Playing the Long Game with $1.5bn Mine

All is not well in the world of diamond mining.

Owners of Ekati, in Canada's Northwest Territories filed for insolvency protection last week, just months after agreeing almost $130 million in federal loans.

In South Africa, the troubled Ekapa mine is up for sale. Its financial woes were compounded by a mudslide in February that killed five workers and caused severe damage to the mine.

That's on top of the long-planned closure in March of Rio Tinto's Diavik mine, also in Canada's Northwest Territories, after 23 years. 

Against that background, Alrosa confirmed last week that it's ready to start work next year on a $1.5 billion replacement for the ill-fated Mir mine, where eight workers died in a 2017 flooding disaster.

At first glance, it doesn't seem like the best time to be pouring cash into such a costly project. Even at second glance it seems like a high-stakes gamble.

Demand for natural diamonds has slumped, as have prices. Alrosa can no longer sell to the G7 and EU nations, and it's busy offloading excess rough to Gokhran, the state-run mineral repository.

So Alrosa must be playing the long game - buying scarcity, not demand.

The core economic logic behind building the new and very deep Mir‑Gluboky mine is no longer about selling more diamonds into today's weak market.

It's about securing control over a shrinking pool of long‑term, high‑grade physical supply for the far future.

Alrosa is betting that mine‑supply will shrink faster than demand for natural stones.

Global production of natural diamonds peaked at 151 million carats in 2017 (Kimberley Process figure). By 2024 it was down 28% to 108 million, and the surging popularity of lab growns will keep on driving that figure down.

Ekati, mentioned above, is due to close in 2029 and Gahcho Kue in 2028 (unless either of them to revive expansion plans). That will bring diamond mining in Canada to an end, just as the closure of Argyle did for Australia in 2020.

The strongest, clearest argument for investing in a new mine, even in such a weak diamond market is scarcity/demand.

Alrosa's Mir‑Gluboky project is not a bet that natural‑diamond prices will rebound quickly; it is a bet that the physical pipeline of large, high‑grade, reliably mined rough will shrink dramatically over the next decade.

And whoever controls the remaining deep, low‑cost reserves will dominate the next cycle.

There will come a tipping point. Demand will keep dropping, but supply will drop even faster.

Mir‑Gluboky targets up to 50 years of high‑grade production at a single, consolidated hub, effectively locking in one of the world's last major, long‑life kimberlite resources.

Alrosa says it aims to start commercial operations in 2034, with a target annual production by 2039 of 5.5 million carats.  

The slump we see today is largely inventory‑driven: jeweler and retailer stockpiles are bloated, lab‑grown supply is elastic.

But Russia is eyeing the future. The sanctions that currently constrain its activities (if they do) may not last forever. But they're a sidebar to the main story.

And that story is that a miner with deep enough pockets (or access to the deep pockets of the government that owns two thirds of it) can keep investing through the downturn.

And can emerge as the dominant low‑cost supplier when demand recovers.

The new mine is a strategic state‑industry asset, not a free‑market option. It's part of something bigger, part of the machinery that supports Russia's 146 million people.

Alrosa is effectively an extension of Russian resource policy. It is central to the economy of Yakutia, the vast east-Siberian republic where Mir-Gluboky and most of its other mines are located.

It's adopting a "last man standing" approach. If and when the rest of the pipeline dries up, Mir-Gluboky will be going strong, as the last major, high‑grade diamond mine.

Have a fabulous weekend.