2009-04-20 17:35 ET – Street Wire

by Will Purcell

Harry Winston Diamond Corp. will mine up to six million carats from the Diavik diamond mine this year, down from eight million in 2008, after having sold barely 60 per cent of last fall’s production.

Harry and majority partner Rio Tinto expect the drop in production of at least two million carats — 25 per cent — thanks to two six-week production halts at the Northwest Territories mine. If both shutdowns go ahead as planned, Diavik will have its lowest carat crop since serious production began in 2004.

Diavik produced well over eight million carats in 2008 and Harry Winston sold its 40-per-cent share of the gems for record prices through the first nine months of the year.

This year, however, Diavik has been busy churning out diamonds into a falling market. Harry Winston sold barely 60 per cent of its share of the diamonds recovered in the fall of 2008, and the lower winter crop this year will help keep its mounting inventory of unsold rough under control.

During the first quarter of 2009, Diavik recovered 1.79 million carats from 427,000 tonnes of kimberlite — about the same as a year earlier, but 30 per cent lower than the final quarter of 2008.

Besides plummeting prices, the decline in production was not helped by one of the harshest winters in years.

Harry Winston’s chief executive officer, Bob Gannicott, says his company is financially prepared for a long slump, although he adds there have been some encouraging signs recently. (Of course Mr. Gannicott, who held all his 750,000 Harry Winston shares through the company’s big stumble from $50, is hardly a natural pessimest.)

Thanks to major production cuts around the world, rough diamond prices have bounced back a bit after falling nearly 50 per cent from last summer. Although Harry’s share of fourth quarter production was one million carats and the company sold $50-million (U.S.) worth of gems, its average price was significantly better than what arithmetic suggests.

Harry Winston sold barely 600,000 of those carats, and long division based on that number yields a much rosier result. That value may be equally unrealistic, as many of the unsold diamonds would logically be the smaller stones less in demand. The best guess is that Harry’s diamond values, which dropped from just over $100 (U.S.) per carat to about $65 (U.S.) per carat, are now fetching something around $75 (U.S.) per carat.

During the first quarter of 2009, Diavik’s production grade averaged 4.18 carats per tonne. The mine is still scraping kimberlite off the bottom of the A-154 South open pit, which is already well beyond its originally planned depth. Through much of 2008, the A-154 South rock was barely averaging four carats per tonne, but the grade suddenly bounced back last fall and now averages over six carats per tonne. A majority of the Diavik diamonds are now coming from the new A-418 open pit, which averages about 3.5 carats per tonne.

With A-418 able to meet production targets on its own and A-154 South likely to provide kimberlite for at least a few more months, the Diavik partners are putting off the start of underground mining until at least some time in 2010.

Some readers may have seen an April 19 segment on NBC Nightly News that reported that $50-billion (U.S.) worth of supply is waiting to come on a recessionary market, and some unnamed dealers figure prices could fall 60 per cent this year. Of course, the network was talking about polished gems: $50-billion worth of rough diamonds would represent nearly five years of production, based on rosier days in 2008. Worse, a further 60-per-cent drop in rough diamond prices would kill all operating diamond mines — which would of course solve any oversupply.

Harry Winston lost $1.14 to close at $4.72 Monday on 1.25 million shares.