There are not many project finance deals that can boast Tiffany & Co, the US jewellery and luxury goods retailer famed for its diamond rings, as the main offtaker. But Aber Diamond's $230 million project financing to fund part of its stake in the Diavik diamond mine in Canada, can do just that.

The lure of Tiffany and a strong project structure, managed to attract some 14 banks to join the deal in syndication at the end of January. The banks joined lead arrangers Bank of Montreal; Bank of Tokyo-Mitsubishi, Canadian Imperial Bank of Commerce (CIBC), Deutsche Bank, Export Development Canada and Royal Bank of Canada in what is the largest project loan to a Canadian mining deal and the largest non-recourse loan for a diamond mine.

All this for a company such as Aber Diamond, which until recently was relatively unknown. However, Andrew Adams, Aber's vice-president and chief financial officer, says for Tiffany the quality of the diamonds on offer at the mine made the deal a very attractive proposition. ?Quite frankly for Aber there are very few companies with a balance sheet the size of Tiffany's in a fragmented market. It was the perfect match between Tiffany's desire for a constant supply of quality diamonds and Aber's desire for an offtake with a well-known name, which really aided the bank financing?.

Diavik Diamonds is an unincorporated joint venture between Diavik Diamond Mines (60%), a wholly owned subsidiary of Rio Tinto of London, and Aber Diamond Corporation of Toronto (40%). Both companies are developing the Diavik mine at a cost of C$1.3 billion ($816 million). Aber, which had previously funded its share of the project using its own equity, decided to turn to the bank market at the beginning of last year. The attractions of the deal are compelling.

Located on an island in a remote arctic area of the Northwest Territories some 300km by air north-east of Yellowknife, the Diavik mine is expected to produce 6-8 million carats a year. The average estimated reserve grade is 4 carats a tonne and the average diamond value is $63 a carat based on a valuation carried out in 2000. The mine's reserves are located in four pipes, with a total reserve of 138.1 carats. The mine has estimated diluted mineable reserves of 25.6 million tonnes and is expected to produce 1.5 million tonnes of ore a year. Diavik has an estimated life of 20 years although much of it remains unexplored.

Attractive though the figures are, the project, nevertheless, has had to overcome some fairly sizeable hurdles to reach financial close. Discovered by a geologist in the 1980s it was not until the early 1990s that Aber, a junior exploration company, joined and staked its territory. Shortly afterwards Rio Tinto joined the deal. In 1998 a feasibility study was carried out but it was not until November 2000 that the project obtained the final go ahead.

The timeframe is not unusual in an area where obtaining the environmental approval for a project is difficult. BHP, a fellow miner in the area and owner of the Ekati mine, took seven years to move from discovery to production. A comparable mine in Africa took just four years.

Rio Tinto and Aber started studying the environmental impact of the scheme and consulting local communities in 1994. The groups won final approval at the end of 2000 and only after Rio had agreed to pay a C$181 million performance bond once full production begins. The bond guarantees that money is available to pay fines or damages. As part of the deal, the joint-venture is also committed to employing a large proportion of its staff from the local community.

The logistics of getting such a mine operational are also impressive. The mine is located on an island but the diamonds are underwater. As a result, part of the operational costs of establishing the mine, which is now 65% complete, have been spent building a dyke. This will remove the water from the site and allow open pit mining.

In addition to this the sole route to the site is via an ice road, which is only accessible during the first few months of the year. This means there is a narrow window of time to transport the heavy machinery and 400-plus staff required for the project. As a result the sponsors started shipping heavy material into the site during February 2000, even though the final approvals were not given until the end of the year.

For Aber the project represented the largest ever financial undertaking by a single-asset Canadian mining company. However, the way the deal is structured means that both joint-venture participants retain the right to market their diamonds independently.

With this in mind Aber attracted the interest of Tiffany in the summer of 1999. Based on the quality of the diamonds, Tiffany purchased 8 million shares in the company at about C$13 a share, the equivalent of a 14.7% interest in Aber. The jeweller also agreed to buy a minimum of $50 million of diamonds a year for 10 years from Aber. As part of the deal both companies agreed to market the diamonds and split the profits.

The deal proved a valuable boost to Aber's cashflow and should have been enough on its own to attract debt.

?After Tiffany & Co bought shares in Aber, our philosophy had been to finance the deal with our own internal equity,? says Adams. However, shortly after that Rio increased the cost of the project from C$1 billion to C$1.3 billion. Says Adams: ?When Rio announced that the cost of the project had risen we had to find another $70 million. Even with the equity from Tiffany it made the deal pretty tight.?

In December 2000, Aber was able to top up its equity through the sale of its stake in the Snap Lake property to the majority interest holder and project operator, De Beers Canada Mining, for $173 million. At the time the transaction, which closed in February 2001, was expected to provide enough capital for Aber's share of the Diavik project, while raising Aber's cash reserves. ?Add to that the amount from the Tiffany shares and we felt was had enough equity to obtain debt financing for the project,? says Adams.

According to Adams, financing the deal as a non-recourse transaction was a logical step. ?As a single asset company, there is no real material difference between a corporate or a project facility. Our major security asset is our share of the Diavik project.?

With Rothschild & Sons as financial adviser, Aber went to the banks with an information memorandum in February 2001. And while the group hoped to fund the transaction earlier in 2001, the effects of the attacks on September 11 meant the deal slowed.

The project was then underwritten in November 2001 with Bank of Montreal, CIBC, Deutsche, EDC and RBC as the lead bank group. BoT-Mitsubishi subsequently joined.

Under the terms of the deal Tiffany & Co has a 10-year offtake agreement with Aber.

The average cost of funds, including arrangement fees is about 7.5%.

The loan has a seven-year tenor and an underlying interest floats at 300bp over Libor. First drawdown of the loan is expected to take place in first quarter 2002, with amortisation over eight equal semi-annual instalments following the completion of the project.

The loan also gives Aber the added option of hedging on a fixed interest basis but it can also hedge on a Canadian dollar basis.

And while the deal has a seven-year tenor, the structure and indications from the feasibility study suggest that Aber will be able to pay off the loan well before the life of the loan in 2005.

Despite the success of the deal Adams says the company is unlikely to follow up the transaction with a second project financing. He says the funding will carry the company until the mine becomes operational. After that the revenue stream will be opened. ?Our strategy then is to maximise the value of the jewels from the ground.?