De Beers Rescinds Snap Lake Rough Supply Commitment To Canadian Cutters; Civic Groups Call On Ottawa Government Not To Issue A Mining License Without A Rough Supply Guarantee

A serious rift has developed between Aboriginal groups, the Government of the Northwest Territories and De Beers after De Beers Canada president Richard Molyneux declared in a newspaper interview that he has no authority to cut a deal with the Government of the Northwest Territories on the direct supply of rough diamonds from the Snap Lake Project. De Beers confirms that it made the commitment in December 2002 when Molyneux informed the Mackenzie Valley Environmental Impact Review Board (MVEIRB) that De Beers would supply quantities of Snap Lake rough diamonds to stakeholders. In a newspaper interview with Stephan Burnett of Canada’s Northern News Services, Molyneux is quoted “What I said is, yes, we would include the supply of Snap Lake production directly to stakeholders, including aboriginal groups”.

The Minister of Resources Wildlife and Economic Development immediately reacted that the government should contemplate legal action against De Beers. A powerful lobby group, the Canadian Arctic Resources Committee (CARC), sent letters to all relevant ministers in the Federal Government demanding that the recommendation made by the North West Territories (NWT) regulatory body to recommend the issuing of a (federal) mining license should be reconsidered or, alternatively, that the domestic supplies commitment be made a condition of the mine development license. De Beers, apparently, is extremely concerned about creating a precedent: agreeing to the Canada request would trigger similar demands in Botswana and Namibia. Legally, argues De Beers, they can not be compelled to sell goods to local cutters.

If that is the position, why did De Beers commit itself in the first place? How can a company allow the most senior executive of its Canadian operations to make a commitment only to say 10 months later that he wasn’t authorized to do so. Community leaders are deeply disturbed by issues of good faith and integrity. “Did De Beers never intended to keep its commitment but waited 10 months to say so publicly, in order to obtain the mining development approval first? Was it a ploy to deceive the community? “This revelation raises important questions about the binding nature of the numerous commitments made by De Beers and recorded in the environmental assessment report,” writes CARC in its letter to Ottawa ministers. 

The commitment was made in December 2002 – and subsequently repeated a number of times in formal hearings and submissions throughout 2003 – in the context of a rather cumbersome and lengthy regulatory process which addresses socio-economic and environmental issues arising from the development of Snap Lake mine. As is customary with all NWT mining projects – including the Ekati and Diavik Diamond Mines – the sides jointly define issues of concern and then negotiate agreements and reach understandings on how to go forward. The December 2002 week-long Technical Hearings basically reviewed the status of issues, providing an opportunity to De Beers to answer questions and submit clarifications, in order for the MVEIRB to identify which issues were “unresolved” and which were “resolved”. The unequivocal commitment by De Beers to supply rough directly from the Snap Lake Mine to local factories and aboriginal groups was confirmed at that time.

There was a convincing rationale behind that decision. Molyneux agreed that Canadian diamonds could generate a brand premium in the market. At the time Molyneux noted that De beers would probably not introduce its own Canadian brand as “there are already large numbers of specifically Canadian branded goods being promoted and based on our current marketing research, De Beers’ interpretation is that the market would be stressed by additional Canadian brands.” But in support of the existing Canadian brands, the MVEIRB public records (available on internet) show that De Beers said “to be able to provide an identified supply of Snap (exclusively Canadian) goods for local supply.”

If there is a premium on Canadian goods – and De Beers confirmed there is – then mixing Snap Lake diamonds with other productions would deny the Aboriginal groups and the local industry with the opportunity to enjoy that premium. It is tantamount to destroying value. That cannot be the intention of any of the stakeholders.

Some studies have indicated – and this writer is inclined to subscribe to that view – that without a possibility to generate brand premiums, the economic justification for the infant NWT diamond industry may become questionable. Without these premiums, some of the goods could not be produced in an internationally competitive manner. Yellowknife currently has four diamond factories, three of which co-owned by major DTC sightholders (Rosy Blue, Schachter & Namdar, and E. Schreiber) and the fourth is set up by Tiffany’s of New York.

Government officials and Yellowknife community groups express a sense of outrage over the timing of the De Beers announced abrogation of its commitment. During the year negotiations have been taken place on the implementation of the rough supply commitment, both with government (in the context of the Socio-Economic Agreement) and with aboriginal groups (in the context of Impact Benefits Agreements) on whose land the mine will be located. As there had been some rumors attributable to De Beers executives in London, indicating lack of support for the local supply commitment, in the final public hearings (in May 2003) before the MVEIRB was to make its final decision on whether to recommend to the Federal Government to give De Beers the green light to start mine development, the Chairman of the MVEIRB directly asked – for the record – if De Beers is reconfirming its Snap Lake direct rough supply commitment, and De Beers answered affirmative. Subsequently, the MVEIRB made a positive recommendation, conditioned on De Beers honoring some 120 commitments which it has made throughout the consultative process, including the specific rough supply commitments.

It is rather disturbing, say GNWT officials, that De Beers is tracking back on its commitment AFTER it has received the MVEIRB go ahead. In the newspaper interview in which Molyneux admitted he does not have the authority to make all these repeated and specific commitments, Molyneux adds: “I can't solve it. This is an issue that is core to our business practices, which have been set in collaboration in mandates from our principals."

The newspaper also quotes Martin Irving, director, Diamond Projects with Resources Wildlife and Economic Development, who speculates that “Molyneux may have had his commitment curtailed by executives at the De Beers Diamond Trading Company in London. If he doesn't have the authority to make the commitment, then what is he doing making the statement?" Irving queried.

Apparently anticipating a public outcry, De Beers Canada published a full page advertisement in a local Yellowknife newspaper in which it lists its significant contribution to the Canadian diamond industry. The company has already invested some C$1 billion in Canada, most of it in the NWT. In the advertisement, De Beers make the case that the Government of the Northwest Territories can not legally compel it to supply rough. Says De Beers: “Canada is internationally recognized as supporting free trade and encouraging competitive business. This includes the right of investors to market their products according to their own best business practices. Diamond producers should be allowed to exercise this right.”

The legal argument may have merits – but may not be relevant anymore today. The legal position was also known to De Beers when it made its voluntary rough supply commitment and when it repeatedly restated the commitment. The commitments are voluntary and made by producers who recognize the legitimate aspirations of the communities living in the mining areas to optimize the benefits to the local economy and people from the mining resource. It is really not very clever first to agree to something (an agreement between willing parties) and then turn around and say that my right to freely sell production is impeded.

The NWT government, the civic groups and De Beers all want the mine to be developed. If the direct supply issue isn’t solved in the near future, it is reasonable to expect considerable delays in the mine development. Let’s hope that common sense will prevail.