Tiffany continues its journey upstream by signing a deal to both buy and sell production from the Jericho mine in Canada.
Jericho, scheduled to open in 2006, will be the third diamond mine in Canada’s Northwest Territories. It is expected to produce approximately 4.7 million carats over its nine years, or 550,000 carats per year, making it significantly smaller than the two other mines in the area, Ekati and Diavik. Tiffany also has an agreement to buy $50 million a year in diamonds from Aber, part owner of Diavik.
As part of the deal, Tiffany will provide a $28 million ($35 million Canadian) loan to Tahera Corp., Jericho’s owner, to finance Jericho’s construction.
What is unusual about this deal is that Tiffany will get all of Jericho’s production. What it doesn’t use for itself it will sell on the market, possibly through the company’s sorting office in Antwerp. This gives Tiffany a new role—rough diamond dealer.
“The industry’s changing, and we have to be open-minded about it,” notes Mark Aaron, vice president of investor relations for Tiffany. He says that the company will “use whatever meets our quality standards. We use a lot of diamonds every year. It’s just prudent for us to secure greater supply.”
Grant Ewing, executive vice president for Tahera Corp., said that Tahera will receive a supplement payment on any diamonds Tiffany buys for its own purposes, based on manufacturing profit. For the other goods, Tahera will pay Tiffany a modest commission to sell the stones.
A Tahera statement says having Tiffany do its marketing mitigates many of the costs associated with marketing diamonds independently, including those associated with shipping, insurance, security and developing a large marketing staff.
Tahera had signed a letter of intent with Lazare Kaplan in 2003 to sell that company its production, but “both parties allowed the letter to expire,” Ewing said.
The agreement extends over the entire life of the project, which is estimated to be nine years.
Tahera plans to finance the balance of the Jericho diamond mine development and construction costs through the sale of equity.