|Is there a diamond mine yet? |
THE ICE STORM
De Beers used to dictate how the world diamond business was run. Then along came Canada - and a fearless coal marketer named Bill Zimmerman
Friday, October 25, 2002
On a pale grey August day this year, a small party of diamond people drove out of Saskatoon, north across the prairie, to take a look at the largest diamond-exploration target in the world. There were four of us-me; Brent Jellicoe, the chief
geologist for Kensington Resources Ltd.; David Stone, the Victoria mining entrepreneur who is Kensington's president; and a burly American mineral economist and marketer named Bill
Zimmerman. It was Zimmerman, sitting there benignly as we sped across the plain, who gave the outing a special air of plausibility-of a diamond hunt with real diamonds at the end. Zimmerman invented the Canadian diamond business.
We were trading diamond stories-of thieves on the Diamond Coast; of large stones that shattered on the polishing wheel; of Nicky Oppenheimer, the South African billionaire whose family name is synonymous with diamonds and whose company,
De Beers, is the stream that waters the nightmares of the diamond trade. Famously secretive and autocratic, De Beers maintained a chokehold on the world diamond business for a
century, and its writ was law.
Because he sits, as it were, at the head of their government, diamond people have always gossiped about Nicky Oppenheimer. Often it comes down to nothing more than that he is the son and grandson of rapacious, brilliant men, that he keeps a private cricket team, and that he flies a helicopter to work.
But Oppenheimer can behave like a mogul when he wants to. In 2001, frustrated by the market's lack of appetite for De Beers stock, he delisted the $19-billion (U.S.) company and took it private, snapping the curtains shut forever on that doubtful window into De Beers's affairs-its annual report.
During our drive north, the topic of De Beers and its penchant for secrecy came up because the Johannesburg company is Kensington's joint-venture partner on the diamond target we were headed for.
Kensington was bitter about De Beers's management of the project. One deposit alone on the joint venture's property contains a billion tonnes of diamond-bearing material. If the body turns out to be mine-grade-a big "if," but an enticing one-the deposit could support a mine for more than 50 years.
Mind you, promising possibilities blossom everywhere on the Canadian diamond scene. More than 500 diamond targets have been identified since the first discovery in the Northwest Territories more than a decade ago, and the emergence of Canada as a world diamond power is no longer in doubt. It was
Zimmerman, more than anyone else, who brought this about, and he did it by pulling off a feat that many observers said was impossible-breaking the hold of the Oppenheimer cartel.
Zimmerman looks more like a high-school football coach than a high-stakes player. He moves his big frame slowly and speaks in a laconic voice, probably the way he spoke when he flew an A-4 Skyhawk fighter-bomber from the deck of the USS Coral Sea during the Vietnam War. He likes to fish with his friends. He is the kind of man who drives his mother home when she comes for a visit-even though she lives in Pennsylvania, 2,500 kilometres away from Zimmerman's home in the Rocky Mountains of Colorado. There is a feeling about him that nothing would ruffle his calm. This is a good quality for a man who suddenly found himself facing off with De Beers, the Goliath of the diamond world.
When The Broken Hill Proprietary Ltd. (BHP), the Australian mining titan, struck diamonds northeast of Yellowknife in 1991-a site now home to the Ekati mine-the chief concern of the top executives in Melbourne, once they established the viability of the project, was what they would do with the
diamonds. Somewhere down the road, the Australians would have to confront De Beers. Could they? It was just as this question was being asked that Zimmerman appeared.
"I'd been marketing coal for BHP out of Indonesia for five years," Zimmerman says, "and I was sick of it. I asked them to find me something else, and they said, 'Well, we've got this diamond thing in Canada. We don't know anything about diamonds. See what you can find out.' So I took it on. I figured, what the hell, it's just another kind of carbon. How hard can it be?"
It could be very hard. The diamond world-the De Beers world-is a secret empire, whose trade routes, customs and language are hidden from all but its citizens. At the heart of the empire lay Kimberley, a dusty town in the centre of South Africa, where 120 years ago the modern diamond age began. In the course of the great diamond rush, the deposits of the Vaal River were quickly depleted. Diamond hunters began to scrape about in the hard earth to see if they could find other sources. Finally, as much by fluke as by science, they located the deep, carrot-shaped deposits that diamond people call "pipes," containing diamonds in volumes never found before. In the 1880s, a battle was fought for control
of this great treasure chest, and De Beers won.
Diamonds in the uncut state are called rough diamonds, or simply "rough." It was the movement of the masses of new rough that defined the diamond empire. Basically, it moved to one place-London, home of the Diamond Trading Company (DTC), the De Beers trading arm that controlled some 80% of the
world's rough. From the great pit of Australia's Argyle mine, from the diamond pipes of Siberia, from the fabled diamond rivers of Brazil and from De Beers's own mines in Africa, it all came flooding into London, week in and week out, tens of thousands of carats at a time, some 80 million carats a year.
Ten times a year the stones got sorted into grey cardboard boxes, priced and sold to a select list of clients.
The near-total control of rough allowed a like control of the diamond price. If the demand for polished goods was weak in the retail sector, De Beers choked back on rough until the price recovered. That was how things ran for a hundred years, and most of the citizens of the diamond world believed that
was how it had to run. So skillfully did De Beers manage its central argument-that only a single seller of rough could guarantee the safety of the diamond price-that even the Russians, who discovered a field of rich pipes in the 1950s, were drawn into the cartel.
The biggest question Zimmerman faced was simply: Who would buy the diamonds? The largest buyers, those whom BHP would want to court, were already customers of De Beers. Would they risk offending the autocrat of the diamond world by helping BHP assess its goods, or assessing them fairly, or even,
eventually, purchasing them?
That quest led Zimmerman to the world centre of diamond rough trading, an area of a few streets in the old Flemish river-port of Antwerp. The rough comes into the diamond quarter from the London sales, with the supply topped up by thieves and warlords, smugglers and small miners in every corner of the world. Men whose livelihood depends upon fine judgments of clarity, colour and shape paw through the goods and haggle over price.
"Our tactics at the beginning were pretty straightforward," Zimmerman says. "We went out to talk to anybody who'd talk to us. I wanted a broad range of people-dealers, valuers, end-use customers who buy polished diamonds. In a very short time I heard that if we didn't sell all our diamonds to De Beers
we'd wreck the market. 'Let me know if you are going to sell them yourself,' one guy said, 'so I can immediately liquidate my entire stock.' But other people said that's just not true."
Zimmerman's brief at BHP was marketing, and he concentrated his attentions on the narrow world of the diamond bazaar. Back in Canada the construction of the Ekati mine was sending hundreds of millions of dollars worth of steel, heavy equipment and diesel oil pouring up the ice road to the mine site in the Barrens. Steelworkers, electricians, miners and engineers flew in and out on shuttles from Yellowknife and Edmonton. Boeing 737s and Hercules transport planes were coming in over Lac de Gras and roaring to a halt on the mile-long gravel strip. And yet there were relatively few diamond
traders who even believed that diamonds could come out of Canada.
"I'd take out a bag of our rough and spread it out," Zimmerman recalls, "and this guy would just stare at it and then look up at me and say, 'You didn't bring this in from Africa, did you?'"
"Bill was an excellent choice for that job," says Jim Rothwell, a long-time BHP executive who became the first president of BHP Diamonds, and Zimmerman's boss. "Bill is very patient. He has good market sense and he's an excellent listener. For a couple of years he just went to Antwerp and listened to people. He had enough humility to know he didn't know too much.
"Unless you understand the marketing of diamonds you don't understand the business. It's not a commodity that has a price, like coal or copper, because each diamond is unique. It takes expertise."
While BHP was testing the waters of the diamond trade, De Beers was testing BHP. A diamond-industry analyst in London once told me De Beers dispatched a top cartel officer to BHP
headquarters in Melbourne with an offer to buy the Canadian deposit. True or not, De Beers did move early to establish contact.
Returning from a research visit to Namibia, Zimmerman was passing through the business lounge at Johannesburg airport when an Antwerp dealer introduced him to George Burne, a De Beers director who would later become the company's first resident point man in Canada. Burne repeated the invitation that Zimmerman had already received from others.
After a tour of the great sorting rooms-"You can't help but be impressed"-Zimmerman was ushered into one of the small, elegant dining rooms with soundproof doors in which, over bad food but good silver, De Beers executives conduct their interrogations. I've lunched there myself, warned beforehand by others that De Beers would try to get everything they could from me, and give nothing back.
"That's funny," said Zimmerman when I told him the story, "that's exactly what De Beers was saying about me."
In the earliest marketing models that Zimmerman and his team developed, BHP did consider selling all its diamonds to De Beers. This idea was killed quite quickly, however, when BHP's lawyers decided it could imperil the company's various U.S. operations, given De Beers's antitrust problems with the
United States Justice Department. Moreover, Zimmerman was discovering that Antwerp dealers, initially skeptical of BHP, were slowly warming to it. The tide of opinion about Canadian diamonds was turning, not because of human persuasion, but because of the gems themselves.
"By 1996, we were getting really substantial samples from Ekati to take with us to the dealers," Zimmerman says. "We had 3,000 carats from the Panda pipe, and more from Fox and other pipes. I'd sit there watching them go through the goods, and I realized they were finding something different-something they hadn't expected to find. Finally, one guy said to me, 'You know what your problem is, Bill? Your problem is you don't even know what you've got.'"
Zimmerman went back to his hotel and thought about this. He remembered that, as buyers had looked at the diamonds, picking them up with tweezers and gazing intently at them through their loupes, they would sometimes murmur that they looked like Russian goods, or rough from some top mine. And why not? The values on the Panda rough were averaging $132 (U.S.) a carat (and when it came time to sell, BHP got $165). If the volumes of the mine were high enough-and BHP knew they would be-then what the Antwerp buyers were saying was that the newcomers had one of the best diamond mines in the
"All we had to do," says Zimmerman, "was set up a good, professional selling operation, show them that we knew how to handle the goods. There was no question they'd buy them."
It is a testimony to the persistence of the idea of diamonds as a perilous terra incognita that even after Zimmerman had concluded this, his own bosses at BHP still had doubts.
"I took the head of North American minerals around Antwerp to talk to some dealers, and I guess the traders in the street and all the haggling got to him, and he said to me, 'Can we do this?' I said yes, and started to explain how, but he cut me off. He didn't want the details, just my promise. About a year later I ran into our chairman in an elevator in our San Francisco office, and he looked at me and said, 'Bill can we really do this?' So right away I plunged into an explanation of how it would go, but he shook his head. 'All I want,' he said, 'is your assurance it can work.'"
And it did. In October, 1998, the first rough went out of the Ekati mine to Antwerp. Antwerp snapped it up. The idea that the cartel presented an unbreachable wall to the free marketing of an independent source of diamonds-the idea that De Beers had worked long and hard to sustain-crumbled away into dust. This by itself would have been a blow to the empire, but more was to follow.
The 1991 Ekati discovery sent a wave of prospecting washing over Canada, from British Columbia to Baffin Island. An area greater than Europe was staked into mining claims. Staking rushes have swept wide tracts of the Northwest Territories, Alberta, Manitoba, Quebec and Ontario. Inevitably, some of the
activity has been promoter-driven, with investors themselves as the commodity to be mined. But underlying the successive rushes and the billions of dollars spent in exploration and development is the indisputable truth that Canada glitters with diamond targets more than any other place on Earth, and
the exploration of those targets is in its infancy.
Canada's diamond potential is hard to overstate. Within sight of the Ekati mine is the country's second diamond mine, Diavik, an enormous open pit created by damming off a corner of Lac de Gras. Diavik is a joint venture of the British mining giant Rio Tinto PLC and Toronto's Aber Diamond Corporation. Before next summer, the mine will begin to produce the first of a diamond stream that will reach seven million carats a year. Together, the two mines will produce some $1.2 billion worth of rough a year, 12% by value of the world's annual supply of gemstone rough.
But where is De Beers in this bonanza? It is 120 kilometres away, camped on its main hopes on the Arctic field-the wholly owned Snap Lake diamond dike and a joint venture with Mountain Province Diamonds Inc. They seem like the lonely outpost of a great empire. Much exploration work remains to
be done on the pipes in the joint-venture project, while the Snap Lake deposit, admittedly with a good chance to be Canada's third diamond mine, is merely a dike, or narrow seam, of diamond-bearing rock, called kimberlite. At a projected 1.6 million carats a year, its potential is dwarfed by the mines at Lac de Gras. The dike was not even a De Beers discovery, but rather was taken by storm from Winspear
Diamonds in a $305-million stock-market buyout.
It seems a cruel fate for a company that has scoured Canada for diamonds longer than anyone else. De Beers has been here 40 years, originally tiptoeing about the country under cover of a prospecting front called Monopros Ltd. In fact, it was the discovery of a De Beers encampment on the Mackenzie River in 1982, on a tip from a bush pilot, that led Canadian diamond hunters to the great discovery.
Adding to De Beers's frustrations has been its exploration success-it has located more than 200 kimberlite targets. By this measure, De Beers gets good results from the $40 million a year it spills into Canada now-roughly half its global exploration budget. Yet even its successes are bedevilled. The
Victor pipe, in the soggy lowlands west of James Bay, has looked like De Beers's ace at the end of a hard game. But the project hit a snag in July when the tiny Attawapiskat native band repudiated its agreement with De Beers for the project, which is on its traditional lands.
So De Beers still stumbles along in the wake of its rivals Rio Tinto and BHP. There is only one project right now with the potential to pull De Beers from its Canadian travails and vault it into the front ranks alongside the leaders-Fort à la Corne.
The route to the Saskatchewan targets lies along a narrow sand road that winds through the thin pines and poplars of the Fort à la Corne provincial forest. We emerged into a logged-out expanse, made forlorn by the lowering sky and the charred stumps of a long-ago fire. The rolling plain stretched for miles. At first sight it was hard to think what had attracted a man like Zimmerman, and Jim Rothwell too, onto the board of a junior explorer with a still- unproven prospect. Both had been top managers (Zimmerman succeeded Rothwell as president of BHP Diamonds) of an international behemoth. But retirement was not enough for either man, and if they wanted a fresh canvas to paint on, this one was
certainly large enough.
"It starts over there," Brent Jellicoe said, aiming his arm to the east as he began to indicate the size of the deposit. "Then it goes right around there, about a quarter-mile in that direction, then goes way out there." We were roughly in the middle of the area he had indicated. I stared off to where he had started.
"You mean the edge is over there, where those hills are?"
"The far hills?"
He nodded. "Big, eh?"
Diamond pipes are a type of extinct volcano. When they erupted, they carried diamonds up from depths of a hundred miles. Most of the time the diamonds perished on the way to the surface, as changes in heat and pressure caused the diamond to adopt some other carbon form, such as graphite. But when conditions were just right, the diamonds survived. When the kimberlite magma reached the surface, it exploded into the air in a plume many miles high, showering the surrounding area with kimberlite.
In the classic diamond pipe, most of this ejecta has been weathered away by time and the elements, and all that remains is the kimberlite lodged in the deep, cone-shaped vent of the volcano. But at Fort à la Corne the broad, thick layer of blown-out, diamond-bearing kimberlite was quickly overlaid with sand and mud-a protective blanket that preserved the diamond lode from dispersal over the tens of millions of
years that followed.
"Compared to the kimberlites in the Northwest Territories," says Zimmerman, "the Saskatchewan kimberlites are immense. To develop a mine at Ekati, we had to put five different pipes into the mine plan, so that when the pipe runs out, as it will this year or next, there's another pipe you can strip the
overburden from and start to mine. At Fort à la Corne, if a mine proves out, we could just keep mining it for 25 or 40 years or even longer."
In the joint venture exploring these targets, Kensington and De Beers each hold 42.25%. De Beers is the project operator, making the day-to-day decisions about running the exploration. A Saskatchewan uranium miner, Cameco, controls the remaining 15.5%, which neither of the others can buy without mutual consent. Like it or not, De Beers and Kensington are sharing the bed.
"De Beers never did want us in the joint venture," David Stone said as we drove around the site, "because then they would have someone who would want to pump things up and disclose everything."
This is a neat encapsulation of the natural antipathy between a large, rich and habitually secretive miner and a small, stock-price-sensitive junior company with shares trading on the Toronto over-the-counter market.
The irony at Fort à la Corne is that the very size of the target is its biggest problem. Costs forbid the comprehensive drilling of such a large area. By comparison, BHP's Panda pipe in the Northwest Territories covers an area of 3.1 hectares, whereas the Fort à la Corne joint venture's main target, FalC 140-141, sprawls over 250 hectares. Its great area comes from the huge, lens-shaped layer of diamond-bearing kimberlite that blankets the volcanic vent.
Cross-examining this broad and complex cloak of kimberlite presents the diamond detective with a knotty task. The grade (carats per tonne) and the diamond values (dollars per carat) vary throughout the body. De Beers has made some early, computer-modelled extrapolations of how much the rock is
worth; while Kensington has massaged this math into a sunny view of the future, De Beers insists that the modelled numbers describe only the samples that produced them and say nothing, or at best very little, about the kimberlite as a whole. The tension between the partners has now flared into the open, with Kensington complaining that De Beers, as project operator, restrains the flow of data that would
help Kensington promote itself. (Kensington's stock climbed as high as $2.36 last March on a wave of enthusiasm for junior exploration companies; lately it has traded around 80 cents.)
"De Beers has been downplaying its interest in the Fort à la Corne joint venture," Bill Zimmerman says. "I am not certain how confident they are in the development of a mine, but it is probably higher than they indicate to Kensington or anyone else."
If a diamond mine with an exceptionally long life lies beneath the sand hills of Saskatchewan, it makes sense for De Beers to sit on Kensington. A low Kensington share price would make the company a cheaper buy if De Beers decided it liked the target enough to take out Kensington and scoop the whole property for itself. In the diamond world, such speculations are shaded with a marvellous paranoia. So when a company controlled by a trader with close ties to De Beers took a $1.85-million private placement in a Saskatchewan junior with a pipe next door, Kensington took notice.
The neighbouring company, Shore Gold, has a target within sight of FalC 140-141. The company that made the investment, Magma Diamond Resources Ltd., is controlled by Benny Steinmetz, a powerful diamond magnate who is a friend of De Beers chief executive Gary Ralfe. It is not outrageous to
suppose that information about Shore Gold's pipe might pass to De Beers, giving it another window into the regional diamond population.
In an office in De Beers's sleek, black-windowed building in Toronto, I spent an hour and a half one afternoon talking about Fort à la Corne with Joe Joyce, De Beers's chief of exploration in Canada, and Richard Molyneux, president and CEO of De Beers Canada Corp. Molyneux is South African and Joyce is British, but both are really citizens of De Beers. They behave like imperial generals who regard with interest, but not fear, the strutting of the provincials. Joyce and Molyneux were clearly uneasy with important Kensington assertions about the Saskatchewan deposit-ease of stripping, throughput of mill, life of mine. Yet as Molyneux himself said, the FalC 140-141 pipe "is the biggest kimberlite body within the Fort à la Corne area, which is the largest kimberlite province in the world."
De Beers cannot afford to turn its back on such a target. There is a long string of "ifs" between this moment and that point in the future when the venture might decide it had a mine, but the possible payoff is too big to ignore. Said Joyce: "It's why we're there."
It seems incredible today to recall that when Zimmerman began his travels in what was still the old diamond empire, the question was whether a new supply of rough could be marketed outside the De Beers cartel. In not much more than a year from now, the Canadian diamond stream will have swelled
to a million carats a month, all of it rushing out of the Barrens and into an eager trade. If De Beers succeeds, as it probably will, in ironing out its difficulties at the Victor pipe, and if other targets such as Fort à la Corne prove out, the tide of Canadian production will increase still more.
I pressed Zimmerman for his opinion on the place Canada might some day occupy in the diamond world. It's something that is always being asked at diamond conferences, as industry watchers exchange the usual speculations about the rise or fall of Russia and the scene in the formerly war-torn parts of Africa that happen to be diamond-rich. "When we were asking ourselves at BHP the question, 'How big?'" he said, "we always gave Botswana first place. As to who would be the second-biggest producer down the road, you have to be looking at Russia and Angola. But there are problems in both
places. So could Canada be the world's second-biggest producer? You bet."
Copyright © 2002 The Globe and Mail