By Michael Ganley -- Why, just 16 months after opening to general fanfare, is Tahera’s Jericho mine on the brink of collapse?

"What I would like to have you tell me, Peter, is that all is well in paradise, because what I’m seeing here is some pretty dark clouds."
-- An unnamed investor grilling Tahera Diamond Corp. chairman and CEO Peter Gillin during a November conference call concerning Nunavut’s troubled Jericho Mine.

"Part of the Central Lobe is really the tenderloin of this kimberlite. We did a batch test of that and we got something like 1.65 carats per tonne, and a value of $101.50 (U.S.) per carat. We are planning to mine as much of that as we practically can."
-- Tahera Diamond Corp. chairman and CEO Peter Gillin

The Jericho diamond mine was always a gamble. It’s a little deposit in a remote location, with a low carat per tonne ratio and the carats were far from the finest. Predictions were for just 3,000,000 carats in total over eight years. By contrast, BHP Billiton’s Ekati mine has recently been averaging 4,000,000 per year and Rio Tinto’s Diavik pulled out almost 10,000,000 carats in 2006. De Beers’s Gahcho Kué is expected to do at least 3,000,000 every year.

Its marginal nature led the global mining giants that took a look at the Jericho deposit in the late 1990s – such as those listed above – to give it a pass, preferring safer bets. But Toronto-based Tahera Diamond Corp., owner of Jericho, didn’t mind the long-shot odds and had no difficulty finding willing investors.

Unfortunately for Tahera, the investors and the employees, Jericho looks to be going belly up. The little mine that could is hemorrhaging money and investors are fleeing, sending the share price as low as six cents. In late December the company was desperately trying to raise enough money on the stock market just to be able to send supplies up the winter road. It said it needed at least $40-million to pay debts and finance the resupply, which generally costs the company about $15-million.

Investors were not jumping at the opportunity. Teck Cominco, which invested $30-million in the company just last year and owns 16 per cent, has said it isn't going to pony up any more. None of the other big companies that are already heavily invested – Tiffany & Co., Dundee Precious Metals – are prepared to go further. No bank is stepping forward to backstop the share sale. It would seem that, if it is to happen, Tahera will have to do it on its own. But is this a sucker's bet?

Tahera chairman and CEO Peter Gillin delivered details of recent bad news at the company’s quarterly conference call with investors in November. "Suffice it to say we view this as a good news/bad news quarter," said Gillin before launching into the gory details: The company had lost $143.1-million dollars in the first nine months of 2007 and was continuing to lose $2-million per month on operational costs; that is, it was costing them $2-million more per month to dig the diamonds out of the ground than the company was selling them for.

Gillin said the problems stem from a number of places: Tahera is getting only 0.55 carats of diamonds per tonne – down from the 0.85 carats per tonne predicted in their feasibility study – and processing just 1,700 tonnes of kimberlite per day, far short of the anticipated 2,200. Ongoing exploration was turning up nothing new. The financial situation was so dire that the company had decided to take a $73-million "one-time asset impairment charge" against the mine, which means it had decided to write the Jericho mine off as any kind of asset.

The coolly detached institutional investors that tuned into the conference call – from National Bank Financial, Scotia Capital, Westwind Partners – took it all in stride, not surprised by the news. They asked about what kind of capital expenditures Tahera had planned for the next year, and about the next rights offering, and about next year’s strip ratio, probing to see if Tahera stock, now so low, might actually be worth another look.

The small, private investors were more animated. "What I would like to have you tell me, Peter, is that all is well in paradise, because what I’m seeing here are some pretty dark clouds," said one, describing himself as "Joe Lunchbucket on the street". "It’s not a happy camper you’re talking to, so please put my mind at ease and tell me that ’08 and possibly ’09 is something to shoot for."

Another pointed out that just to break even the company would have to increase revenues by 50 per cent. "You’re not even making it close, guys," he said, exasperated. Gillin took his lumps and did his best to be reassuring, pointing out that the mine had been improving its throughput in recent months. "We’ve processed a little over 99,000 carats in the quarter, which is 34 per cent over the previous quarter," he said. "October was 55,000 tonnes at a grade of 0.85 carats per tonne which resulted in 47,000 carats for that month. It’s the highest monthly volume we’ve had from inception." Nobody was overwhelmed.

It wasn’t supposed to be this way. Jericho opened to great fanfare just a year and a half ago. Prime Minister Stephen Harper made the trip to the Barrenlands to herald a watershed in Nunavut's history. Along with Harper, Nunavut Premier Paul Okalik, then-INAC minister Jim Prentice and other dignitaries helped Gillin cut the ribbon on Nunavut's first mine in years. It was smiles and handshakes all around. "It is symbolic that the first mine that has ever opened in our territory is a diamond mine," Okalik told the assembled crowd. "It’s a gem."

Hopes were high. Gillin, an investment banker with strong ties to Bay Street, had been hired by Tahera in October 2003, and since then the company had been on a winning streak. It had gone to the markets and raised enough capital to build the mine. It had made it through the permitting process in good time. It had forged an agreement with U.S.-based luxury retailer Tiffany & Co., in which Tiffany agreed to buy or market all of the mine’s diamonds. Tiffany provided a $35-million loan facility to help in construction and $8-million for working capital. Shares in Tahera hit an intraday high of $4.15 in early 2006.

Even before Harper climbed atop a stack of three drill-rig skids to say that mines like Jericho are making Canada one of the largest and most important diamond producers in the world, there were indications that this project was star-crossed. The 42-day ice-road season in 2006 – during Jericho's crucial construction period – hit this mine particularly hard. Little Tahera was less able to absorb the cost of flying materials in than the big boys around Lac de Gras and had to trim back capital expenditures. Most notably, it didn’t get all its fuel in. That made the company change the mine plan and go after some more available but less rich kimberlite to conserve fuel.

Further bad luck came with the meteoric and unprecedented rise in the Canadian dollar versus the American. Most of the mine’s costs are in Canadian dollars, but diamonds are sold in U.S., so the red ink spread. And the price for the diamonds that Jericho produces - generally small and not in the elite categories - have been stubbornly stagnant. Combined with a process plant that remains well below its intended capacity, these factors have hamstrung Tahera. They have deprived it of crucial revenue early in the mine cycle when it is least able to withstand losses, when it labours under heavy debt repayments and further capital expenditures to try and improve the process plant.

A December news release from Tahera was particularly bleak. The company admitted that it would face "dire" financial difficulties if the rights offering didn't fly. "Failing to find an alternative source of financing, Tahera would be forced to consider various alternatives such as interrupting activities at the Jericho Mine, mine closure, sale of the Company or seek creditor protection under Canadian insolvency legislation," it warned. It also disclosed that the company needs and had not secured $3-million to $5-million in bridge financing.

It’s not that Jericho is done for. The powerful companies with interests in the mine are doing what they can to keep it afloat. Teck Cominco, which owns 16 per cent of Tahera, isn’t putting in any more cash but is still offering advice. Tiffany first deferred scheduled debt repayments until the end of the year and then agreed to convert $12.7-million of the debt owed by Tahera into a 19 per cent stake in the company. Nuna Logistics, with a lucrative contract to run the mine, has agreed to turn $3.15-million of the debt Tahera owes it into equity and to renegotiate the contract to give Tahera better terms. Both of these agreements are contingent on Tahera raising at least $40-million in a new rights offering. And of course both these companies have no choice since Tahera has nothing to pay them with. But they would like to see the company turn the monthly losses around and have not yet abandoned ship. Dundee Precious Metals, which owns eight per cent, has said it is not yet sure whether it will participate in the rights offering.

If the mine is able to operate through another winter-road season and into the summer there is the possibility that Tahera will get into some better kimberlite. "Part of the Central Lobe is really the tenderloin of this kimberlite," Gillin says. "We did a batch test of that and we got something like 1.65 carats per tonne, and a value of $101.50 (U.S.) per carat. We are planning to mine as much of that as we practically can." And the company is planning to spend $3.5-million on plant improvements including the installation of a new cone crusher if it can get through this bottleneck.

There are no villains in this story, but there are victims. There are the minority shareholders, for one. "Tiffany's decision means another gazillion shares issued and minority shareholders marginalized again," stock analyst John Kaiser says. "That's been the history of Tahera: Minority shareholders get diluted and diluted and diluted."
And it’s a tough blow for Nunavut. The Jericho mine has helped turn the economy around. The territory had seen a GDP decline of 0.2 per cent in 2005 before rebounding when Jericho was being built and growing 3.4 per cent in 2006. The hundreds of jobs the mine offers – many to people from small, remote communities where jobs are hard to come by – have helped the wealth trickle down. It will be a lesser blow, but still significant, for the NWT, which serves as the staging ground for the mine.

So Peter Gillin is back pounding the pavement, trying to raise the cash to give his little company one more chance. Maybe, just maybe, if Tahera can get through this winter-road season it can turn that $2-million monthly loss around. Maybe, but the odds are long and getting longer.