Turns out, diamonds aren't forever
Without new mines, territory's future 'grim', says economist
Meagan Leonard
Northern News Services
Monday, March 7, 2016
NORTHWEST TERRITORIES
The NWT economy likely won't recover if new mining projects do not come online in the next decade, according to the latest economic forecast for the North.
Despite positive outlooks for the Yukon and Nunavut, "no economic growth is expected for the Northwest Territories this year" the Conference Board announced Feb. 22.
Board economist Elise Martin told News/North China's recent transition from a high-growth economy to a more modest one has resulted in an oversupply of base metals. She said between 2005 and 2010, major industry players invested in large-scale projects anticipating steady growth - then markets declined just as those projects were anticipated to go into production.
"China was consuming around 40 per cent of the world supply of base metals in 2014, like iron ore, copper and nickel," she said. "It was consuming 15 per cent in 2000."
The three mines affected by this downturn were Avalon Advanced Material's Nechalacho Rare Earths Elements project, Canadian Zinc's Prairie Creek zinc, lead-silver project and Fortune Minerals' NICO gold-bismuth-copper project. Prairie Creek is anticipated to begin producing by 2020 with the other two by 2030.
"By then, financing conditions should be better, as more stable global economic conditions and a realignment of inventories help support a recovery in base metal prices," the report states.
Martin said if these players do not enter the market in the next decade, things appear bleak for the territory as all of its diamond mines are anticipated to shutter by 2030.
"If they don't (come into production), it's going to look way more grim than the outlook we have right now," she said. "It's difficult to be as optimistic as 2006 when the prices of commodities were really high and it was easy to finance a project."
Restructuring
TerraX's Yellowknife City Gold project and Kennady Diamonds Kennady North project were not included in the forecast, although both have received significant financial backing and could come online around 2025.
As this commodity "super-cycle" comes to an end, major industry players have begun restructuring in anticipation of the market bottoming out this year, says Martin.
"Some assets are going to have to be let go and some assets will be sold," she explained. "When that happens, the prices will find their bottom and start climbing again."
Perhaps most significant was De Beers' decision to cease production at its Snap Lake diamond mine, which has not turned a profit since opening in 2008. The company has also moved its Canadian headquarters from Toronto to Calgary to curb costs with a number of Yellowknife employees expected be relocated by June after owner Anglo American was downgraded to a "junk status" in February by credit rating agencies Fitch Group and Moody's Investors Service.
"Two-thirds of the assets of the company are set to be shelved or sold," Martin said.
Rio Tinto, which operates the Diavik diamond mine and owns a 60 per cent interest has also been restructuring, Martin said, after experiencing significantly less revenue in 2015. Lower processing volumes combined with lower grades were cited as the cause. Although Diavik is expected cease operations in 2023, development of the A-21 pipe, containing some 10 million carats, will ensure production remains robust until closure.
Diamonds down
The diamond industry represents approximately 17 per cent of overall GDP in the territory, but the market has been hit by over-supply and a slowing Chinese economy. Sales had increased by 14 per cent between 2010 and 2014 but fell six per cent in 2015. This caused prices for a one-carat stone to decrease 13 per cent in just one year with Anglo American selling 35 per cent fewer diamonds by volume.
As a result, Martin said Anglo American is trying to shore up prices by cutting production.
"Diamond mining output decreased by 16 per cent in 2016 for the company and it seems like the strategy is paying off because sales have been strengthening," she said.
Oil and gas
Energy investors are not expected to show any interest in the NWT for the foreseeable future, according to the report.
Plans to extract oil in the Canol and Bluefish shale formations are not going ahead and exploration programs have stopped.
Chevron's plans to drill in the Beaufort Sea have also been delayed indefinitely. Because oil operations in the Arctic require significant up front capital, it is estimated a well would only turn a profit if oil was selling for $75 U.S. a barrel and currently it is trading for less than $35.
Population to decline
The NWT has the highest proportion of fly-in, fly-out workers of all three territories with some 6,500 people who do not take up residency here - nearly a quarter of those employed.
By 2030 the population is expected to decrease by 120 people, with 525 people leaving the territory each year. It is the only territory anticipating a population decline in the next 15 years.
