Canada's diamond sector is hoping to add some lustre to the slowing Canadian economy.

Despite a sharp downturn in commodity markets and a global financial crisis, analysts say there are no imminent plans to shut down diamond mines or dramatically scale back production because of world economic conditions.

Though production is likely to drop at the country's two major mines - Diavik and Ekati, both in the Northwest Territories - it's primarily due to lower grades that the mines are yielding and different ore sources, as opposed to cutbacks related to the global downturn.

"There are no cutbacks or shutdowns, not to my knowledge," says Pierre Leblanc, the principal of Ottawa-based Canadian Diamond Consultants Inc., which provides independent, commercial and policy advice related to the Canadian diamond industry.

"Production is continuing - as far as I know - as planned. Even though the price of rough diamonds is lower, diamonds are still being sold," Leblanc adds. "It's better to sell these diamonds now, than stockpile and sell for another day."

Canada is the third-largest diamond producer in terms of value. In 2007, Canada produced $1.7 billion of diamonds, behind Botswana at $3 billion and Russia at $2.6 billion.

Leading diamond producer De Beers Group remains bullish on Canada, having opened two new diamond mines this summer while a third is in the works.

The first two mines, Snap Lake in the Northwest Territories and Victor in northeastern Ontario, are De Beers' first mines outside Africa and are expected to produce two million carats per year. Its third mine, Gaucho Kue, in the Northwest Territories - a joint venture with Toronto-based Mountain Province Diamonds Inc. - is in the advanced exploration stage and undergoing environmental impact assessments. It's tentatively scheduled to begin production in 2012.

"Canadian production is on plan and on target. There are no layoffs and a lowering of production levels is not planned," adds Derek Teevan, director of government and corporate affairs for Toronto-based De Beers Canada Inc. "We're committed to our partners, we're committed to our First Nations partners and we're committed to our employees."

But some diamond producers are still expected to take some hits from the current economic turmoil.

More than 50 per cent of the world's diamonds are actually sold in the United States, Teevan notes. "So the downturn in the United States economy does have an impact on the diamond industry - we've been noticing that since August."

Meanwhile, a report released in late October by RBC Capital Markets analysts Irene Nattel and Stephen Walker say the current economic climate leaves them no choice but to drastically cut their price target for Harry Winston Diamond Corp., which owns a 40-per-cent stake in Diavik - the remaining 60 per cent is held by Rio Tinto - and also runs a retail division selling higher-end jewelry and timepieces. The duo has sharply lowered their earnings assumptions with their target price for Toronto-based Harry Winston, dropping by more than half from $35 a share to $14 a share.

"With a global recession all but a foregone conclusion, we have significantly pulled back our assumptions on Harry Winston's rough diamond sales prices from the Diavik mine," the report says.

"Where we had previously been anticipating strong price growth of plus 10 per cent per annum over the next several years, we are now modelling a flat market in calendar 2008, followed by a 10-per-cent decline in 2009 with zero-per-cent growth thereafter until 2013."

The RBC analysts say Harry Winston's retail operation is losing some sparkle, too. "The current capital market turmoil and commodity price meltdown cannot help but negatively impact even the uber-rich that constitute Harry Winston's retail clientele, the report says. "Consequently, we have modified downward our revenue growth assumption for the segment, which negatively impacts the profitability outlook, as well as the new store-opening schedule."

Teevan agrees the retail side of the diamond sector is in for a rough ride, noting that it could be a difficult Christmas for diamonds and other discretionary goods.However, there is some bright news on the horizon. The financial mayhem that has seen oil prices drop significantly, along with the recent rapid decline of the Canadian dollar versus its U.S. counterpart, is giving Canadian diamond producers more breathing room.

"We've got a variety of impacts on mining globally - energy costs, exchange rates, both of which have a major impact on our operating costs," says Teevan.

"We sell diamonds in U.S. dollars, so this recent change in the exchange rates is positive for us. Similarly, with the cost of oil, we've seen a significant change in fuel costs (lowering). Both of those are a plus to Canadian operations generally."

Leblanc also believes the future remains bright for Canada's diamond industry.

"The demand has grown tremendously during the past few years," he says. "With the development of China and India as economic powerhouses, there is increased demand and this wasn't there five years ago.

"World demand is going to exceed the production. I think it's going to soften for a certain amount of time, maybe a year to 18 months, but the market will recover, as it always does."

He added diamond companies around the globe will likely be less aggressive in pursuing their maximum rates of production in favour of "second-level" maintenance - "when prices are low, they slow down a little on production and allow for more of the in-depth maintenance to take place," says Leblanc.

Diamond data

* The Diavik diamond mine, at Lac de Gras in the Northwest Territories, is owned by Rio Tinto (60 per cent) and Harry Winston Diamond Corp. (40 per cent).

* Melbourne-based BHP Billiton, the world's largest mining company, owns 80 per cent of the Ekati diamond mine, located about 310 km northeast of Yellowknife, N.W.T.

BHP has made an all-stock offer to purchase Rio Tinto conditional on regulatory approval, which it has received in Australia and the U.S..

It is awaiting a response from the European Union and Canadian regulators, and if successful, would then own two of Canada's major diamond mines.

* Nunavut's first diamond mine, Jericho, is in limbo. Owned by Toronto-based Tahera Diamond Corp., Tahera entered into creditor protection in January 2008 and mining activities were suspended in early February.

(Laura Severs can be reached at laura@businessedge.ca)