The Gahcho Kue diamond mine took 21 years to build, and Dermot Desmond was there for every one of them.

It has been an investing odyssey. The mine, first backed by Desmond in the mid-1990s, once promised to be one of the world’s richest. It was forecast to produce CAD$10 billion worth of output over the course of its life.

But it hasn’t worked out as hoped. The share price of Mountain Province, the Desmond-backed company which is a 49 per cent owner of the mine, peaked the month it opened in September 2016. Since then the share price is down 95 per cent.

Desmond owns 30 per cent of Mountain Province. He’s owed CAD$60 million by it. And this week, with diamond prices depressed and cash flow shut off by Covid-19, he’s doubled down on his investment. Dunebridge, a company controlled by Desmond, is to buy CAD$50 million worth of diamonds from Mountain Province. 

Gahcho Kue is accustomed to being cut off from the world. It’s only accessible by land during the months of winter, before the ice roads melt. But Covid-19 has cut it off from its customers and its cash flow for the last three months.

The ice road.

Its rough diamonds are sold at live auctions by dealers in Antwerp, Belgium. Covid-19 shut down the diamond market in Antwerp in mid-March.

Under the terms of the deal, Dunebridge will buy CAD$50 million worth of smaller mine diamonds, which are below 10.8 carats, from Mountain Province. Dunebridge will pay the prevailing market price for the diamonds. And Mountain Province will get a cut of any profit Dunebridge makes re-selling them. 

It’s a good deal for Mountain Province. The mining industry is strapped for cash as a result of the lockdown. Mining analyst Edahn Golan says, “Mining is very cash-intensive, mining companies without deep cash reserves need to generate cash flow, so selling a run of mine (unsorted) goods for a lump sum makes perfect sense, especially if they get part of the proceeds of the buyer’s sales if rough prices rise.”

The first sale, for CAD$22 million, is expected to go through on June 11th. 

A crusher at work on the Gahcho Kue mine.

Desmond has been a backer of Mountain Province, in one form or another, since the mid-1990s. He now owns 30 per cent of the company, along with a CAD$60 million loan. Without Desmond’s support the mine couldn’t have happened. “Without the support of the Irish we would be up the creek,” says Mountain Province’s former CEO Patrick Evans. 

Desmond willed the Gahcho Kue mine into existence. It was twenty-one years in development and cost more than CAD$1 billion. It was forecast to produce 12,000 carats per day for 14 years, at an average price of CAD$167 per carat, for a total forecast output of CAD$10.2 billion.

However, not long after Gahcho Kue opened in September 2016, diamond prices started to fall. September 2016 has been the high point for Mountain Province’s share price. 

Mountain Province shares peaked shortly after Gahcho Kue opened in September 2016.

Today, the company is worth CAD$74 million, or €48 million. 

Mountain Province shares are down 68 per cent this year

The biggest survive

“Direct sales are very common by larger companies – De Beers and ALROSA,”, says Edahn Golan. 

“Smaller companies such as Mountain Province prefer tendering their goods, and that was the route they took up until March when the diamond industry came to a halt due to COVID-19.”

The biggest diamond miners, like de Beers and ALROSA, are best placed to wait out Covid-19. They have enough cash that they don’t need to sell at reduced prices. 

Edahn Golan says, “Overall, rough diamond prices fell 4-6% during the pandemic, in reality reflecting two trends: that the large suppliers preferred limiting sales to lowering prices, and that some companies made limited sales for a reduced price to generate cash flow. Mountain Province is in the second group.”

The world’s five biggest producers could be sitting on inventories worth about $4.5-billion by the end of the years. 

Meanwhile Dominion Diamond Mines, owner of the NWT’s Ekati mine and a major stakeholder in its neighbour, Diavik, has filed for insolvency protection.