De Beers says that as mining moves deeper into the earth and towards more remote locations, the extraction process is becoming increasingly complex, remote and more costly.
“The cost and capital intensity of diamond mining projects are rising, for three main reasons. Firstly, global demand for capital goods has driven price increases in equipment. At the same time, operating costs in some of the major mining geographies have increased significantly over the last few years. In Botswana, for example, the cost of electricity increased 11 percent per year between 2002 and 2012 and labour costs increased 14 percent per year.
In Russia, the price of electricity increased 12 percent per year over the same period and labour costs 19 percent, while in South Africa power prices have risen by an average of 14 per cent over the same period,” De Beers says in its 2014 Diamond Insight Report.
In the case of Botswana, that may well be so but the report doesn’t mention the heavy water subsidies (up to 40 percent) that mining companies get from the government. The African Development Bank (as some other parties) view this subsidy as unfairly high and being implemented at great disadvantage to ordinary people who have to bear its burden.
The second reason the report gives is that diamond miners are developing deeper and more remote parts of existing deposits – such as the Jwaneng Cut 8 project. The latter will remove an initial 500 million tonnes of waste earth to expose the ore and, to ultimately recover more than 100 million additional carats and prolong the life of the mine to at least 2028. The project began in 2010 and the total investment cost is US$3 billion. The report says that “this is the single largest private investment in Botswana’s history.” The Jwaneng mine has been extended through various programmes, gradually unearthing new parts of the ore body by deepening the mine pit and Cut 8 is the most recent of those.
Finally, new projects are farther away, in more hostile natural environments that include the Arctic.
“Such operations are inherently more complex to run and involve greater infrastructure investments,” says De Beers adding that increasing costs in the upstream are putting pressure on companies that do business at the midstream level and that these financing challenges could intensify over the coming years. “One possible consequence is that some companies may exit the industry.”
De Beers’ expectation is that as supply from existing mines decreases, mining will become increasingly complex and remote, and increasingly costly. Such scenario will require “investment in operational innovation … to drive productivity.”
This set of challenges notwithstanding, overall diamond supply is expected to increase in the next few years, driven by new projects coming on stream.