Romancing the Stone

It 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.

It is not that the mining companies themselves are not looking for more. In India itself, De Beers, the world’s largest diamond producer, and Rio Tinto have been exploring for years. De Beers is also said to be actively exploring Madhya Pradesh and parts of Andhra Pradesh for new finds. But exploration and mining of diamonds is considered the most painstaking and time consuming compared to other minerals.

Diamonds are extracted from volcanic pipes or from riverbeds or ocean beaches, which is also called alluvial mining. While Koh-i-noor was an alluvial product, the Bunder belt consists of volcanic pipes and is similar in nature to the Argyle mine. However, even though an area might be known to have deposits of the white stone, its economic viability is a high concern for miners. For instance, a high grade diamond in Canada might compensate for the high costs of operations there. While it explains the no-result of De Beers in India after many years of search, it also makes smaller players wary of investing money.

Moreover, explains Delhi-based geologist G.S. Roonwal, “Diamond is classified as carat per tonne, which means you need to dig out lots and lots of tonnes of earth just to understand the value of the find.”

Kilalea adds that it takes anywhere between 10 to 15 years for an exploration to reach the production stage. Rio Tinto alone invests almost $150 million every year in exploring for diamonds — the budget is much more than India spends for all its mineral exploration. But Rio Tinto has also trimmed its exploration budget this year because of the slowdown.

“Bunder is an important part of our portfolio and we are looking forward to it,” says Cox. He adds that the initial find could lead to more deposits.

But what would it mean to the Indian diamond industry?

Vikram Merchant, who heads Rio Tinto Diamonds’ Mumbai office, says, “You can trace the rise of the Indian diamond and cutting polishing industry to the Argyle mine. Most of the rough diamonds from Argyle find their way to India. Bunder can have a similar effect.”

But can it give credence to India’s claim to become an alternate trading centre to Antwerp? After all, 11 out of 12 diamonds in the world are cut and polished in India; the domestic retail market for the stone is growing the second fastest in the world; and now with Bunder mines showing promise. Doesn’t it make sense for India to be an alternate destination for all the Gujarati and Jewish businessmen and shift some part of the trading to India? “Well, it is too early to say that, but yes, it is possible,” accepts Cox.

More than 80 percent of the world’s rough diamonds pass through the skilled hands of Indian polishers and cutters, making for a $10 billion industry. “I don’t think there is any other product where we have a similar domination,” says Vasant Mehta, diamond trader and chairman of the Gem & Jewellery Export Promotion Council.

But the crown rests uneasy. For two years, growth in the industry has stagnated and a competitor is fast emerging in the form of China. Now one way to get ahead in the race, according to Mehta, would be to have Mumbai emerge has an alternative to Antwerp as a trading centre. The small port city in Belgium has created its domination through centuries and does business of over $30 billion every year.
But tax haven Dubai, which offers a 50-year tax holiday, has already taken an early lead as a diamond trading centre with business worth over $11 billion in 2007. A trade route has developed between Dubai and China, which is emerging as a cutting and polishing centre, increasing the frustration of Mehta and his peers.

“We have been lobbying with the Indian government for the past few years. There are unnecessary taxes, like the consignment tax, involved in diamond trade in India and opening an office here is also not very easy,” says Praveen Shankar Pandya, president of Diamond India, an amalgamation of 58 diamond companies.

However, both Mehta and Pandya think Rio Tinto’s Bunder mines could be the game changer for India. Already, the world trade internationally has undergone a dramatic change in the last 10 years. De Beers’ monopoly in diamond trade halved from 80 percent to 40 percent of the world production — with private miners setting up their own auction site rather than depend on De Beers’ Diamond Trading Company (DTC), world’s largest distributor of rough diamonds.

Rio Tinto, for instance, earlier used to route its diamonds through DTC. But now it has about five Indian clients, or site holders, through whom it supplies Argyle diamonds to the local market. But still most of the buying and selling happens via Antwerp. With the coming up of Bunder, not only can the diamond produced in Madhya Pradesh be sold directly to the polishing and cutting centres in Surat and Mumbai, but international consignments can also be brought in.

“Though Bunder might generate only up to $200 million (at current prices) of diamonds annually, it will pave the way for others,” adds Pandya. Of course, he adds, two things will be needed from the government to make that happen. First, “a conducive environment should be created to make it profitable for international traders to open office in India and second, the government should insist with Rio Tinto that diamonds from Bunder should be sold in India,” he says.

Interestingly, the Indian government has slowly but steadily taken a step towards the trading-centre goal. In August, discussions with the visiting head of state of diamond-rich Namibia included direct sale of diamonds to traders in India. A leg-up from the Bunder diamonds could well be the booster.

People at Rio Tinto Diamonds don’t want to give more details. In an emailed statement, the company said, “Right at the moment we need to progress our bulk sampling activities at Bunder. On the basis of these results, we will have a much better feel for next steps, including timing for pre-feasibility.” But Cox separately notes there is a similarity between the geology around Bunder and Argyle, which is famous for its pink diamonds that sell for $1 million per carat. Perhaps, Bunder might just rekindle the love affairs of queens and princesses with Indian diamonds