Diamond mining is perhaps one of the least understood parts of our business pipeline. There are many who spend their entire careers working in the diamond industry without ever stepping foot in a mining camp. The truth is that many of the world's best-known diamond miners don't actually do any mining. They may not own a single piece of construction equipment, and may not have a single operator on their payroll. This is often the job of mining contractors, a very important but largely unknown support service in our industry. Let's take a closer look at these businesses that are so important to the production of our raw material.
If you've ever been to a mining camp, it can be a little confusing to understand who is who. Despite everyone working under the same roof, it is normal to see many different company logos on the backs of jackets, helmets, and even construction machines. In the case of smaller mining companies, they often don't actually do any mining, but contract the work out to third party specialists. The 'miner' acts more like a logistics coordinator to ensure that all the necessary work is completed on time, and that all of the different functions are working together. This is not the way that all mining companies operate, but it is the most appropriate option for small and mid-sized companies, and even the largest firms will employ third party contractors for certain functions.
For the producers, especially smaller ones, it can be much more cost effective to employ outside contractors. Purchasing equipment and training operators to use it is expensive and time consuming. The company has no recourse if its own people fail to deliver on timelines or budgets, but can hold third parties more accountable to these goals. Contractors can be brought in at any time during the construction, development, or operation of a mine, so costly production delays can be avoided. It also saves them the huge costs of purchasing equipment, as the contractor often maintains ownership of the machines and is responsible for their maintenance.
Mine contractors are spread around the world. They tend to be small to medium sized companies that operate in specific countries or regions, such as Northern Canada or Southern Africa, for example. With that comes strong knowledge and expertise about local mining practices, regional political considerations, and geographical or topographical constraints. They can also achieve a certain measure of economies of scale, to offer lower prices and better utilize their people and machinery.
Contract mining companies dominate the diamond industry in Northern Canada. In fact, Canada's place as a major producer nation could not have been achieved without the engineering and construction input from dozens of firms in the country. The supply lines that feed the operating mines in the north, including the famous winter ice road that keeps the mines operating year-round, are built and maintained not by the miners themselves, but by third-party service companies. These mines are examples of some of the most complex engineering projects ever initiated in the mining industry, including a $1.3 billion retention wall at the Diavik mine, which was built by a joint venture of contract companies, and which allows the mine to extract diamonds located at the bottom of a 50m deep lake in the arctic.
While the advantages of contracting out mining work often outweigh the costs, it is not always a perfect relationship, and can create certain challenges that leave the producers vulnerable. Most contract workers are unionized, and they often represent several different unions with competing objectives and bargaining power. Labor disruptions in the mining industry are not uncommon, and can cripple a miner's ability to meet its sales targets and delivery schedules. In September 2016, as De Beers was ready to begin sales from its new Gahcho Kué mine in Northern Canada, the union representing the company's 65 kitchen and cleaning staff threatened strike action, which almost closed the mine at the most critical point in its opening. The company replaced the union contract with non-union workers, and litigation continues.
During the fourth quarter of 2016, the share price of Lucara Diamond Corporation tumbled, before the company announced that it had parted ways with the mining contractor that had helped the company begin its operations at the Karowe mine in Botswana, and had replaced it with another local mining contractor. Some concern was raised about the reason for the change, and some worried that something had gone wrong, potentially affecting production. In the end, the transition was smooth, but concern over the initial news may have impacted share value.
History has many examples of major labor disruptions that have affected conditions at various mines in different countries. To a certain extent, miners can mitigate this risk by using contract companies and outsourcing important operations. Producer companies can then focus on the important business of selling their diamonds for maximum value in the marketplace.
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