Diavik Diamond Mines Inc.

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Diavik Diamond Mines Inc.

5007 50th Avenue
Yellowknife, Northwest Territories X1A 2P8
Canada
Telephone: (867) 669-6500
Fax: (867) 669-9058
Web site: http://www.diavik.ca

Wholly Owned Subsidiary of Rio Tinto plc
Incorporated: 1996
Employees: 750
Sales: CAD 870 million (2005)
NAIC: 212399 All Other Nonmetallic Mineral Mining

Diavik Diamond Mines Inc. operates the Diavik Diamond Mine located in Northwest Territories, Canada. Employing a combination of open pit and underground mining methods, the mine has an annual output of roughly eight million carats and an estimated mine life of 16 to 22 years. The mine is located 210 kilometers south of the Arctic Circle and 300 kilometers northeast of the company's main offices in Yellowknife. Diavik is a subsidiary of Rio Tinto plc, a London, England-based mining concern. The mine is a joint venture between Diavik and Aber Diamond Limited Partnership, a subsidiary of Aber Diamond Corporation. Aber Diamond Limited Partnership owns 40 percent of the mine, while Rio Tinto, through Diavik, owns 60 percent of the mine.

ORIGINS

Diavik was a Canadian pioneer shouldering a heavy responsibility for the country's future in the mining business. Only the second diamond mine established in Canada, Diavik helped make the country a leading force in the world's diamond market, greatly assisting in the chase to catch global giant Botswana and runners-up Russia and South Africa. The diamond deposits, or kimberlite pipes, that Diavik mined were discovered at the beginning of the 1990s, more than a decade before the company would begin producing diamonds. Aber Diamond Corp., a Toronto, Ontario-based company, staked mineral claims at the site between 1991 and 1992 and began exploration in March 1992, formally initiating the process that would lead to Diavik's formation four years later.

Although Diavik executives and miners played a prominent role in the world's diamond market, they could not have been more isolated from their competitors or from civilization. The kimberlite pipes that would give life to the company were located on a 20-square-kilometer island in Lac de Gras, 210 kilometers south of the Arctic Circle and 300 kilometers northeast of Yellowknife, the capital of the Northwest Territories. The remote location of the pipes defined Diavik, presenting enormous challenges to engineers, miners, and executives and dictating the company's every movement. Few companies were influenced by their geographic location as much as Diavik was influenced by the tundra it called home. Commonly referred to as the Barren Lands, the tundra was situated within a continuous permafrost zone, devoid of trees and dotted with numerous lakes, bedrock outcrops, and glacially deposited boulder fields. Temperatures averaged 10° C (50° F) in the summer and −31° C (−24° F) in the winter.

OFFICIAL FORMATION IN 1996

Before Diavik was assigned to its role in the inhospitable environment of the Barren Lands, preliminary work was conducted under the aegis of Aber Diamond and Kennecott Canada Exploration, a subsidiary of global mining giant Rio Tinto plc. The two parties formed a joint venture project named Diavik in June 1992, which presided over the discovery in 1994 and 1995 of the specific pipes—designated as A154North, A54South, and A418—that the mine would tap into. A 74-person exploration camp was established in February 1996 to house operations for underground bulk sampling at the Lac de Gras site, which yielded 5,900 metric tons of bulk sampling from two pipes by the summer. Next, Diavik was officially formed, assuming project responsibility from Kennecott Canada Exploration. In December 1996, Diavik Diamond Mines Inc. was established as a wholly owned subsidiary of London, England-based Rio Tinto. Its main offices were opened in Yellowknife, where the company would manage the operation of the Diavik Diamond Mine, an incorporated joint venture between Aber Diamond Limited Partnership and Diavik Diamond Mines Inc. As the deal was structured, Aber Diamond Limited Partnership, a wholly owned subsidiary of Aber Diamond Corporation, controlled 40 percent of the mine, while Rio Tinto, through its subsidiary Diavik Diamond Mines, Inc., owned the remaining 60 percent of the mine.

After Diavik was formed, there was much to be achieved before construction of the company's mine could begin. Exploratory work, government approval, environmental-impact studies, among a host of other issues and activities, would require more than four years of attention before work crews could start building the mine. The clearing of each obstacle brought Diavik one step closer to the date diamond production began. After environment and pre-feasibility studies were completed in 1997, the company submitted the project description to the Canadian government in March 1998, which triggered a formal review as mandated by the Canadian Environmental Assessment Act. A year-and-a-half later, in November 1999, Diavik received approval from the federal government for permitting and licensing. Another year passed before the company received all the necessary permits and licenses to bring the mine into production. In December 2000, investors associated with Rio Tinto and Aber Diamond approved financing for the mine's construction, giving their nod to a CAD 1.3 billion expenditure. Construction began the following month, as Diavik engineers took on the monumental task of building a mine in the Barren Lands of the Northwest Territories.

Canada's first diamond mine, the Etaki mine, commenced production in 1998 at its site near Lac de Gras, not far from the center of activity at the beginning of 2001. The construction of the Diavik mine and its operation demanded herculean efforts from engineers and miners. "It's in the middle of nowhere out in the Arctic," a company manager, Tom Hoefer, said in a January 2006 interview with US Business Review. "There are no all-weather roads and no power lines in the region." Workers were transported to the location from a company-owned airstrip in Yellowknife, but equipment and supplies could only be shipped via an ice road built over frozen lakes during a two-month period in the winter. "We have a year's worth of fuel, explosive, tires, and other supplies at the site," Hoefer said. "We have to buy everything up front because we can't truck supplies to the mine in the summer." Aside from logistical challenges, the location of the mine required an innovative engineering approach, as company officials searched for a way to reach the diamond ore bodies situated under a 30-mile-long lake. The solution was to build dikes in the lake, thereby allowing the lake bottom to be burrowed for open-pit mining. Construction of the dike earthworks for the A154 pipe was underway by October 2001. When the dike was completed in July 2002, Diavik was awarded Canada's highest engineering achievement award. As de-watering commenced, the company began constructing a second dike, which was expected to be completed in 2006.

COMPANY PERSPECTIVES

Our vision is to be Canada's premier diamond producer, creating a legacy of responsible safety, environmental, and employee development practice and enduring community benefit.

PRODUCTION COMMENCING IN 2003

Shortly after the first dike was completed, Diavik reached the milestone it had been pursuing since its creation. By the end of 2002, after 7,200 truckloads of material had been shipped along the ice road, construction of the mine was completed, with cost overruns bringing the project's cost up from CAD 1.3 billion to CAD 2 billion. Diavik started producing diamonds in January 2003 and made an immediate impact on the world's diamond market. Etaki, in operation for five years, accounted for 6 percent of world production by value, putting Canada in the market's fourth position behind South Africa. With the addition of the Diavik mine, Canada's share of world diamond production rose to 11 percent, putting it in third position behind runner-up Russia, with an 18 percent share, and global leader Botswana, with a 29 percent share. By the end of 2003, the Diavik and Etaki mines produced $1.2 billion worth of diamonds, trailing the $1.6 billion generated in Russia and the $2.5 billion generated in Botswana.

Once the mammoth task of constructing the mine was completed, the no less arduous job of operating the mine began. A central component of the mine's operation was the private ice road, which was constructed annually and typically open between early February and early April. Heavy loads required as much as 19 hours travel time to complete the 350-kilometer trek from Yellowknife to Lac de Gras, a trip completed an average of 1,500 times each year to transport supplies.

At the mine, the infrastructure comprised several principal assets, including a process plant, an administration/maintenance complex, fuel tanks, a power plant, and facilities to accommodate workers. The process plant, which stood 11 stories high, comprised three modules devoted to removing diamonds from the host kimberlite rock. The administration/maintenance complex housed offices for Diavik officials and served as a warehouse space. Diesel fuel, the single largest commodity transported on the ice road, was contained in three, 18 million-liter fuel tanks (a fourth was added in 2005) that provided fuel for mobile equipment, heating, and diesel power generators. The power plant housed five large diesel engines coupled to generators, each capable of producing 4.4 megawatts, and four smaller diesel engines, each capable of producing 1.25 megawatts. Worker accommodations consisted of 156 modules prefabricated in Alberta that were organized into four wings, with each wing containing three floors. Each room was single occupancy and equipped with a bed, a desk and chair, cable television and telephone hookup, and a bathroom. All main camp buildings were connected by prefabricated metal modules referred to as "arctic corridors," which were elevated, enclosed walkways designed to provide shelter and to carry drinking and heating water, sewage, power, and fiber optics. Amenities for the workers included a gymnasium, a fitness center, a squash court, and lounges. The Diavik mine also relied on its own communications system that connected the site via satellite to Yellowknife.

The elaborate, expensive, and self-sustaining complex at Lac de Gras was geared to do one thing: extract valuable gems from ore bodies below. The three pipes contained 95.6 million carats of proven and probable reserves, with the A154 South pipe, containing 46.7 million carats of rough diamonds, ranking as the largest pipe. As a group, the ore bodies were small in comparison to the world's other large diamond deposits, but the deposit grade at the Diavik mine of more than three carats per metric ton of ore was much higher than the world average of less than one carat per metric ton of ore. Annual production total was expected to peak at roughly eight million carats, with the life of the mine expected to range from 16 to 22 years.

As production began, Diavik and its joint venture partners began to reap the rewards of years of efforts. In 2004, the mine produced 8.27 million carats, exceeding expectations. Under the terms of the joint venture agreement, each partner retained the right to receive and to market its share of the diamonds produced. Diavik's 60 percent share of diamonds was marketed through another Rio Tinto subsidiary, Antwerp, Belgium-based Rio Tinto Diamonds. Aber Diamond Limited Partnership funneled its 40 percent share through several subsidiaries. The company owned 51 percent of jewelry retailer Harry Winston and supplied diamonds to Tiffany & Co.

KEY DATES

1996:: Diavik Diamond Mines Inc. is formed.
2001:: Construction of the mine begins.
2003:: Diavik begins producing diamonds.
2005:: Phase Two construction commences.

At the end of 2004, investors approved a second phase of construction, earmarking CAD 363 million to construct a dike for the A418 pipe. The production total for the following year reached 7.74 million carats, less than the total extracted in 2004, but the average recovered grade of ore processed in 2005 was 3.72 carats per metric ton, which was far higher than the world average. "We are pleased with the continued growth in production at Diavik as work proceeds to open more working faces to dependably deliver ore to the expanding processing capacity," Aber Diamond Corp.'s chairman, Robert Gannicott, said in a February 5, 2006, interview with Diamond Intelligence Briefs. "We are also optimistic that improvements to both mining and processing methods may improve the liberation and recovery of enhanced diamond value." In the years ahead, as Canada asserted itself in the world diamond market, Diavik promised to figure as an important part of the nation's bid for market leadership. The Barren Lands contained the valuable resources to enrich Diavik and its partners and to fuel the rise of Canada's diamond industry.

Jeffrey L. Covell