Inside the finances of a stricken NWT diamond mine company
Dominion Diamond Mines’ decision to file for insolvency protection has opened up hundreds of pages of documents exposing the inner workings of the company.
Ordinarily, diamond mines keep their finances and internal decision-making close to their chest. However, going to court for protection from creditors means laying bare your financial situation.
A 148-page affidavit from Dominion’s chief financial officer, Kristal Kaye, sets out why Dominion chose to file for protection this week.
The company owns and operates the NWT’s Ekati diamond mine and also has a 40-percent stake in the neighbouring Diavik mine – which became a problem this month.
Dominion needed to make a $16-million payment to Diavik on Wednesday as part of the regular course of business. Such payments are common: Dominion had already paid more than $85 million into its Diavik joint venture through similar payments in January, February, March, and early April.
However, hit by the pandemic and unable to sell any diamonds, the company didn’t have $16 million this time around.
Nor does it have the cash to pay a $28-million interest payment on various debts at the start of May.
Without the funds to pay either of those bills, bosses decided to file for creditor protection.
An Alberta court’s decision to grant that protection on Wednesday allows Dominion to essentially press “pause” on those debts – giving the company time to restructure itself, find new investment, or sell to another owner.
Dominion had requested a “stay period” from Wednesday until May 2. Under the rules of creditor protection, Dominion can’t be taken to court over its debts until at least that time. The company can ask the court to extend the stay period beyond May 2 if it needs more time.
Diamonds worth almost $200M, no way to sell
Kaye’s affidavit seeks to convince the court of the problem by setting out, in detail, why Dominion is running out of money.
The pandemic is the main reason. Not only have operations at the Ekati mine shut down for safety reasons, but restrictions related to Covid-19 mean Dominion can’t get diamonds to its sorting facility in India and can’t sell any diamonds in Belgium.
Kaye says Dominion has diamonds worth $90 million in Canada that it can’t ship to India. (All values in this article are in Canadian dollars, though Kaye’s document switches between US and Canadian.)
From India, the company’s diamonds are transferred to Belgium for sale. But Belgium’s diamond trading floors have been closed due to the pandemic since March.
In Belgium, the company has another $86 million in diamonds waiting to be sold but they can’t go anywhere because those trading floors aren’t open.
$14 million of that comes from just two individual stones, valued at around $6 million and $8 million.
Among diamonds Dominion can’t sell right now are two individual stones worth $14 million between them. Photo: Dominion Diamond Mines
Without the ability to sort and sell diamonds, Dominion states it will have zero revenue between now and July.
As a result, the company forecasts it will lose $39 million in that period.
Even after sending more than 400 employees home and telling them to apply for federal government support, Dominion is still paying more than $1.5 million every two weeks in payroll and benefits.
The company also has to pay more than $11 million to lawyers and financial specialists for the privilege of entering insolvency protection.
Meanwhile, there is $3 million in vacation pay accrued by staff but so far unpaid.
Dominion’s northern spending
The extent to which Dominion supports the NWT’s economy is also set out in Kaye’s affidavit and accompanying documents.
Adding together 2018 and 2019, the company spent $524 million with northern businesses. (By comparison, that equates to about a seventh of the territorial government’s entire budget for those two years, which was around $3.6 billion. That $524 million would pay for Yellowknife’s new swimming pool at least 10 times over.)
Of that money, $319 million went to Indigenous businesses. Impact benefit agreements related to Ekati are worth around $7 million per year.
That level of investment in the North was powered by $743 million in diamond sales in the last financial year alone. However, the moment those sales stop, Dominion has weekly bills of more than $3 million and no way to keep paying them indefinitely.
More than a thousand jobs are at risk, though filing for creditor protection doesn’t mean the mine will completely close down – it remains in care-and-maintenance for now, which was already the case before this week’s news because of the pandemic.
The Ekati mine will remain in care-and-maintenance mode for now. Photo: Dominion Diamond Mines
Before the pandemic, there were 634 staff at the mine. In 2019, Dominion had also used 425 contract workers at Ekati.
Also at risk are royalty payments to the Government of the Northwest Territories.
Since November 1, 2017 – the year The Washington Companies bought Dominion for $1.5 billion (equivalent to $1.2 billion US dollars at the time of the transaction) – Dominion has paid the NWT $14 million in royalties from its share of operations at Diavik and $5 million in royalties from Ekati.
While that’s a tiny sliver of the NWT government’s overall budget, it’s not far from the $25 million the territory recently said it had set aside to pursue new mandate items over its four-year term.
Even if the Ekati mine eventually completely closes – which, again, isn’t immediately likely – Dominion says it has already posted securities to the GNWT worth $388 million for both Ekati and Diavik. Those securities are designed to cover clean-up costs if, for any reason, Dominion isn’t around to pay for them itself.
How Diavik’s operations will be affected by Dominion entering insolvency protection, and being unable to make Wednesday’s $16-million payment, is unclear. Rio Tinto, which owns the other 60 percent of Diavik, declined to comment for this article.
‘Valuable and viable’
The mine’s owners tried to strike an optimistic note in Dominion’s application to the court for creditor protection.
They wrote that Dominion remains a “valuable and viable business” only in need of protection ” for reasons outside of their control,” namely the pandemic shutting down revenue.
The court application states the company “urgently requires the breathing room … to maintain the status quo of their operations as they consider restructuring options for the benefit of their stakeholders.”
That breathing room and subsequent restructuring could, the company claims, mean “the overall
value of their business will likely be enhanced” once Dominion comes through the process.
However, that may rest on how quickly conditions in Canada, India, and Belgium allow Dominion to resume diamond sales, and how the diamond market recovers from the pandemic. The market was already weak and a sustained global economic slump may make recovery even harder.