Diavik Diamonds
North American Mining Deal of the Year 2002
Diavik Diamonds
Diavik Diamond's $230 million diamond mining deal is the first of its kind to be done in recent years. The inability to hedge with diamonds has tended to make even the fiercest of lenders jittery in the past. This deal, led by a banking group of six, attracted 14 banks in syndication. It is the largest Canadian mining deal ever completed and also the largest diamond mine project financing. The mine will provide 5% of the world's diamond production.
On closer examination, it is clear that Aber's offtake agreement for a decade with luxury goods company Tiffany & Co for $50 million per year, and its robust underlying economics and project structure has given significant comfort to lenders.
Diavik Diamonds is a joint venture between Diavik Diamond Mines (60%) and the Aber Diamond Corporation of Toronto (40%). Diavik DM is a wholly owned subsidiary of London-based Rio Tinto.
The lead arrangers are Bank of Montreal, Bank of Tokyo Mitsubishi, Canadian Imperial Bank of Commerce (CIBC), Deutsche Bank, Export Development Canada (EDC) and Royal Bank of Canada. Debt funding was $230 million in the form of one single secured senior loan priced at a floating rate of 300bp over libor on a seven year term. Amortisation is a spread of eight equal semi-annual installments after completion of the project, which should occur in about 18 months. According to the feasibility study, debt should be repaid by 2005.
EDC had a clear reason for its role in the project as most production will be exported to the US, and diamond mining is a growing industry in Canada. The residual production will be sold into a broader market ? mainly Antwerp. KfW came in as part of the syndicate as quite a large portion of procurement was from German equipment suppliers for both the process plant and the machinery, together with technical equipment.
Tiffany was attracted to Diavik by its high quality diamonds. The mine has a production of about 6-8 million carats per year priced at $60 per carat. Marshall Baillieu, a director at financial advisor Rothschild & Sons, says: ?In diamonds, shape, colour and weight is of big value ? this is its separating characteristic. Diavik is clearly one of the leading diamond deposits in the world, which means project economics are incredibly robust. This is very comforting to lenders. The financing is unique in that there is complete exposure to price risk. This is mitigated, though, by the high quality of the diamonds.?
Production is secured under an offtake agreement that lends significant comfort. Selling rough stones into the market potentially means using several intermediaries. It was in this respect that Tiffany & Co was a cornerstone of the financing package, and the diamond quality matches Tiffany's specifications very well.
One of the main risks ? apart from price exposure ? was construction risk. The Diavik diamonds are entirely underwater, submerged below a massive lake in the remote arctic Northwest Territories. The largest capital outlay of the project went into building a giant 40km x 20m high dyke to keep water out of the mine.
The deal proved its strength when it hardly missed a step just after September 11. Baillieu of Rothschild adds: ?In the early days of the project we took more time to get the underlying structure sorted out to a high level of detail. This worked well for us as right at the end of the term sheets finalising, September 11 happened and shut down the credit markets. We were able to come out of this and re-approach the lending markets and get it syndicated quickly. It was a test of how the deal would stand up in the market.?
Robert Gannicott, CEO of Aber Diamonds, says: ?It was a difficult deal to put together as it straddled a period of September 11 and the uncertainty this conjured up in the world. It was a credit to the banking group to get it back on track.?
The project was well-structured from day one. He adds that ?the financing of the project through debt was successful in avoiding significant dilution to equity holders that would have inevitably occurred had we financed it through new equity.? It was Aber who approached Tiffany & Co for the offtake agreement. ?At the time, they were the biggest diamond retailer for higher quality diamonds,? says Gannicott.
On another point, he adds: ?The difference with diamonds is that the value of reserve is harder to estimate in terms of quality and quantity, unlike copper and gold. The other difference ? and this is more perceived than real ? is that the market is not as transparent as other markets, which are listed on the Metal Exchange. This means there is no exchange price one can refer to.?
Repayments operate with a cash sweep and 90% of the profits generated within Aber are applied to repayment of debt. There is a high profit margin so it should be paid off fairly quickly.
Gannicott sums up the deal: ?This took a lot of time and work. It was a somewhat unconventional project in an unconventional location in an unconventional commodity.?
Diavik Diamonds
Status: closed January 2002
Size: $230 million senior secured loan
Location: Northwest Territories, Canada
Description: Financing of a 6-8 million p/a high quality diamond mine
Sponsors: Diavik Diamond Mines (60%) and Aber Diamond Corporation of Toronto (40%)
Lead arrangers: Bank of Montreal, Bank of Tokyo-Mitsubishi, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Deutsche Bank, Export Development Canada. 14 banks joined in syndication.
Offtaker: Tiffany & Co
Financial advisor: Rothschild & Sons
Lawyers to the lenders: Meghan Demers
Lawyers to the sponsors: Stikeman Elliot
Technical advisor: CIBC
Market advisor: WWW Diamonds Consultants Ltd
Diavik Diamonds
Diavik Diamond's $230 million diamond mining deal is the first of its kind to be done in recent years. The inability to hedge with diamonds has tended to make even the fiercest of lenders jittery in the past. This deal, led by a banking group of six, attracted 14 banks in syndication. It is the largest Canadian mining deal ever completed and also the largest diamond mine project financing. The mine will provide 5% of the world's diamond production.
On closer examination, it is clear that Aber's offtake agreement for a decade with luxury goods company Tiffany & Co for $50 million per year, and its robust underlying economics and project structure has given significant comfort to lenders.
Diavik Diamonds is a joint venture between Diavik Diamond Mines (60%) and the Aber Diamond Corporation of Toronto (40%). Diavik DM is a wholly owned subsidiary of London-based Rio Tinto.
The lead arrangers are Bank of Montreal, Bank of Tokyo Mitsubishi, Canadian Imperial Bank of Commerce (CIBC), Deutsche Bank, Export Development Canada (EDC) and Royal Bank of Canada. Debt funding was $230 million in the form of one single secured senior loan priced at a floating rate of 300bp over libor on a seven year term. Amortisation is a spread of eight equal semi-annual installments after completion of the project, which should occur in about 18 months. According to the feasibility study, debt should be repaid by 2005.
EDC had a clear reason for its role in the project as most production will be exported to the US, and diamond mining is a growing industry in Canada. The residual production will be sold into a broader market ? mainly Antwerp. KfW came in as part of the syndicate as quite a large portion of procurement was from German equipment suppliers for both the process plant and the machinery, together with technical equipment.
Tiffany was attracted to Diavik by its high quality diamonds. The mine has a production of about 6-8 million carats per year priced at $60 per carat. Marshall Baillieu, a director at financial advisor Rothschild & Sons, says: ?In diamonds, shape, colour and weight is of big value ? this is its separating characteristic. Diavik is clearly one of the leading diamond deposits in the world, which means project economics are incredibly robust. This is very comforting to lenders. The financing is unique in that there is complete exposure to price risk. This is mitigated, though, by the high quality of the diamonds.?
Production is secured under an offtake agreement that lends significant comfort. Selling rough stones into the market potentially means using several intermediaries. It was in this respect that Tiffany & Co was a cornerstone of the financing package, and the diamond quality matches Tiffany's specifications very well.
One of the main risks ? apart from price exposure ? was construction risk. The Diavik diamonds are entirely underwater, submerged below a massive lake in the remote arctic Northwest Territories. The largest capital outlay of the project went into building a giant 40km x 20m high dyke to keep water out of the mine.
The deal proved its strength when it hardly missed a step just after September 11. Baillieu of Rothschild adds: ?In the early days of the project we took more time to get the underlying structure sorted out to a high level of detail. This worked well for us as right at the end of the term sheets finalising, September 11 happened and shut down the credit markets. We were able to come out of this and re-approach the lending markets and get it syndicated quickly. It was a test of how the deal would stand up in the market.?
Robert Gannicott, CEO of Aber Diamonds, says: ?It was a difficult deal to put together as it straddled a period of September 11 and the uncertainty this conjured up in the world. It was a credit to the banking group to get it back on track.?
The project was well-structured from day one. He adds that ?the financing of the project through debt was successful in avoiding significant dilution to equity holders that would have inevitably occurred had we financed it through new equity.? It was Aber who approached Tiffany & Co for the offtake agreement. ?At the time, they were the biggest diamond retailer for higher quality diamonds,? says Gannicott.
On another point, he adds: ?The difference with diamonds is that the value of reserve is harder to estimate in terms of quality and quantity, unlike copper and gold. The other difference ? and this is more perceived than real ? is that the market is not as transparent as other markets, which are listed on the Metal Exchange. This means there is no exchange price one can refer to.?
Repayments operate with a cash sweep and 90% of the profits generated within Aber are applied to repayment of debt. There is a high profit margin so it should be paid off fairly quickly.
Gannicott sums up the deal: ?This took a lot of time and work. It was a somewhat unconventional project in an unconventional location in an unconventional commodity.?
Diavik Diamonds
Status: closed January 2002
Size: $230 million senior secured loan
Location: Northwest Territories, Canada
Description: Financing of a 6-8 million p/a high quality diamond mine
Sponsors: Diavik Diamond Mines (60%) and Aber Diamond Corporation of Toronto (40%)
Lead arrangers: Bank of Montreal, Bank of Tokyo-Mitsubishi, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Deutsche Bank, Export Development Canada. 14 banks joined in syndication.
Offtaker: Tiffany & Co
Financial advisor: Rothschild & Sons
Lawyers to the lenders: Meghan Demers
Lawyers to the sponsors: Stikeman Elliot
Technical advisor: CIBC
Market advisor: WWW Diamonds Consultants Ltd
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