Dominion Diamond Sees Further Gains at Arctic Gem Mine

Dominion Diamond Corp. (DDC) is proving it can operate a diamond mine in the harsh Arctic conditions of Canada’s remote Northwest Territories after selling the luxury Harry Winston jewelry brand last year.

The Ekati mine, acquired last year from BHP Billiton Ltd. (BHP), is Toronto-based Dominion’s first attempt at running an excavation. With a promise of higher returns for unpolished stones, Ekati, about 200 kilometers (124 miles) below the Arctic Circle, offers the challenge of improving results in tough conditions.

“Inevitably when you buy something that you’ve only really been able to see on paper you hold your breath a little bit,” Chairman and Chief Executive Officer Robert Gannicott said in a phone interview last week. “It’s worked pretty well for us.”

Dominion is increasing recovery at Ekati by capturing more smaller diamonds from crushed ore, Gannicott said. The company plans to make those adjustments permanent and Gannicott believes more improvements can be achieved.

Last week, Dominion said it agreed to buy out one of Ekati’s minority partners, Chuck Fipke, for about $67 million. Fipke and Stewart Blusson, who still has an interest in Ekati, discovered the deposit in 1991.

Initial results have been encouraging, according to Edward Sterck, an analyst at Bank of Montreal.

“Pretty consistently, on a quarter-by-quarter basis, diamond production in carat terms has been ahead of my forecasts,” Sterck said in a July 10 phone interview from London.

Unrewarded Gains

The gains have yet to be rewarded by investors. Dominion shares have risen 4.2 percent in the past 12 months. Smaller producer Petra Diamonds Ltd. (PDL) has increased 64 percent in London, while Gem Diamonds Ltd. (GEMD) rose 32 percent. De Beers, owned by Anglo American (AAL) Plc, and Russia’s OAO Alrosa are the two largest producers.

Dominion sold the Harry Winston brand to Swatch Group AG (UHR) for $1 billion. It also owns 40 percent of the nearby Diavik mine, which is controlled and run by Rio Tinto Group.

While Dominion has underperformed rivals, Sterck said he sees potential for it to catch up. The shares may have suffered as investors that bought the stock for jewelry exposure sold positions after the Harry Winston sale. Others hoping for a special dividend were disappointed that the money was used elsewhere, he said.

“They certainly look very underpriced at the moment versus the peers,” Sterck said.

Cash flow will rise as the company mines a richer zone at Ekati in the coming years, he added. Dominion had earnings before interest, taxes, depreciation and amortization of $60.5 million for its fiscal first quarter, more than double a year earlier, according to data compiled by Bloomberg.

Fat Lake

Ekati, which means fat lake in the language of the First Nations Tlicho people, began production in 1998. Its largest gem-quality diamond, the 78 carat Ekati Spirit, was found in 2010. Current plans call for production to 2019.

The mine is located in a region where heavy equipment must be moved on ice roads during the winter. The Northwest Territories, which runs across the top of the North American continent, extending into the Arctic Circle, has a population of 43,459, according to the territories’ Bureau of Statistics. Winter temperatures of minus 50 degrees Celsius (minus 58 degrees Fahrenheit) are common.

The challenges are likely worth the returns with demand for diamonds growing “phenomenally,” BMO Capital Markets commodities analyst Jessica Fung said in a June 26 interview.

“You’ve got so many people that are rising up to the middle class, they want diamonds just like the rest of the world,” Fung said.

Confident Market

Analysts remain bullish on Dominion. There are eight buy ratings on the company and one hold, according to data compiled by Bloomberg.

Rough diamond prices will probably hold recent gains through the year before rising further in 2015, Gannicott said. Prices for rough stones from Ekati have risen more than 9 percent this year, while gems from Diavik increased by about 8 percent, he said.

“To us it feels very steady now, Gannicott said. ‘‘The market is confident again. I’m pretty optimistic about where we go next year.’’

Economic recovery in the U.S., the biggest diamond jewelry consumer, is underpinning sales of rough diamonds. Support is also seen from retail demand in India and China, Gannicott said.

‘‘I would say two years ago diamond sales in China were dominated by very big purchases by very wealthy people,’’ Gannicott said. ‘‘We have now got a marketplace that’s much more normal.’’

To contact the reporter on this story: Liezel Hill in Toronto at lhill30@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net Jim Efstathiou Jr., Jacqueline Thorpe

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