rebellion of an Australian mine that quit De Beers’ blandly named Central Selling Organization in 1996? Or, more likely, will the Canadian mine seek to protect prices by selling some stones through De Beers but not enough to violate U.S. antitrust laws?

Adding urgency to the questions, the Asian financial crisis is hurting demand for top-line diamonds--for example, sales fell 19% last year in Japan, and gloomier figures are forecast this year--just as the Canadian gems are starting to compete with stones from Africa and Russia.

Those issues are widely discussed in Yellowknife (population 17,500), the Northwest Territories’ capital city, which is southwest of Ekati by 200 miles of tundra. In this city on the shore of Great Slave Lake, residents say that Ekati and future diamond mines planned in the region will restore jobs lost to gold mining troubles and government cutbacks.

Despite Remoteness, Merchants See Pluses

Diamond merchants unsettled by African civil wars and Russian corruption enjoy Canadian civility and Yellowknife’s quirky mixture of log cabins and 10-story office buildings. “People have commented that it beats the Congo,” Peter Neugebauer, Yellowknife’s director for economic development, dryly noted.

Farther afield, Canadian diamonds are also on the minds of merchants in Los Angeles’ jewelry district and in the cutting shops of Europe, Israel, India and New York.

“The industry is watching very, very closely. It is very important for the future of the diamond industry as a whole,” Guido Giovannini-Torelli, editor of the New York-based monthly publication Diamond Insight, said of the marketing of the Canadian gems.

Martin Hurwitz, chief executive of MVI Marketing Ltd., a gem marketing consultant firm in Beverly Hills, agreed. The Canadian mine and its unknown sales plans have triggered, he said, “excitement and a lot of anticipation and curiosity about what is going to happen.”

Of course, immense amounts of money are at stake.

Ekati’s anticipated daily diamond production will not fill up a gallon milk jug, officials say. Yet that’s enough to generate between 3.5 million and 4.5 million carats a year, expected to be about 6% of the world’s annual production by value. With the wholesale price of high-quality rough diamonds averaging more than $100 a carat, and operating costs about $35 a carat, backers predict they can pay off the $700-million initial investment in just four or five years. Then, for the 15 or so additional years the mine is likely to last, sparkling profits may total hundreds of millions of dollars a year.

“The cash flows can be tremendous,” said Andrew Muir, a mining analyst for Canaccord Capital Corp. in Vancouver.

Without such potential rewards, the mine’s owners would not have undertaken the herculean tasks of exploring and developing the remote site. They drained lakes for the pit, constructed an all-weather support base and slogged through years of difficult political and environmental negotiations with the Canadian government and four main groups of native people. They even had to build a two-mile-long water channel to preserve Arctic fish migration--a fact unlikely to sway a romantic fellow shopping for an engagement ring.

There are no permanent roads to the mine, only ice roads that cross frozen lakes for 10 weeks in winter. Long convoys of 40-wheel trucks made the two-day drive from Yellowknife over the past two winters, bringing everything from generators to dormitory beds. At other times, cargo jets carried in supplies--and passenger planes delivered the workers.

“The weather challenges here were fantastic,” construction manager Emilio Maestrini, who grew up in Torrance, said on an observation deck above the pit. Recalling wind chills below minus 90, he remarked: “I don’t think one ever gets really used to it.”

Developers Pursued Unorthodox Theories

A subsidiary of the Australian mining giant Broken Hill Proprietary Co., or BHP, owns 51% of Ekati, and Dia Met Minerals Ltd., of British Columbia, holds 29%. The remaining 20% is split between Dia Met Chairman Charles Fipke and fellow Canadian geologist Stewart Blusson. Those two men pursued anti-establishment theories of glacier paths and discovered the underground carrot-shaped ore formations, called kimberlite pipes, that hold diamonds like raisins in a pudding.

Because BHP also has extensive mineral holdings in the United States, it could be subject to antitrust prosecution if it sold significant portions of its diamonds to De Beers. BHP does not want to lose the lush American market, but it also would benefit from De Beers’ disciplined ability to stockpile gems during hard times and its brilliant marketing (“A diamond is forever”). Japan, for example, had no tradition of diamond engagement rings before De Beers advertising conquered the national psyche.

Through its own mines and its marketing contracts with others, De Beers handles about 70% of the world’s raw diamond trade--or about $4.64 billion worth last year, according to the company’s annual report. The Central Selling Organization clearly survived the loss of its Australian contract, although the resulting competition caused a drop in prices of low-quality gems. And De Beers managed last year to win back much of the Russian diamond production that had previously been pulled out of the cartel.

Still, analysts suggest that Ekati diamonds could pose something of a threat, since they are of higher quality, with better clarity, than those from the rebel Argyle mine in Australia.

BHP reported last month that it had set up its own sales office in Antwerp, Belgium, but added that “discussions are continuing for the sale of a portion of production to large diamond companies,” thought to be a code term for De Beers.

A De Beers official reached by telephone in London confirmed that talks are ongoing and said he hoped that BHP would market at least part of its Ekati gems through the organization. Ekati’s share of world production is not very big, “but little things can mount up. We are always concerned when a new producer does not sell through us,” said Roger van Eeghen, a Central Selling Organization marketing executive.

While decisions about its sales are being made in faraway boardrooms, Ekati is open for business. The 550 workers are mainly divided into two alternating groups, each on site for 14 days of 12-hour shifts and then flown out for two weeks of rest and recuperation. According to agreements, about a third of the employees are from native groups such as the local Dogribs and Yellowknife Dene.

Strong safeguards pushed by native leaders and environmentalists are meant to limit pollution of traditional hunting grounds and fishing waters. Now, native leaders say they will be monitoring BHP’s promises on ecology and hiring. “To say it and write it is one thing, and to do it is another,” said Darrell Beaulieu, an official with the Yellowknife Dene.

The mining work is not of the chisel and pail variety. Granite covering is blasted away with explosives. Huge mechanical shovels then scoop out the gray, sandy kimberlite, which carried diamonds from deeper below the Earth’s surface ages ago. Inside the highly automated processing plant, kimberlite is crushed, washed and X-rayed for its shockingly meager holdings: an average of one carat of diamond, far less than the size of a raisin, per ton of ore.

During that work, human hands don’t touch the diamonds, according to BHP’s security manager, Mike Loper. He runs a network of cameras and random searches to avoid the organized theft rings that plague Russian and African mines. Soon to be installed is a voice monitor that will search for stress when an Ekati worker declares: “My name is John Doe, and I have no diamonds.”

Alcohol is forbidden in the 375-room dormitory, and employees are not allowed to hunt the bears and wolves that pass nearby. To keep up morale in the arctic setting, indoor diversions include racquetball courts, pool tables and a pleasant cafeteria. The place feels like a cross between a “Star Trek” set and a friendly rehabilitation center.

Yellowknife is Ekati’s party and supply town. In the early ‘90s, prospectors riding helicopters instead of ponies used Yellowknife as their base for the staking rush that claimed mineral rights on millions of federally owned acres in the region. Now, work is underway on a BHP diamond sorting facility in Yellowknife, and there are plans for a diamond cutting plant as well. Not far from Ekati, a rival mine, owned in part by the British firm that controls Australia’s Argyle, is expected to open in four years, and a De Beers subsidiary is exploring yet another possible mine in the area.

Beyond those rivalries, tensions about the De Beers cartel could spark an unusual advertising war. Hoping to grab shoppers with an aura of prestige and quality assurance, the cartel recently tested selling its diamonds by the De Beers brand name for the first time and is considering a worldwide campaign. Some Canadians hope to counter by advertising Canadian diamonds as a special luxury. The favorite name? Arctic Ice, of course.

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Where the Diamonds Are

Just seven countries account for about 90% of rough diamond production. Canada is expected to join the significant producers in the $7-billion global industry.

Country: 1997 (Value U.S. $ Millions)

Botswana: $1,461

Russia: $1,210

Angola: $1,035

South Africa: $971

Congo (former Zaire): $715

Namibia: $410

Australia: $288