Canada Diamond Jackpot

Canada's frigid north a diamond miner's paradise

Canada Diamond Jackpot An aerial view of an open pit mine is seen at the Diavik diamond mine, south of the Arctic Circle in Canada's Northwest Territories, February 13, 2008. Once a hotbed of gold mining, Canada's far north is now unearthing riches from a different precious commodity - diamonds. Picture taken February 13, 2008. REUTERS/Cameron French

DIAVIK MINE, Northwest Territories (Reuters) - Once a hotbed of gold mining, Canada's far north is now unearthing riches from a different precious commodity: diamonds.

At the Diavik mine, just over 130 miles south of the Arctic Circle, a 650-foot deep crater pierces a frozen-white tundra, yielding some of the purest diamond deposits known.

"They're among the three best pipes in the world, by value per tonne," spokesman Tom Hoefer said of the kimberlite pipes -- vertical columns of diamond-bearing rock -- the mine is currently working.

Hoefer relates a story -- true, he says -- of a drill that was pulled from the ground with a sizable diamond stuck right on the bit.

It is a far cry from the Klondike gold rush in neighboring Yukon territory, which drew tens of thousands of prospectors over three years starting in 1896.

The Diavik mine is located on an island in icy pure Lac de Gras, a lake in Northwest Territories. The lake has been diked and partially drained to open access to the ore below.

Power is generated on-site and supplies are trucked in on an ice road that's open barely 10 weeks a year. (For a separate story on the ice road, click on .) Temperatures are so low that truck axles can suddenly become brittle and snap.

But the result is worth the challenges and costs. The mine produces clear, white stones of jewelry rather than industrial quality and yields are about 3 carats per tonne, three times the industry average.

Last year, it produced 11.9 million carats, roughly 10 percent of global output and a little more than a third of the annual production of Rio's Argyle mine in Australia, the world's largest producer by volume.

Total capital and operational spending on the mine has reached $3.2 billion, including $563 million for an underground expansion that should keep it running past 2020. A second pit is expected to start producing diamonds soon.

The mine is operated by a subsidiary of Rio Tinto , which markets 60 percent of the take, while 40-percent stakeholder Harry Winston Diamond markets the rest.

HIGH-SECURITY

At first glance, the presence of diamonds at the mine would appear to be a myth. The mined kimberlite has barely one part per million of actual diamond, and the final stages of the processing plant are shrouded in secrecy, with guards accompanying the few workers allowed inside.

Visitors and workers are put through an airport-style security check both on the way in and on the way out, checking for smuggled drugs and alcohol on the way in, and errant diamonds on the way out.

Once past security, however, the site has all the comforts of home, with single rooms for miners, an indoor gym and running track, and a wealth of extracurricular activities for miners, who spend two weeks at a time living at the site.

"It's like being on a cruise ship," says Marion Evans, who works at the adult education facility at the mine, designed to give workers a leg-up in training for better positions.

A glance out the window at surroundings shrouded in ice fog shatters the cruise ship analogy.

Standing atop a dike at the 2,300-foot South pit, the minus 37 degrees Celsius (minus 35 Fahrenheit) temperature feels 20 degrees colder in the wind. Any exposed skin is excruciatingly painful.

Two hundred meters below, 23-foot high dump trucks haul 250-tonne loads of mined kimberlite up a winding road to the processing plant. In the distance, a transport truck approaches along the frozen surface of Lac de Gras, finishing its 360 km (225 mile) trip up the ice road from Yellowknife, the territorial capital.

Along with BHP's nearby Ekati mine -- BHP's mineral claim actually brushes up against the side of the Diavik site -- Diavik has been a crown jewel of the Canadian industry.

The initial discovery of diamonds around the lake in the early 1990s triggered a claiming rush in the north that has resulted in the opening of four mines so far, with Tahera Diamond's small Jericho mine and De Beers Canada's Snap Lake mine. The growth of the Canadian industry, led by BHP and Rio, has helped lessen the dominance of industry leader De Beers.

But the ride has become bumpy of late. An abnormally warm 2006 winter shortened the season that the supply road remained open, leading to equipment and fuel shortages, while the rising Canadian dollar has boosted expenses at a time when rough diamond prices have failed to keep up.

Diamond prices have risen, but they've experienced nothing like the rise of traded commodities like gold.

Jericho was forced to seek protection from creditors in January after becoming insolvent, and has since halted mining operations. De Beers, meanwhile, took a writedown on its Canadian mining assets of nearly $1 billion.

At Diavik however, the plan is to continue to build the underground mine, and to come up with a way to mine a fourth ore body on the site, one that sits in water too deep to use the dike system.

That pipe has not been factored into the mine's plans, but with the company on site for at least the next 15 years, the hope is they'll find away to access it.

"It's tough to find diamonds," Hoefer acknowledges. "You've got to throw a lot of money at it."

(Reporting by Cameron French; Editing by Eddie Evans) © Reuters 2008