North of 60 Mining News - The mining newspaper for Alaska and Canada's North

Canada's diamond industry has had its wings clipped, just as it was taking flight.

The Yellowknife operations of Sirius Diamonds and Arslanian Cutting Works NWT, holding a combined C$17.2 million in government loan guarantees, were forced into interim receivership in mid-June, triggering an emergency response from the Northwest Territories government.

The plants employed about 90 people.

The territorial government said June 23 it would continue to backstop Arslanian, by introducing new partners and ensuring that the firm's bank loan of C$9.2 million was paid off.

Northwest Territories Finance Minister Floyd Roland said the loan guarantees would be extended for another five years.

"Everyone's a little bit nervous about the industry so we've agreed to back up any loans they've put in place," he conceded.

An earlier deal was reached whereby a subsidiary of Montreal-based Basal Diamonds will pay C$9.2 million for 75 percent of Arslanian's plant.

Government says firms in financial trouble

Roland said both Arslanian, North America's largest diamond cutter, and Sirius were in financial trouble - a claim the two firms deny.

"We tried to work with them before going through this process to resolve the issue, but unfortunately that wasn't able to happen," he said.

Roland said the government had been concerned about the viability of Arslanian and Sirius for some time, but delayed any action until told by the Royal Bank of Canada that it was going to demand payment of the Sirius loan.

A spokeswoman for Arslanian said the company had been meeting its obligations when the government "just swooped in."

In Arslanian's case, Roland said it was "timely to move as we did to protect the public purse."

A Sirius spokesman insisted his firm was also up to date with its interest payments, although he admitted it may have failed to maintain a certain equity stake in the Yellowknife plant.

Roland said the new arrangement is better for the territory because the revised guarantees will be based on a percentage of the restructured plant's assets. The new owners will add their personal guarantees to the loans.

Governments have subsidized industry

In a bid to capitalize on Canada's sudden emergence as the world's third largest diamond producer behind Russia and Botswana, the governments of Canada and the Northwest Territories have employed a number of strategies, including various subsidies, to build a domestic diamond cutting sector, despite warnings that the manufacturing operations were not very profitable.

In the process, Canada has found itself going head-to-head with countries such as India, where labor costs are dramatically lower.

The Northwest Territories and Nunavut Chamber of Mines issued a recent report that portrayed diamond cutting as a failing secondary industry and argued governments should have no part of the sector.

Tiffany and Canada Dene Diamonds also have manufacturing plants in Yellowknife that operate without loan guarantees, although Canada Dene needed to go through a reorganization after encountering financial problems.

However, in the midst of the manufacturing woes, De Beers said in June that it had successfully concluded a drawn-out regulatory process and would build a diamond mine at Snap Lake in the Northwest Territories.

The final approval involved a water license from the Canadian government, which opens the way for De Beers to join BHP Billiton's Ekati mine and Rio Tinto's Diavik operation, possibly as early as 2006.

De Beers, which is 45 percent owned by Anglo American, has been shut out of the United States for decades, accused of breaching anti-trust laws, but there have been reports of discussions with the U.S. Department of Justice to resolve the impasse.

In the meantime, analysts believe it is important for De Beers to have a mine in Canada, should it be allowed to sell directly into the U.S. market.