Fitch delivers bleak outlook for Ekati owner Dominion

Credit rating agency Fitch has downgraded Dominion Diamond Mines, saying the owner of the NWT’s Ekati diamond mine is in a weak financial position and appears to need a cash injection.

Operations at the Ekati mine have been suspended since March because of the Covid-19 pandemic. Dominion also holds a 40-percent stake in the neighbouring Diavik diamond mine, which continues to operate.

Dominion was bought by The Washington Companies in 2017. Its mining operations directly create hundreds of jobs in the territory and indirectly support hundreds more.

Fitch last week downgraded Dominion from B+ to CCC, a junk bond rating marking an investment that would be highly speculative and carry substantial risks.

The worse a company’s bond credit rating is, the less likely you are to get your money back if you invest.

The rating update discusses what might happen in the event Dominion files for bankruptcy, suggesting Fitch believes there is a chance Dominion may not recover from the pandemic.

Fitch stated “weak diamond market conditions, consistent underperformance, and uncertain return expectations partially due to the coronavirus” were all factors in reaching its conclusion.

“Fitch believes an extended period of suspended production or an extended period with the inability to sell diamonds would quickly result in weak liquidity,” the outlook read.

One of the few things Dominion has going for it, according to Fitch, is the “favourable jurisdiction” of Canada and the Northwest Territories.

Otherwise, according to the outlook, the company is vulnerable because it trades in only one thing, diamonds, and is likely to need some kind of cash injection in the next year or two.

Dominion did not respond to a request for comment.

Tom Hoefer, executive director of the NWT and Nunavut Chamber of Mines, declined to comment. Hoefer said he could not speak about an individual company’s situation.

Pandemic not just a problem in Canada

Fitch is not the first credit rating agency to express significant misgivings about Dominion’s future. Moody’s issued a similar assessment last fall.

Uncertainty about the future of a company so heavily invested in two of the NWT’s three working mines is a grave concern at a time of extreme economic peril brought on by the novel coronavirus.

The NWT has gone to great lengths to keep its diamond mines operational during the pandemic, issuing a range of exemptions to allow a flow of southern workers to and from mines that would otherwise be prohibited.

Fitch says Dominion is struggling because:

• the diamonds coming out of Ekati and Diavik are of a lower grade than they used to be;
• costs at Diavik have gone up;
• average sale prices for the diamonds have been lower than expected; and
• an entirely new management team came on board in 2018, then a new interim chief executive this year.

The pandemic, however, is a big new cause for concern – and not just because production at Ekati has been halted indefinitely, with no firm date for any return to work.

The coronavirus is also disrupting Dominion’s connections in India, where most diamond cutting and polishing takes place, according to Fitch.

“The uncertainty associated with the length of time lockdowns will last creates significant risk in the timing of future diamond sales,” Fitch stated.

In analyzing what might happen were Dominion to file for bankruptcy, Fitch assumes the company “would be reorganized rather than liquidated.” There is no suggestion any such proceeding is imminent.

In the event that happened, Fitch believes the company would be worth approximately half what The Washington Companies paid for it in 2017.