Canada: The Next Diamond Superpower?

The frozen North produces some nice ice.

By Rob Bates, Senior Editor -- JCK-Jewelers Circular Keystone, 12/1/2002

Canada has arrived in the diamond industry in a big way—and it's about to get bigger.

Its first mine, Ekati, accounts for 6% of world production by value. In February comes a second mine, the equally big Diavik. Snap Lake, De Beers' horse in this race, is scheduled to come on stream in 2006. With that, Canada's share of the market could top 15%, making it a serious rival to South Africa for the title of world's third-largest diamond producer, behind Botswana and Russia.

And that may be just the beginning. These mines are in the Northwest Territories, but there's exploration in every Canadian province and promising kimberlites all over the country. The Great White North may have more diamonds than anyone ever dreamed. Crowed one Canadian trade publication: "Nothing short of an empire is under way."

Big players. These big finds have attracted big players. De Beers now spends 40% of its exploration budget in Canada. Noted retailer Tiffany has a deal to buy $50 million worth of diamonds a year from Aber Resources—junior partner in Diavik—and is setting up a $3 million factory in Yellowknife, the Territories' capital. Diamond giant Rosy Blue is negotiating to buy Arslanian Cutting Works, which has its own factory in Yellowknife.

The country's diamond infrastructure is growing as well. There are already three factories in the Territories (Tiffany's will be the fourth), two trade publications, and the beginnings of an association, the Canadian Diamond Council. The Northwest Territories has the lowest unemployment rate of any province in Canada, and its economy is growing eight times faster than the country's as a whole.

Give 'em a brand. For American jewelers, the most interesting part of the Canadian story is the attempt to market Canadian stones as a brand. In a sign of how branding fever has swept this industry, there are six Canadian brands on the market already, and the opening of Diavik may spawn more.

These brands are offered by a range of organizations, including the Ekati mine—the first mine to market wholesale—and U.S. retailer Ben Bridge, which has a private-label Canadian brand, Ikume (a Native American word for "light"). The only players not marketing a Canadian brand, it seems, are Tiffany and De Beers, both of which claim they're not interested.

These brands are trying something unprecedented—selling a diamond on the basis of its origin. The marketers think Canada will have a special appeal—and not just for Canadians.

First, there's the mystique of the wilderness. "We want people to see these diamonds as pure and beautiful as the Arctic itself," says Larry Wadell, president of Ben-Dor, which markets "Tundra Diamonds." The brands have names like "Canadian Arctic" and "Glacier Fire" and are inscribed with symbols calculated to evoke Canada, such as maple leaves and polar bears.

Then there are the close ties between America and Canada. "In this political climate, people like the idea of something coming from this area," says Oren Sofer of Beny Sofer and Sons, which markets the "Canadia" brand. "It keeps it 'in the family.' "

Finally, there's the conflict diamond factor. Canadian diamonds are among the few that, prior to implementation of the Kimberley Process, can be certified "conflict free." Some retailers even keep Canadian stones on hand in case the topic is broached.

But while the companies marketing Canadian diamonds happily mention the "conflict" issue when asked—and sometimes even when they're not—they don't want to promote that feature to consumers. One reason is that the topic is dying down. "When the Kimberley Process comes on stream next year, the issue of conflict diamonds should be over," says Martin Irving, director of diamond projects for the government of the Northwest Territories, which has a diamond certification program. "It doesn't make sense to tie your marketing to an issue that will disappear."

Moreover, no one wants to give the potentially damaging subject more publicity. "Everybody's handling the conflict issue with kid gloves," Sofer says. "Retailers aren't interested in any kind of ad or text that says 'conflict diamonds.' They don't want to create a problem where none exists." Most references to it are vague; Canadia, for instance, says its stones are "mined and cut under socially conscious and environmentally sensitive conditions."

Canadian stones may also provide protection on another thorny issue. The NWT certificates guarantee the stones are natural and untreated. "These stones are being tracked like no stone in history," says Stephen Ben-Oliel of Sirius Diamonds, which markets the "polar bear" stones.

So far, the initial response to Canadian diamonds has been encouraging. Steve Davolt, vice president of marketing for Ben Bridge, says the "Ikume" stones are selling not only in border states like Washington and Michigan but also in farther-flung places like Texas and Arizona, closer culturally to Mexico. "Canada is an interesting hook for consumers," he says. "It's just a great story to tell."

And the Canadian story is just beginning. Canada is clearly becoming a major player, but could the country one day dominate the market? "From what I've seen, Botswana and Russia will always be the leading producers," says Richard Molyneux, president of De Beers Canada. "But the world of geology is always full of surprises."

What Makes a Stone Canadian?

This wouldn't be the jewelry industry without a disagreement over nomenclature. And with more people marketing Canadian diamonds, a mini-scrap has broken out over exactly what "Canadian" means.

A diamond that is both mined and manufactured in Canada is obviously "Canadian." But what about a diamond mined in Canada but manufactured in New York? Or mined in Russia but cut in Canada?

It's a knotty question and one that many take seriously amid reports of stones being falsely marketed as "Canadian." But different branches of the Canadian government have provided different answers.

The Canadian Competition Bureau, that country's version of the U.S. Federal Trade Commission, says a diamond called "Canadian" must come from a Canadian mine—and that's it. Where it's cut makes no difference.

"When we talk about a 'Canadian' diamond, people relate it to the origin of the diamond, not where it was processed," says Marie-France Gauvreau, competition law officer for the Canadian Competition Bureau.

This has not pleased the local government in the Northwest Territories, which wants to boost its cutting industry. Its "Canadian diamond" program certifies only stones that were both mined and cut there.

"The definition of a Canadian diamond should be 'mined, cut, and polished in Canada,' " says Martin Irving, director of diamond projects for the Northwest Territories. "If you call something a 'made in America' product, most of that product has to be made in America. Anyone who knows diamonds knows that a lot of the value of a diamond comes from the cutting. Try giving a rough diamond to your wife."

Irving feels the Canadian government cannot police its definition. "Their way is unenforceable and provides no certainty to the consumer," he says. "Let's say Canadian stones appear in Antwerp. Anyone can call their stones 'Canadian' and it's virtually impossible to prove they aren't. The Canadian federal government only has jurisdiction in Canada. They can't go to Belgium and say, 'Prove this is from Canada.' "

Susan M. Ben-Oliel, general counsel for Sirius Diamonds, argues that "consumers and trade buyers perceive the term 'Canadian' diamonds … to mean, at the very least, that the stone is mined, cut, and polished all within Canada."

And what about the United States? American "country of origin" laws say that if a diamond is mined in Canada, it can be called a "Canadian diamond," says the Jewelers Vigilance Committee. As with Canada, where it was cut does not matter.

"It's like a Burmese ruby," says Cecilia Gardner, JVC executive director. "It may be cut and polished elsewhere, but it's still from Burma."

In part to handle these questions, the Canadian industry has developed a voluntary code of conduct for marketing "made in Canada" diamonds. Participants are permitted to call a stone "Canadian" only if there's a paper trail documenting its origin.

Ekati Mine and De Beers Part Ways

De Beers' hold on the diamond market has shrunk again.

Ekati, the first Canadian diamond mine, will not renew its agreement to sell 35% of its production to De Beers. The deal began shortly after the mine opened in 1998 and will expire this year.

"The deal did what it was intended to do," says Graham Nicholls, a spokesman for BHP, the mine's owner. "Three years ago we didn't have the experience we have now, and it was to our advantage to lock in that 35%. Now we have learned a lot and see ways we can add value to that 35% by marketing and moving further downstream."

The deal was an unusual one from the start. Because of antitrust considerations, Ekati couldn't sell De Beers more than 35% of production. A De Beers statement said the company "does not expect the non-renewal of the contract to have a material effect on its business." Spokeswoman Lynette Hori noted that the mine represented only 3% of the company's turnover by value, adding, "It should not have any effect on the goods we offer to clients."

While past defections from De Beers have sometimes been bitter, this one ended on good terms.

The De Beers statement noted the company "draws satisfaction from the professional working relationship with BHP Billiton that has marked the operation of the agreement." Nicholls agreed: "Our relationship has been and continues to be very good with De Beers."

The Players in Canada: A Glossary

Ekati. The country's first mine opened in 1998 and produces $500 million in stones a year. It sells 35% of its production to De Beers, but this deal expires at the end of the year and will not be renewed. (See "Ekati Mine and De Beers Part Ways" on page 76.) The mine is known for its fine-quality rough and has the highest average value per carat of any mine in the world. "Some of the octahedral crystals are so beautiful it's a pity to polish them," says Hillary Jones, managing director of Arslanian Cutting Works North America. The mine is 80% owned by Australian mining company BHP-Billiton, which in 2000 bought out junior partner Dia Met.

Diavik. Canada's second diamond mine is scheduled to open in April. It will likely produce more stones than Ekati but with a lower average value. The mine is 60% owned by British mining company Rio Tinto (formerly RTZ). Unlike Ekati, the two Diavik partners will market their production separately. Junior partner Aber Resources will sell $500 million of its production a year to Tiffany, which also owns 14% of the company.

Snap Lake. De Beers owns this deposit, which is set to be Canada's first all-underground mine when it opens in 2006 or 2007. De Beers acquired it in a hostile takeover of Winspear Resources in 2000.

Sirius, Deten'cho, Arslanian Cutting Works. These three Northwest Territories cutting factories currently split 10% of Ekati's output. Aborigine-owned Deten'cho has cut back production considerably. Jones says the Canadian cutters want their work to be as respected as the "Russian cut" once was. Tiffany will open a factory in the Territories next year to cut part of its Diavik production.