Snap Decision: What’s the Impact of the Mine Closure?

Snap Lake: The biggest pain will be felt by transportation companies

Though rumours have long circulated about the potential closure of never-profitable Snap Lake Mine, De Beers Canada made it official on Friday morning, announcing the layoff of 434 employees while the site is shuttered.

“This is part of a broader response to the downturn in the diamond market over the recent months,” said De Beers Canada CEO Kim Truter at an early afternoon press conference in Yellowknife. “What we’ve seen is a very sudden, a rapid decrease in pricing and demand for our products… And when you look at the economics of Snap Lake, which has been a troubled operation from the onset, this downturn has basically made the economic viability of this project untenable in the short term.”

Truter stated that around 120 employees (of a total workforce of around 750) will be transferred to the Gahcho Kue project, slated to open next year (41 have already made the move), while around 70 workers will be kept at Snap Lake during the care and maintenance phase.

“We are trying to preferentially select people from the North and Northern Aboriginal communities as well to make up that component. So we’re trying to protect Northern employment,” says Truter.

Those not being retained have been “placed on a suspension process for the next 16 weeks where they’re basically entitled to their full entitlements. In other words full salary, full benefits, in effect full continued employment for 16 weeks.”

Premier Bob McLeod did not mince words about the significance of the closure during a GNWT press conference held shortly after Truter’s address.

“This is not the kind of decision that we want to hear,” McLeod stated. “That said, it is a business decision that has been made by De Beers Canada and their parent company. As a government our priority is the individuals and their families who are directly affected by this decision, and the impacts that this decision will have on NWT business owners and our communities.”

Diamond mining is by far the largest private sector contributor to the NWT economy. In addition to offering employment, McLeod highlighted the $1.5 billion De Beers has spent on NWT companies through Snap Lake, including $865 million on Aboriginal firms and joint ventures.

Local impact

Although the full impact of the closure on the NWT economy won’t be known for some time, it’s clearly going to ripple across many sectors.

The diamond industry contributes approximately $400 million directly to our GDP, but Peter Vician, deputy minister of Industry, Tourism and Investment pointed out when factors such as the use of local businesses and other industry services are considered, that number increases significantly.

“When you’re looking at GDP and other sectors that contribute to the economic makeup of our diamond mine sector — construction, transportation and professional services,  it can be in the range of up to 40 percent of our economy directly,” he said.

The biggest hit will likely be to transportation companies. Many of these are Aboriginal-owned businesses like the Tlicho Investment Corporation-owned Ventures West Transport and Tlicho Landtran, which deliver fuel, equipment and building materials to Snap Lake, and YKDFN’s Det’on Cho, whose subsidiaries manage logistics and catering, among other things.

Yellowknife-based Summit Air, which runs two flights a week from Edmonton to Snap Lake as well as resupply flights out of Yellowknife, is also going to take a hit.

“Summit Air was disappointed by the decision, although we understand it,” said Myles Cane, Summit’s senior vice-president of operations.

He wouldn’t say how much revenue Summit was taking in from Snap Lake operations, but told EDGE: “it’s just a piece of the overall revenue,” adding that Summit will continue to work closely with De Beers on the Gahcho Kue project.  

Some of the transportation companies serving Snap will likely stay busy over the next year as equipment is moved out of the mine site. But this won’t continue over the long term.

The effect on Aboriginal governments will also be significant.

“We’re going to have to tighten our belts,” says Bill Enge of the North Slave Metis Alliance. Not only did Metcor, the business arm of the alliance, lose contracts for producing and shipping concrete to Snap Lake, the Impact Benefit Agreement between De Beers and the alliance is now on hold until Gahcho Kue operations begin. That agreement included transfer payments, training and preferential hiring for alliance members and even scholarships. The Tlicho Government, the Yellowknives Dene First Nation and the Lutsel K’e and Kache Dene First Nation also have IBA’s with De Beers.

“I would say it’s a big crisis in more of a global sense; the North Slave Metis Alliance, we’re in good shape to weather the storm, but lots of people are going to lose their jobs, and for businesses that borrowed money from the bank to do business with De Beers, those loans still have to be paid.”

We can also expect some impact on other sectors of the economy, like hospitality. “No hotelier can truthfully say it won’t impact me,” says Newton Grey, manager at Capital Suites in Yellowknife. His hotel won’t likely lose many customers, he says. “But if the guy down the road has lost a big piece of pie, he might slash rates, so it’s going to affect everyone.”

On the Yellowknife real estate front, realtor and city councillor Adrian Bell remains fairly optimistic.

“The city can absorb a certain number of unexpected units for sale. And there’s a couple other big projects going on: Giant Mine remediation is ramping up and there’s the Stanton renewal, so it’s not inconceivable we won’t notice it. But I’d have to know the number of [recently laid off Snap Lake] employees in Yellowknife.”

That number remains unclear. Though according to 2014 numbers, 24 percent of the mine’s workforce hailed from Yellowknife (70 per cent of the mine’s total Northern workforce); we don’t yet know how many of these workers are being kept on for the maintenance phase or moved to Gahcho Kue.

Why now?

The GNWT was formally notified earlier in the week of De Beers’ intention to suspend operations at Snap Lake — Vician said he only received a formal letter of the decision on Thursday, the day before the announcement was made public. That being said, rumours of the mine shutting its doors have circulated since its earliest days of development, largely because of challenged profit margins.

“Snap Lake, I believe, hasn’t been profitable since it opened and De Beers is now part of Anglo-American Group, and Anglo is suffering along with the rest of the resource world with low commodity prices,” said Richard Morland, a former executive with BHP Billiton and a mining engineer with more than 30 years in the industry.

As well as a sluggish market, Morland said prior to the announcement of the closure that operations at Snap Lake are taxing.

“Snap Lake is the most challenging of the three diamond mines up here,” he said, listing ground conditions, water inflows, and the geometry of the ore body as factors.

Truter, for his part, downplayed the water issues the mine faced.

“The water situation was actually a positive measure, because once we increased our water license it allowed for us to invest in some of our underground development again.”

The main problem was that Snap Lake had been “a borderline marginal asset for many years.”

“We’ve tried a variety of solutions, technical, operational, leadership, all kinds of solutions… [But ultimately] with a situation of negative cash flow going out for many years we had no choice but close the operation.”

Despite the challenges that faced Snap Lake, Truter said this is in no way indicative of a downturn in plans for Gahcho Kue.

“Not in the least, in fact quite the opposite. One of the benefits of withdrawing [Snap Lake] product out of the market is that potentially we’re influencing the supply and demand equation.

“In simple terms, Gahcho Kue is an open pit mine. It produces a greater volume, it creates more revenue to cover its operating cost. What’s important to remember: underground mines are generally much more expensive than open pit mines. If you then factor in the cost of operating in the Arctic Circle, that adds many, many layers of cost to business up here, so a business like Snap Like just couldn’t withstand that cost structure, where as a business like Gahcho Kue can.”

So, why was De Beers moved to open Snap Lake in the first place?

“I believe part of the reason Snap was opened in the first place is De Beers had been beaten to the Canadian market by BHP and Rio, and Snap was really a way of establishing a beachhead for the diamond business in Canada,” said Morland. “It was almost a little bit of keeping up with the Jones’, I think.”

Since operations began at Snap in 2008, De Beers has also opened Victor Mine in Ontario.

State of the industry

The drop in global demand for diamonds has largely been attributed to a slump in the Chinese economy — the second-highest customer base for finished products, next to the U.S.

“Diamonds are a luxury good and about two years ago, China reached number two in the world for diamond purchases as their booming economy fuelled luxury sales,” said Tom Hoefer of the NWT Chamber of Mines. “But now as their economy slows, diamond purchases have slowed too, along with some many other commodity prices.”

And in the end, Vician pointed out,  it is the consumer that decides the success of the diamond market.

“Chinese contraction over the last two years particularly has demonstrated that inventories that were on hand are now basically held up for sale, and that’s required basically a retraction on the part of the major suppliers,” he said.

Asked whether the economic environment in China, as illustrated by the diamond industry’s contraction, will affect GNWT efforts to pursue Chinese tourism and trade opportunities, Vician was optimistic.

“You have to remember there is a large volume of diamond market carrying on today, so we remain confident the marketplace will increase,” he said. “There are signals that the Chinese market is stabilizing, and we hope to see that continue in the future.”

What’s next?

Although this news is about the last thing politicians and GNWT officials wanted to hear, especially at the beginning of a new assembly, the deputy ministers gathered for the press conference emphasized that both Ekati and Diavik remain profitable, with development of Diavik’s A-21 pipe moving ahead. Barring hold-ups at the regulatory phase, Dominion Diamond remains firm on the development of its Jay project at Ekati, which is expected to extend mine life into 2030.

Hoefer, of the Chamber of Mines, isn’t so sanguine: “If Ekati closes in 2020 according to its current mine plan, our economy would see a significant decline, since this world-class mine employs 1,500 workers and spends $275 plus million annually for goods and services, plus pays significant taxes and royalties.” Hoefer puts on semi-rosy glasses to note that the chamber is “excited to see that [Dominion] have proposed a plan to mine the Jay deposit, which could add 11 years of continued employment, business spending and tax and royalty payments, keeping our economy strong.”

 — With additional reporting by Mark Rendell

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