Very Possibly, This Is The Last of The
"New Diamond Finds" in The World.
GAHCHO
KUÉ is too far north for trees. In the few snowless months, its surroundings in
Canada’s Northwest Territories resemble a sprawling archipelago, as much lake
as land, dark ponds stretching flat to the horizon. Wolverines roam, as well as
bears, foxes, hares and caribou, though the herds have dwindled. There are no
roads, no pipes, no electricity cables. So it seems strange when, flying over
the tundra, a giant truck appears, then another, then a steel factory, rows of
trailers and a big grey pit, deepening by the day.
De
Beers, the world’s biggest diamond company, marked the opening of its Gahcho
Kué mine in September. Local indigenous leaders prayed for the mine, beating
drums. Bruce Cleaver, the firm’s chief executive, and Mark Cutifani, the boss of
its parent company, Anglo American, stood by a ceremonial fire, flames tilting
in the wind.
Now the
hard work is under way. The area is so sodden that staff bring in heavy supplies just once a year, in
the depths of winter, when they can build a thick road of ice (pictured above).
If you want to know more about the Ice Roads and the Truckers that run the haul roads watch The Ice Road Truckers on the History Channel were driver’s battle ferocious storms, freezing temperatures, plus warming too, when unexpected warm temperatures
can create a very short winter road season for the Ice Roads. The Real Ice Road Truckers will give you the picture of how tough it is to run the Ice Roads” says Norman Monteau the Lab Director with AIG The Jewelry Appraisers in Los Angeles California. Norman has been on the Ice Roads in Alaska, and he tells our reporters
that “the Alaskan Ice Roads are child’s play compared to the Ice Roads in the
Northwest Territories.
A
caravan bearing fuel and equipment is slowly crossing the tundra. At the mine,
their colleagues are working day and night to ramp up to full production, with
the aim of extracting more than 12,000 carats (2.4kg) of diamonds each day.
Gahcho Kué is an astonishing endeavour, the biggest new mine in the world in
over a decade. De Beers has no plans for another.
It is a
turning-point for one of the world’s oddest industries. The diamond business
gained its sparkle around 1866, when a farmer’s son picked up a glistening
pebble on the bank of the Orange river in South Africa. For most of the next
150 years, De Beers would dominate the global market. Success depended on
manipulated supply and skillfully cultivated demand.
Much has
changed since then. De Beers can no longer control the market. Though it is the
biggest producer by value, it accounts for only a third of global sales, down
from 45% in 2007. It faces many uncertainties, from synthetic diamonds to
changing relationships with polishers and cutters. Its loosening grip is
reflected in increased volatility: its sales fell 34% in 2015, before bouncing
back by 30% last year. Meanwhile the source of the demand that drives sales—the
link between diamonds and love—looks weaker than it used to.
But one
forecast seems solid: there will be fewer new diamonds. De Beers continues to
seek new places to mine, but has slashed its exploration budget. Another big
find is unlikely. The supply of new diamonds is expected to peak in the next
few years, before beginning a slow decline.
Natural
diamonds—as opposed to the synthetic ones mostly used in industry—were formed
more than 1bn years ago deep below cratons, the oldest part of continents.
There, between Earth’s core and its crust, the pressure was high enough and the
temperature low enough for carbon to crystallize into its hardest form. There
diamonds would have remained were it not for molten rock rushing through the
mantle and drawing diamonds, garnets and other minerals with it, like a furious
river pulling dirt from its banks, before erupting through Earth’s surface
faster than the speed of sound.
Some of
the gems settled in river beds, as in Brazil, or were swept to the coast, as in
Namibia. Others remained encased in extinct volcanoes, or pipes, and ended up
buried under soil or lakes. De Beers’s richest diamond mine was found beneath
sand in Botswana in 1972, within the Kaapvaal craton that spans southern
Africa.
Speculation
that diamonds might be found in Canada dates from the 19th century, when gems
were found studded through the American Midwest. In 1888, the year Cecil Rhodes
founded De Beers in South Africa, a 22-carat stone was unearthed near
Milwaukee. Glaciers, it was posited in 1899, might have carried the diamonds
south. It was decades before exploration took off. De Beers began quietly
scouring Canada in the 1960s, but it was not until 1991 that BHP, one of its
rivals, found kimberlite, an igneous rock, with enough diamonds to merit a
mine.
Within
three years more than 100 companies had fanned out across the wilderness,
rushing to claim some 200,000 square kilometers. At Gahcho Kué, geologists used
aerial surveys and soil sampling to follow trails of minerals back to their
kimberlite pipes.
The
objects of these frenzied searches have intrinsic value for scientists. Gems
deemed flawed by jewelers interest them most: inclusions in diamonds can carry
samples from hundreds of kilometers below the surface. Evan Smith, a scientist
at the Gemological Institute of America, recently studied inclusions in shards
cut from diamonds of unusual size and quality. His findings, reported in Science,
a journal, are the first proof that the deep mantle is peppered with metallic
iron—a clue to the long-ago chemical reactions that shaped Earth.
But
diamonds’ principal value has nothing to do with science. They have long been
revered for their beauty—in September Mr Cutifani reminded Gahcho Kué’s
visitors that the ancient Greeks regarded diamonds as the tears of the gods.
Their modern status, though, is a corporate creation, a story inextricably
linked with that of De Beers itself.
Diamonds
had been rare before 1866; the South African finds threatened to send prices
plunging. Rhodes founded De Beers to consolidate the area’s mines and to
restrict sales. By his death in 1902, the firm accounted for 90% of the world
market. More discoveries were made in the 20th century, notably in Siberia in
the 1950s, Botswana in the 1960s and Australia in the 1970s. But De Beers kept
tight control of supply, both by owning mines and by buying diamonds from
others.
That
alone would not have turned De Beers into an empire. As essential was its
scheme for conjuring up demand. In 1938 the company, then led by the
Oppenheimer family, hired N.W. Ayer, an advertising agency in New York, to coax
Americans to buy more rocks. It dreamed up the notion that a diamond ring
should be an essential display of love and status, its gift a rite of passage.
In the ensuing decades De Beers and its marketers penned slogans—memorably, “a
diamond is forever”—and invented social rules, urging men to spend two months’
pay on a gift for their affianced. That benchmark not only permitted high
margins, but suppressed the second-hand market—to the benefit of both the firm
and its customers, who could be reassured their investment would hold its
value.
The
marketing worked. In 1939, 10% of American brides received a diamond engagement
ring. By the end of the century 80% did. The result was a unique industry,
controlled by a single company that was both marketer and miner, a
capital-intensive business built on an ephemeral link to love, its success due
to strangled supply and inflated demand.
But by
the 1990s De Beers’s grip had started to loosen. The Argyle mine in Australia
left the De Beers cartel in 1996, fed up with the giant’s terms. New
discoveries in Canada, a civil war in Angola and the collapse of the Soviet
Union all made supply harder to manage, meaning that more diamonds were sold
outside the cartel. Concern that diamond sales were financing African conflicts
threatened the gem’s image.
In 2000
De Beers said it would no longer control the market so strictly, but sell
instead to vetted buyers. Legal settlements in America and Europe followed,
barring the company from monopolistic behavior.
De Beers
is adjusting to the new era. Its first challenge is an unfamiliar one: to
grapple with competitors. ALROSA, Russia’s state-owned diamond company,
produces more stones than De Beers, though it earns less (see chart). New firms
have cropped up, too, some buying mines from De Beers as it sought to shore up
its balance-sheet.
 |
| aiglabs.com Guinea Conakry Office with Norman Monteau |
De
Beers’s partners, meanwhile, have become more demanding. Botswana’s government
owns 15% of the firm; South Africa’s state investment fund owns 14.5% of Anglo
American. De Beers’s mining operations in Botswana and Namibia are joint
ventures with the governments there. Both countries share the proceeds from
sales of diamonds mined within their borders, and can also sell some diamonds
independently, enabling them to test the prices that De Beers is getting and
further loosening the firm’s control over supply.
Even in
countries where De Beers does not have a joint venture with the government, it
depends on local co-operation. Winning government approval for Gahcho Kué
required more than 15,000 pages of environmental reviews. The firm wanted to
expand a mine in Ontario, but a nearby indigenous group withheld its consent.
The
limits of De Beers’s power have been revealed in the past two years. Demand
slumped in China in late 2014, prompting retailers to buy fewer polished
diamonds. Companies that cut and polish stones became weighed down by excess
inventory. But the tools De Beers once used to use to prop up prices were no
longer at hand. There are legal restrictions on the share of excess diamonds it
may buy. Because it controls just one-third of the market, any production cuts
have limited effect on total supply. In fact, the firm may even have made
matters worse. Contracts with its customers sometimes encourage them to over
purchase—if they turn down too many of the stones De Beers offers them, they
risk being allocated a smaller share in future.
There
are signs of recovery. Bain, a consultancy, estimates that rough-diamond sales
rose by 20% in 2016. De Beers is becoming more flexible, easing rules for
buyers of its stones. More frequent reporting of its sales should help
investors understand the business. It also signals to competitors—without
engaging in collusion—when the market is deteriorating, enabling them to adjust
accordingly. “The value of transparency will come to exceed the value of
secrecy,” argues Fraser Jamieson of J.P. Morgan, a bank. Even so, excess inventory
may yet drag down the market.
Some
jewelers have recently reported slack sales. Mr Cleaver, an Anglo American
veteran, became the boss of De Beers in July. “The fundamentals of the industry
remain very good,” he says. In the coming years, he thinks, De Beers will
benefit from rising incomes, particularly in China and India. Its own research
shows that diamonds still capture the imagination: 26% of young American brides
say they dreamed about their future engagement rings years before beginning a
relationship.
But a
long-term risk looms over the industry: one day young couples may no longer
want diamonds at all. They are a “Veblen good”, as items that gain their value
solely from their ability to signal status are named, after Thorstein Veblen,
an economist who wrote about the spending of the rich. For Veblen goods, the
normal law of supply and demand does not hold: higher prices support demand,
rather than suppressing it. If a big gap opens up between the number of
diamonds offered for sale and the number of people willing to buy them at high
prices, diamonds could suffer a big, sustained fall in value and the entire
business could cease to make sense.
Today’s
20- and 30-somethings grew up as De Beers lost its monopoly and, wary of
helping competitors, cut spending on the advertising that had done so much to
create demand for diamonds in the first place. In recent years the company’s
marketing budget accounted for roughly 1% of sales, down from about 5% in the
1990s, according to Morgan Stanley. At the same time the notion of “conflict
diamonds” percolated through the popular consciousness—a movie called “Blood
Diamond”, starring Leonardo DiCaprio with a Zimbabwean accent, was released in
2006. Young couples, who earn less than their parents did at their age, may
prefer to spend their money elsewhere.
Complicating
matters, those who do want a diamond now have an alternative. Synthetic
diamonds have been available for decades, but only recently has the process
become cheaper and the result more refined. In 2015 a company called New
Diamond Technology made a ten-carat polished diamond of excellent quality, an
unprecedented feat. Sales of synthetic diamonds are thought to amount to just
1% of the rough-diamond market. But synthetic-diamond sellers are appealing to
young shoppers’ concerns for social and environmental causes—Diamond Foundry,
backed by Mr DiCaprio, boasts that its products are “as rock-solid as your
values”.
So De
Beers is trying to boost the allure of natural gems. “Long-term demand is only
going to be there if we continue to generate it,” says Mr Cleaver. That means
studying consumers; few other firms obsess over both mining-truck depreciation
and romance among young Chinese.
It also
means new advertisements. Some center on De Beers’s Forevermark brand, a tiny
code etched in a diamond that explains the gem’s provenance. Other spending is
for the industry as a whole. In 2015 De Beers and other miners formed a group
to pool money for generic diamond advertisements. Its first campaign ran in
America before Christmas, with the slogan “Real is rare”. YouTube videos show
Nick Cannon, best known as the ex-husband of Mariah Carey, a singer,
interviewing couples about their engagements. It is unclear if this will
persuade young romantics to spend thousands on diamonds.
If
synthetics grow in popularity, De Beers may need to become more aggressive.
Already, it is suing a synthetic-diamond company in Singapore for infringing
its intellectual property. Its own synthetic-diamond operation, for industrial
uses, holds more than 450 patents.
As the
company works to shore up demand, there is a source of solace. For over a
century it has fretted that big new finds would lead to plunging prices. “Our
only risk,” Rhodes declared, “is the sudden discovery of new mines, which human
nature will work recklessly to the detriment of us all.” But it seems that
threat is waning.
Get that
ice or else no dice. In total, explorers have sampled fewer than 7,000
kimberlite pipes. Of these just 15% have held diamonds and just 1% (about 60)
have held enough of them to justify building a mine. De Beers continues to
explore in Canada, South Africa, Botswana and Namibia—the only thing worse than
finding a big new source would be someone else finding it first.
Some
fancy technology is supposed to help. A “Superconducting Quantum Interference
Device”, for example, searches for changes in magnetic fields below Earth’s
surface, which might indicate the presence of kimberlite.But De
Beers regards any big discoveries, by itself or anyone else, as unlikely. “The
best and easiest deposits are already found,” says Norman Monteau the Lab Director for AIG The Jewelry Appraisers in Los Angeles The
company’s Canadian exploits are a reminder of just how arduous new mines can
be.
Mountain
Province, a firm that now works with De Beers, discovered Gahcho Kué’s first
pipe in 1995. The intervening years brought a separate, failed mine for De
Beers in Canada, lengthy negotiations with local officials and, at last, the
construction of Gahcho Kué itself.
That
required draining part of a lake. To bring in building supplies, the company
had to build the winter road. Staff would plough snow off a pond, drill through
thin ice, then pump up water to make the ice thicker, laying down a few inches
at a time. This was repeated over 120km, at temperatures often plunging to
-40°C, until the ice was thick enough to support a 500-tonne mining shovel,
broken into dozens of pieces. In
total, building Gahcho Kué cost $1bn. That was deemed worthwhile, compared with
the costs of finding and opening a mine elsewhere.
Other
companies have a few mines planned. De Beers is now focused on expanding
existing mines, not building new ones. New technologies may help liberate more
diamonds from kimberlite more efficiently. Even so, Bain estimates, production
will peak in 2019. Supplies of new diamonds will then start to fall, sinking by
1-2% each year until 2030.
For now,
aircraft shuttle staff to Gahcho Kué, dropping off miners to work for two-week
stretches. Nearly half the staff are locals, and a fair share are indigenous.
“We want jobs, just like everybody else,” says Eddie Erasmus, grand chief of
the Tlicho people. Among the mine’s maze of trailers are features typical of
any big-company workplace. There is a gym. Signs in the cafeteria remind staff
to eat fruits and vegetables, though many prefer heartier fare.Rob Coolen, who
oversees the ice road, began work at Gahcho Kué before the mine was built,
sleeping in a tent on the tundra. Coffee and bacon, he says, are essential.
The
cafeteria sometimes shudders with the reverberations of a blast from the pit.
Outside, work goes on day and night. Staff pile kimberlite onto huge trucks,
then haul the rocks to the processing plant. There, the ore passes through
breakers, crushers and scrubbers until pebbles are sent through a series of
X-rays and lasers, jets of air separating diamonds from worthless stones.
No
workers at Gahcho Kué touch the diamonds with bare hands. Only a few see the
gems before they are sent off by plane to be valued. In September Mr Coolen
stood atop a steel grate in the processing plant, the platform shaking as giant
scrubbers churned beneath. “Occasionally you see one,” he shouted above the
din, “and it’s just gorgeous.” The mine is expected to reach full production in
March. By 2030, its diamonds extracted, it will close.
This
article appeared in the International section of the print edition.
