Romancing the Stone

Image: Herve Collart/Sygma/Corbis

t was around the Ninth Century when European traders back from their visit to India first started talking about the sparkling white stone. As imagination soared, so did the marvel around diamonds and the desire to own them among queens and princesses in Europe and the world over. That gave birth to the world’s first diamond industry in India.

Most of the mining was centred in Golconda, Andhra Pradesh, which is said to be the origin of famous diamonds such as Koh-i-noor, Orlov, Sanc and Darya-i-Nur. The domination would last till 1866 when the hard stones were discovered in South Africa. Shortly thereafter De Beers Diamond Company was founded and the diamond trade gradually but surely shifted away from the Indian subcontinent. Today, India’s lone active diamond mine is in Panna, Madhya Pradesh, and Indians are more famous for dominating the global diamond cutting and polishing business than for producing the precious stones.

India’s diamond mining story though, still might have some sparkle left. Of late, a murmur has been going through the Indian diamond industry that has made every one from the mining, trading and polishing communities sit up. For the first time in more than a century, India has found a new diamond mine — one that will produce more than twice what Panna produces every year and of a higher grade. Diamond “pipes” were first found in Bunder (so named after the large population of monkeys in the region) in Madhya Pradesh’s arid Bundelkhand region in 2004 by Rio Tinto, roughly three years after the London and Melbourne-based mining giant began exploration in the country. Rio Tinto obtained a prospecting licence in 2006, a first for a multinational company in India.

Typically, one in 100 exploration projects reach a stage where they become functional. Now three years later, Rio Tinto’s diamond exploration in Bunder has come to that stage, says the managing director of its diamond business, Bruce Cox. “We are now pretty confident about the project. There are deposits that can be mined at a fairly large scale and the grade is enough to make it viable. By October this year, we would know about the price per tonne of producing diamond from Bunder through bulk sampling and this will be followed by feasibility studies. We will be setting up a plant and hope to start producing diamonds from Bunder anytime between 2013-2015 and the total investment would be about $500 million.”

According to initial findings, Bunder has an “inferred resource” of 27.4 million carats of diamond valued at more than $2 billion in today’s prices and with a grade of 0.7 carats per tonne. Cox says
that on value terms, Bunder will come “somewhere between the table,” but what’s crucial is the timing of when the mine starts producing.

The 2015-deadline will be an important one. For, three years from then, Rio Tinto’s biggest diamond mine located in Argyle, Australia, would have lived its life and would be officially closed.

Since 1983 when it started operations, Argyle has been Rio Tinto’s money spinner, producing about 30 million carats of diamond roughs each year, and has generated more than $6 billion in revenue till now. Even today, Argyle is the largest source of rough diamonds in the world and contributes to almost 80 percent of Rio Tinto’s annual revenue of $850 million from the diamond business.

But that may not be for too long. The mining operation there is currently open pit and as it goes underground in 2010 — to extend its life by another eight years — production will drop by half. Moreover, most of the diamonds from Argyle are the brown ones, which typically are not very profitable. The pink diamonds, for which Argyle is famous worldwide, account for only about 1 percent of its production. Officials at Rio Tinto Diamonds are thus eager to find replacements like Bunder for Argyle. Though Bunder might not have the scale of Argyle, its diamonds might be of higher grade. “Bunder is important for us to sustain our diamond business,” says Cox. Rio Tinto’s other two active mines — Diavik in Canada (9 million carats a year) and Murowa in Zimbabwe (200,000 carats a year) — are relatively much smaller and are not completely owned by it.

Rio Tinto is the third largest diamond miner in the world but the first two — De Beers and Russia’s Alrosa — are many times bigger. Though Rio Tinto might not face any immediate threat from its nearest competitor BHP Billiton with whom it is also in talks to merge its Canadian operations, the production cut at Argyle and its eventual closure will see the company losing its eminence in the world diamond map.

Thus, a replacement is high on the priority list and Rio Tinto has been exploring globally. Along with India, it had opened up exploration in Canada, Angola and South Africa. It has withdrawn from Angola “after many years of exploration” and no luck, and the company is yet to find any credible deposit in other places — of course, except in India.

But like Des Kilalea, the London-based veteran industry analyst at RBC Capital Markets, says, “It is not only Rio Tinto, but all other diamond companies and countries are facing this problem — shortage of new finds.” Globally, 162 million carats of diamonds were produced last year, a drop of 7 percent from a year before, and had a value of about $12.7 billion. At the same time, demand stood at about 160 million carats. While Kilalea reckons that the present financial downturn has dulled some of the appetite for diamonds — especially in its biggest retail market, the US — in the long run, demand is going to shoot up because of the growing appetite in China and India.

“Almost all the mines are getting old and increasingly there is a need to go underground, which is expensive. Everywhere, including in Africa and Russia, mines are getting old. In the next 10 years, only four new mines might become functional, one of them being Bunder. If the demand continues to increase, prices are going to rise up significantly,” adds Kalilea.

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