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

Tahera Diamond Corp., nearly 17 months to the day after the hopeful startup of its Jericho Diamond Mine in Nunavut Territory, said it would seek protection from its creditors under Canada's Companies' Creditors Arrangement Act.

A few hours later, the Toronto-based diamond producer announced that it had obtained an order from the Ontario Superior Court of Justice granting the company and its subsidiary protection until Feb. 14, 2008, with the period to be extended or terminated thereafter as the court deems appropriate.

The court shelter process will prevent creditors and others from enforcing rights against Tahera and its subsidiary and will allow Tahera to restructure its operations.

Tahera said it sought bankruptcy-court protection after generating little interest in a $36.7 million equity offering aimed at raising cash to keep its troubled diamond mine afloat this winter and failing to come up with another viable alternative.

Though the court's protection enables Tahera to continue its day-to-day operations until its status changes, the implications for Tahera shareholders are less clear, will not be able to be determined until the end of the restructuring process and will depend upon the terms of a restructuring plan approved by the affected stakeholders, the company said in a statement.

Among Tahera's largest stockholders is Teck Cominco Ltd., which owns 16 percent of the company's common stock and enough warrants to purchase another 9 percent of the shares.

Industry analysts have been pessimistic about Tahera's prospects, observing that a rescue of the beleaguered operation likely would have happened by now or at least through the failed equity offering.

A model diamond mine

Nearly 11/2 years ago, Tahera celebrated the opening of Jericho, a relatively small diamond mine about 400 kilometers, or 250 miles, northeast of Yellowknife. The $120 million venture, Canada's third diamond mine, was expected to produce 500,000 carats of diamonds a year over an initial eight-year mine life.

Tiffany & Co., a marketing and financing partner in the venture, had first dibs on the mine's output as well as a contract to market any remaining stones for Tahera.

An open-pit mine, Jericho employs 125-175 workers in an operation that was intended to process up to 2,000 tonnes of ore a day, with an average yield of 1,700 carats of diamonds worth $85-$100 per carat.

One-tenth the size of the Diavik and Ekati mines in Northwest Territories, Jericho was initially viewed as a potential model for future diamond mining development in the Arctic. It's lower capital costs and rapid development was believed to bode well for the venture's profitability.

What went wrong?

From the start, Tahera ran into numerous problems at Jericho. Processing at the mill fell short of the mark throughout the first months of operation as the company encountered lower grades of ore that yielded less valuable stones.

Faced with mounting costs and ongoing losses, Tahera has struggled to resolve its difficulties. Company officials blame the high Canadian dollar, soaring oil prices, falling diamond prices and operating problems at the mine site, for Jericho's ongoing woes.

Tahera posted a $25.6 million loss for 2006 and a loss of $143 million for the first nine months of 2007, including a $14.8 million deficit for the third quarter. It also wrote off $73 million in asset value.

The company said in November it was revising its mine plan with technical support from Teck Cominco. Changes included improving grade control, installing a new jaw crusher and improving scheduling and maintenance planning.

In December, Tahera announced it would seek a much-needed $36.7 million offering of hundreds of millions of shares and warrant units and reached terms on a $30 million financing deal with Tiffany & Co. and Nuna Logistics to convert debt into shares.

At the time, Tahera also raised red flags about the recent volatility of its business. At the end of the fall quarter, the company only had $6.8 million in cash on hand and warned that if it couldn't raise fresh capital, it might have to mothball the Jericho operation.