Rio Cuts Back On Argyle Mine Jobs, Production

Buying a diamond is the ultimate in discretionary spending.

So it should be no surprise that with the world's worst financial crisis since the Great Depression in full swing, sales of both rough and cut diamonds have plummeted.

As many as 300 workers at Rio Tinto's Argyle mine in Western Australia's remote Kimberley region have just discovered that hard truth.

The mining contractor to Rio and Argyle, Macmahon, spent yesterday telling the workforce — it has the highest indigenous representation of any mine in Australia at 25 per cent — that the operation was about to get considerably smaller, reducing annual output from 20 million carats to about 15 million.

More ominous was Rio's decision to adopt a go-slow approach on a $US1.5 billion ($A2.2 billion) life-extending move to begin mining Argyle's billion-year-old diamonds from an underground position, with the existing open-cut operation now on its last legs.

Debt-ridden Rio stressed its need to conserve cash under its $US10 billion debt-reduction target for 2009, as well as the "current global conditions".

Rio did not say so but industry participants have reported that the trade in rough and polished diamonds in the all-important US market tanked in the second half of 2008 as the global financial crisis took hold.

Argyle — the world's biggest diamond mine by volume but not by value because of the relatively low quality of its stones — is the single-biggest contributor to the Kimberley economy and is the major supplier of low-value rough diamonds to India's huge cottage-based diamond cutting and polishing industry.

The move to underground operations was given the go-ahead by Rio in late 2005 and meant that Argyle stones, including the world-famous $US500,000-plus a carat "fancy pinks" that make up a small percentage of its production, would continue to be produced until at least 2018 on the exhaustion of the open-cut diamond resource in the AK1 kimberlite pipe.

Before that 2005 commitment was made, Rio extracted a deal on royalty relief (down from 7.5 per cent to 5 per cent of revenue) and the waiving of secondary processing obligations (fancy pinks would still have to be cut and polished in Perth) from the WA Government.

The plan now is to mine some extensions to the open-cut resource for at least two years and hope that the diamond market bounces back sufficiently to warrant a full-blown move to underground mining.

Average annual production over the life of the underground mine was expected be about 60 per cent of Argyle's historical annual average of 34 million carats.

The quality of the rough stones is expected to be similar, with a value of about $US10 a carat. That low average value compares with gem-quality rough stone values of more than $US150 a carat.

Only 5 per cent of Argyle's output is of gem quality.