BITING INTO PERMAFROST (Expert magazine)

Sergey Kudiyarov

«Expert» № 28 (907)

July 7, 2013

Udachnyy Quarry Udachnyy_006
The largest diamond quarry replaces the biggest diamond mine

Russia’s largest diamond underground mine was put into operation in Yakutia.

OJSC ALROSA has launched the first starting complex of the new underground mine with capacity 1.5 million tons of diamond ore per year at the Udachny mining and processing division (MPD). The underground mine is expected to reach its design capacity of 4 million tons of ore per year in 2019 and maintain it at that level for about sixty years (at current production volumes the company has enough reserves for at least thirty years). Consequently, Russian diamond industry will be able to maintain its leading position in the world.

Construction of the underground mine began in 2004. The project proved expensive.  ALROSA has already invested 32 billion rubles in the development of underground mining at the Udachny. According to Alexander Makhrachev, the Director of Udachny MPD, the investments in the development of the mine will total 48 billion rubles by 2019. The pipe has been explored to a depth of 1,400 meters. Total costs for the mine development and exploration to a depth of 1,400 meters will amount 63 billion rubles.

Udachny underground mine investments account for 1/5 of ALROSA’s total investments in capital construction since 2004 and over third of all investments in the development of underground mines. The project was financed by own funds.

During its operation period the revenue from the development of underground mine will significantly surpass the development costs and reach $21 billion, Alexander Makhrachev said.

Replacing the open-pit

There was already an open-pit mining at Udachny when the underground mine construction began.

The Udachnaya kimberlite pipe was discovered in 1955 by the geological field party under Vladimir Shchukin guidance. It became one of the oldest known primary diamond deposits in Russia (today they account 93.5% of the total production), along with such pipes as Zarnitsa (discovered in 1954, located 23 km from Udachny and now refers to Udachninsky MPD) and Mir (discovered in 1955). All of them are located in Yakutia, and 77% of all Russian diamond reserves are now concentrated there.

In 1960, the preliminary exploration to a depth of 400 meters was completed, by 1972 - to a depth of 800 meters.

The kimberlite pipes are vertical geological bodies formed as a result of gas burst through the crust. This pipes are filled with igneous diamond rock – kimberlite. They were named after the town of Kimberley in South Africa where in 60th diamonds were found in primary rocks for the first time (not in placers as it used to be before).

Basically, the Udachny deposit is not a simple kimberlite pipe but two nearby ore bodies: the east part with medium diamond grade and exceptionally rich west. This explains the significant reserves. However, a pioneer of domestic diamond industry is not Udachny but the Mir pipe located to the south and “closer to civilization”. On the basis of Mir pipe the Mirny MPD and Mirny city (the “capital” of ALROSA) were built.

The developing of Udachny began in 1967. There is also a processing Plant No. 12 at the deposit; its design capacity is 12 million tons of ore per year. The plant is equipped with seven 9-meter autogenous mills; it’s the largest diamond processing facility in Russia. This plant has been operating till nowadays but below its design capacity.

The open-pit mining was performed through a circular system – from the center to the periphery. The ore was delivered by mine trucks to the processing plant.

In spite of the relatively late beginning of the development the Udachny mine became an important part of Russian diamond industry. Alexander Makhrachev said the Udachny gave up to 88% of all company’s diamonds at the top of its production in 1980-1990. In those years, the quarry exported 20-25 million tons of ore per year. The Udachny has already produced diamonds cost $88 billion.

The Udachny MPD became exceptionally large due to significant mining volumes. From the bird view it looks like a gaping hole 2.2 to 1.8 km in size. The open-pit mine’s design depth is 640 meters and demanded unusual technical solutions. The slope angels vary from 60 to 75 degrees depending on their depth, the working benches’ height amounts 15 meters – this open-pit mine has steep slopes. It is the world’s biggest working open-pit mine today, ALROSA says. There was only one larger quarry located in South Africa but it is closed now.

However, in autumn of 2015, the Udachny open-pit mine is going to be closed too. The depth is so great that further mining operations are impossible.

In recent years, the open-pit had been reducing its production volumes due to increasing depth. Last year, its output was less than 5 million tons of ore, 4-5 times lower than its peak volumes. Thus, the Udachny MPD gave the road to its ALROSA’s “colleague” – the Aikhal MPD outperformed Udachny by production volumes. The future of Udachny is underground mining.

ALROSA had to develop the underground mine in order to maintain its market positions. The company produces more than quarter of the entire world's diamonds, and its products occupy a decent price position – cheaper than diamonds of Namibia and Botswana, but more expensive than Australian, Angolan and Congolese. It would be strange to miss such income due to the production decrease at one of the key enterprises, having the opportunity to stop this reduction.

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ALROSA had to develop the mine in order to maintain its market positions.

Two-thirds is gem quality stones

The Udachny MPD retrains its employees who have desired to work at the underground mine. Only about 40-50 people have already moved from the Udachny open-pit to the underground mine because of ongoing dewatering at the surface (it will become a part of the underground mining complex soon) and support service vehicles park. The underground mine’s manning table doesn’t allow to hire new staff; the amount of employees will grow along with production volumes.

The underground mine will be developed to 1400 meters level. Thanks to the heaters, the temperature in the mine is not lower than 3.2 degrees even if there is minus 60 degrees at the surface. Such services are provided not only for more comfortable working conditions but also to prevent freezing of fire safety systems.

“It’s planned to start caving from the 380 meters level at the eastern ore body. Russia doesn’t use this technology yet; this topic was being discussed in soviet times, in 1950th. But there was an accident: the inspection group was fatally injured by a rock fall. All works on that technology were stopped. However, it gives an advantage over the cash costs. If we used the traditional method, about 680,000 tons of cement would be required for the backfill”, Alexander Makhrachev said.

The Udachny deposit will be also a leader by product quality. Alexander Makhrachev said that 67% of diamonds are gem quality. This is above the world average 50% level and not bad according to Russian standards. The grades at the deposit vary from minimal 1.56 to 6.8 carats per ton (the average diamond grade in Russia is 1.34 carats per ton).

Customers and cheaters

The situation with world’s demand for diamonds is ambiguous.

It is expected both a diamond consumption increase and rise of diamond prices.

ALROSA considers that the diamond market has growth prospects determined by the external fundamental reasons. The experts (e.g., BAIN report, 2013) estimate there will be a deficit in the world diamond market by 2017-2018. The supply will slip as resources of existing deposits exhaust. Conversely, the demand will increase because of diamond jewelry consumption growth, primarily in India and China. The deficit will become the main price driver.

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The underground mining allows to develop the Udachny deposit for at least 50 years

Thus, the worldwide diamond production tends to decrease in a mid-term, and the demand has a trend to increase.

The annual worldwide diamond output is about 130 million carats. The 5 million carats growth won’t significantly impact the worldwide supply. Furthermore, ALROSA follows a responsible trading policy aimed to maintain the diamond market stability and to prevent volatility of rough diamond prices.

According to Kimberley Process data, diamond mining volumes fell from record 177 million carats in 2005 to 134 million carat in 2013. In monetary terms the diamond market demonstrated growth and reached the historical maximum. It means that average global diamond price (if mining figures are estimated) increased from $65 for carat in 2005 to record $125.6 per carat in 2013. Domestic diamond producers could increase production volumes in such favorable conditions not facing problems with sales and prices fall.  For example, while production was growing by 15% from 2003 to 2013 (from 33 million carat to 37.9 million carat), revenues from diamond sales significantly increased (see diagram 7) by 82% for the same period. Average Russian diamonds cost (Ministry of Finance data) increased from $51 per carat in 2003 to $82 a carat in 2013. Gem quality diamonds price now total $140-200 for carat (according to Antwerp World Diamond Centre where ALROSA sells 65% of its diamonds).

Sergey Goryainov, the expert of the Rough&Polished agency, also sees good sales opportunities. “Diamond market has positive outlook. There has been no large discovery of a diamond deposit similar to existing ones for the last fifteen years. Many deposits are moving to underground mining now. But underground mining is more expensive and more intensive. It may result in prices increase. Moreover, jewelry demand is growing all over the world, especially in the US. There was some fall in demand during the crisis, but now it is growing again. It takes 40% of the diamond market. China and India also boost consumption of diamond jewelry”.

Indeed, in 2005-2011, Chinese diamond jewelry market was growing 32% a year, and Indian market was growing 22% a year, they both continue to annually increase 10-20% now. Market experts believe that China and India will surpass US by 2020.

However, the diamond producers face another problem amid growing consumption. It is synthetic diamonds, which are created in laboratories. Could they occupy any part of the diamond market?

ALROSA sees no serious danger in that. Good quality diamond jewelry should have certificates identifying where the rough diamond was extracted. However, Sergey Goryainov calls to stay alert:  “There are different opinions on synthetic diamonds, sometimes controversial. I think it’s a big problem. The technologies are developing and it is possible to create high quality diamond monocrystals, which are difficult to distinguish from synthetic diamonds. Certainly, synthetic diamonds are cheaper and there is a temptation to sell them at the price of natural diamonds.

In the last two years, there have been several cases of mixing synthetic materials with diamonds. There are probably more cases which remained unknown. The problem is that main synthetic diamond producer is China. And this country has rather specifical view on brands. They counterfeit various brands in different industries. China is a closed country, and we do not know how many synthetic diamonds it produces”.

This page was last updated on 11 July 2014 at 12.34