De Beers mine in Northwest Territories had water issues before closure

De Beers was quick to blame rapidly souring market conditions for its decision Friday to mothball the Snap Lake diamond mine in the Northwest Territories, but the companydownplayed another contributing factor: a larger-than-expectedflow of naturallyoccurring groundwater in the mine's underground workings.

• From March: Mine could close if dissolved solid limit not raised

"What many of you may not know, but some will, is that we have been storing large volumes of ... water underground for some time now," Glen Koropchuk, De Beers Canada's chief operating officer, saidat a public hearing back in March.

The water was being stored because of its high concentration of total dissolved solids, including mineral saltslike chloride, and because De Beers couldn't release that water into Snap Lake after treatmentwithout going over prescribed limits.

Besides being unsafe for workers,the excess water also tied up parts of the Snap Lake ore body, reducing the property's minable ore inventory "to a critical level," said Koropchuk.

De Beers said that if the discharge restrictions remained in place, and the company became non-compliant, the mine might have to close.

In September, the restrictions were eased by thethen-territorial finance minister, Michael Miltenberger.

"The amended water licence is one of the key steps toward to the long-term sustainable operation of Snap Lake mine," Tom Ormsby, De Beers' director external and corporate affairs in Canada, said at the time.

'No choice but to close the operation'

That victory was apparently short-lived.

On Friday, De Beers CEO Kim Truter said that despite the relaxing of regulations, Snap Lake was being put on care and maintenance, eliminating more than 400 jobs in the mine about 220 kilometres northeast of Yellowknife.

He cited "a very rapid downturnof the diamond market in recent months," but added thatDe Beer's next N.W.T. diamond mine, Gahcho Kue, would continue to undergo construction.

What was so wrong with Snap Lake that it (and only it) needed to be shut down?

The mine had been a"borderline, marginal asset for many, many years," Truter said. He offered few specifics, however, beyond the mine's larger-than-forecasted capital cost and the generally highercost of running an underground mine.

Trutersaid little about Snap Lake's water issue, except that the company was recently able to reinvest in its underground development, and had in fact made "some quite good operational improvements."

"But the market collapse has happened so fast that it's made operation unviable for many years to come."

Economics 'clearly miscalculated'

PaulZimnisky, an independent, New York-based diamond industry analyst, said the closure seems "kind of short-sighted" given that diamond prices have been on a downward trend since the second half of 2011.

"Albeit, the weaknessaccelerated over the last 12 months."

Zimnisky says the danger signs were there all along.

"The economics of the mine were clearly miscalculated in light of thewater difficulties when they decided to move forward with the project," he said.

"But at the time there was an industry rush to have a presence inCanada."

De Beers hopes that by closing Snap Lake and reducing its production of diamonds, demand for diamonds from properties like Gahcho Kue and its Victor mine in Ontario will pick up at a later date.

Snap Lake was originally slated to remain in production until 2028. Koropchuk said that would have resulted in another billion dollars in investment.

Gahcho Kue, where De Beers hopes to begin production in the second half of 2016, and where 41 of Snap Lake's approximately 700 workers have been reassigned, has an expected mine life of 11 years.

The investor day of De Beers' parent company, Anglo American, takes placeon Tuesdayin London, where the company's plan to raise over $1 billion by reducing costs is bound to come up.Anglo has alreadysold its construction materials business for$1.6 billion, along with some unprofitable South African platinum assets.