The future of the Australian diamond sector is now heavily reliant on exploration, with firms vying to make another large discovery.
Click here to read part one of this article, which covers the closure of the Argyle diamond mine.
When the mining equipment permanently shut down at Western Australia’s Argyle mine in November 2020, the country’s diamond sector entered a transitional period.
As the world’s fourth largest diamond-producing asset shuttered, domestic output of the gems instantly declined by as much as 90 percent.
The future of the Australian diamond-mining sector is now heavily reliant on exploration, with several companies vying to discover another formidable source of rare diamonds.
“I believe Australia is still quite speculative for diamond exploration,” said diamond analyst Paul Zimnisky. “There have been exploration efforts in recent years that have been somewhat disappointing, but I think the upside offered is still quite intriguing.”
There are also two past-producing diamond mines that have become more interesting since Argyle’s closure: Ellendale and Merlin.
Both projects have previously failed to live up to their intended potential, but Australia’s new diamond landscape may breathe new life into these old assets — read on to learn more.
The Ellendale diamond mine
The Ellendale mine in West Kimberley once accounted for half of the world’s fancy yellow diamonds.
The Western Australian asset was in operation between 2002 and 2015, and produced 1.3 million carats during that period. After its closure, an 8.43 carat fancy yellow stone was unearthed in 2017 during exploration by Gibb River Diamonds (ASX:GIB).
The canary-coloured stone was one of the largest of its kind recovered in the country.
The high quality of Ellendale’s yellow diamonds drew the attention of global jewellery powerhouse Tiffany & Co. (NYSE:TIF) in 2009. Kimberley Diamonds, the former owner of the mine, signed a short-lived exclusive yellow diamond offtake deal with the renowned jewellery house.
In 2019, Bill Johnston, Western Australia’s minister for mines and petroleum, invited Gibb River and private explorer India Bore Diamond Holdings (IBDH) to apply for new tenements.
“It’s not going to happen overnight, but restarting mining operations at the former Ellendale mine will be a high point in the rejuvenation of diamond exploration and mining in the Kimberley,” Johnston said at the time. “It has taken 12 months to get to this point, but the State Government’s tendering process is highly confidential and very thorough, so it is pleasing to have the EOI process wrapped up.”
He went on to describe the tendering process as confidential and extremely thorough. The decision to invite the explorers came after a AU$230,000 governmental investment to rehabilitate the site.
The move was successful, and IBDH quickly discovered three natural fancy coloured yellow diamonds. While the recovery of yellow stones at Ellendale was hardly remarkable, these were indeed unique.
When exposed to ultraviolet light, the gems fluoresce purple. Fluorescence is extremely rare, occurring in only 25 to 35 percent of all the diamonds recovered globally; of those, most fluoresce blue.
Despite being beautiful, the golden stones are among the more affordable in the coloured diamond sector, ranging in price from US$2,500 per carat to over US$20,000.
Lower prices and limited output contributed to the former owner’s liquidation and the demise of Ellendale in 2015. But over the last decade the value of yellow diamonds has climbed 30 percent, making mining for the gems at Ellendale potentially more alluring and lucrative.
In late March 2021, Gibb River sold the Ellendale mine to Burgundy Diamond Mines (ASX:BDM) for AU$6.7 million and 4 million ordinary shares.
The Merlin diamond mine
Another asset that may be central to Australia’s diamond future is the Northern Territory’s Merlin mine.
The site birthed the nation’s largest diamond, a 104.73 carat rough white stone, in 2001. A 35 carat rough brown diamond and an extremely rare small blue diamond are also among the notable finds at Merlin.
Mining began at the site in 1998 and ran through 2003, with the property reopening briefly in 2016.
In that time, the project had several owners, including Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO), as well as Ashton Mining and Merlin Diamonds (formerly North Australian Diamonds).
Over its brief lifespan, 500,000 carats of diamonds were recovered from Merlin, of which a large fraction were gem-quality stones. Merlin’s propensity for high-quality diamonds is reportedly unique.
“Sixty-five percent of production is gem-quality, and only 35 percent is classified as near-gem or industrial quality,” reads Mining Legacies’ overview of the project. “This compares to a worldwide average of just 20 percent gem-quality diamond production at diamond mines worldwide, and a mere 5 percent gem-quality production at Australia’s largest diamond mine, Argyle diamond mine.”
Ellendale and Merlin never gained the same fame as Argyle despite the fact that they produced more gem-quality diamonds combined.
“A number of small diamond ‘pipes’ with a much higher proportion of gem-quality diamond than Argyle have been mined at Merlin in the Northern Territory and Ellendale in the west Kimberley region, both of which are currently not in operation,” states Geoscience Australia.
The lower price point for yellow diamonds ultimately weighed on Ellendale’s growth and led to its closure. But Merlin faced another set of issues, predominately related to its last owner’s finances. That company, Merlin Diamonds, was officially delisted from the ASX in 2018.
In 2019, Deloitte was appointed as liquidator by a court following an investigation by the Australian Securities and Investments Commission.
A little over a month after Argyle was permanently closed, ASX-listed Lucapa Diamonds (ASX:LOM) expressed interest in the Merlin mine.
“Merlin is a multi-pit mine development opportunity with underground mining potential and is home to Australia’s largest recovered diamond of 104 carats,” notes a December company statement. “Lucapa is of the view that the tenements also have considerable exploration potential with a significant number of unresolved exploration targets.”
The acquisition would give the Africa-focused miner its first domestic project. The move could also usher in the next chapter in Australia’s diamond story.
“(Ellendale and Merlin) have had difficulty with operational profitability in recent years, however both mines can probably be looked at as an option on future Australian diamond prices,” said Zimnisky.
“(The projects) have produced some pretty unique diamonds, however as far as scale, both are much smaller than Argyle,” he added to the Investing News Network (INN). “Of course, Ellendale is known for the fancy yellows and the arrangement it had with Tiffany & Co.”
New deals with jewellers and even international mints may play an important role as the nation switches its diamond focus.
Global sector pivots in response to challenges
Australia’s transition comes at a time when the global diamond industry is also looking to offer enhanced digital experiences in response to the pandemic, as well as shifting demographics.
“Based on what I have seen, the oversupply problem of recent years has primarily been worked through, which makes me optimistic about the industry near term,” Zimnisky told INN. “Further, I think we could see a global spending spree in the second half of this year as the global economy begins to open up.”
The diamond analyst does have concerns, especially as stimulus programs and economic support wind down into 2022 to 2023. “It will come down to whether or not the stimulus actually stimulates sustainable productivity in the years post-pandemic,” he said.
This sentiment was echoed by diamond analyst Yaniv Marcus, who sees diamond miners acting cautiously from hereon out. “I think mining companies are being careful with how much production they are outputting,” he said. “They need to make sure there is enough demand.”
Don’t forget to follow us @INN_Australia for real-time news updates!
Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.