Rio Tinto’s diamond deal likely a good one: analyst

The second-largest mining company on the planet got a good deal when it signed an agreement with a Saskatoon-based firm that could result in it acquiring 60 per cent of a “very significant” diamond deposit in the Fort à la Corne forest east of Prince Albert, according to an independent industry analyst.

Shore Gold Inc. likely needed a major partner to bring its StarOrion South project into production, hence its consolidation of ownership and the “very inexpensive” agreement — worth up to $75 million over the next seven and a half years — it signed with a Rio Tinto Group subsidiary, Paul Zimnisky said.

“It’s kind of like a double-edged sword,” New York-based Zimnisky said of the project, which Shore Gold has been developing for more than 20 years. “It’s so big that it has the potential to be a world-class project … but at the same time it’s very cumbersome because of the size and the expense to move something like this forward.”

Shore Gold announced the deal with Rio Tinto Exploration Canada Ltd. last month, after its share price rocketed up to a fiveyear high amid speculation about a potential sale. Under the terms of the agreement, the British-Australian mining giant can acquire a progressively larger stake in the project by spending money on exploration or paying Shore Gold.

While Rio Tinto can walk away at any time, which would frustrate Shore Gold shareholders, its track record — which includes the Diavik diamond mine in the Northwest Territories — is “very positive” given the Star-Orion South project’s challenges, which include capital costs estimated at $2 billion or higher and large amounts of rock and earth to move, Zimnisky said.

“If the mine is profitable, (Shore Gold) shareholders will probably do quite well,” he said. “If it’s not, they won’t. It’s really as simple as that.”

In an interview at the company’s downtown Saskatoon office, Shore Gold president and CEO Ken MacNeill said Rio Tinto was “one of the few” firms able to advance a project the size of Star-Orion South. He called its involvement a “fantastic step.”

MacNeill said he could not speculate on Rio Tinto’s intentions or when the mine could enter production.

At the same time, “They’re not going to go through all of these steps and then say, ‘Oh, wait a minute, we’re not going to do anything here,’ ” he said. “It just doesn’t work that way. Rio Tinto, in my experience, does not get involved in projects unless they’re moving them forward — and that’s the point to this.”

In an emailed statement, Rio Tinto spokesman Matthew Klar confirmed the company had signed the agreement with Shore Gold and said it has “a deep experience and expertise in the diamond exploration and mining business and looks forward to working on this growth opportunity for diamonds.”