/ FT.com Home UK / UK - Fire and ice: how gas and diamonds are driving open Canada's furthest frontierSkip to main content, accesskey 's' Homepage, accesskey '1' Financial Times FT.comHOME UK UKSubscription pageCloseFire and ice: how gas and diamonds are driving open Canada's furthest frontier By Bernard Simon in Toronto Published: August 23 2006 03:00 | Last updated: August 23 2006 03:00 Yellowknife's Summer Solstice arts and music festival found an incongruous sponsor this year. As the Canadian Arctic's main service and transport hub, Yellowknife (population 20,000) is a gritty frontier town of truckers, administrators and southerners seeking a fresh start. It is better known for raucous bars frequented by off-duty miners than for smart shopping malls. So what would possess Tiffany, the chic New York-based jeweller, to add its lustre to a cultural event there? The answer is diamonds. Over the past decade, northern Canada has gone from being a non-player in the global diamond market to the third-biggest producer, behind Russia and Botswana. Tiffany has participated in the diamond rush as a shareholder, lender and customer. The boom is helping to generate a wave of commercial, political and military interest in the Canadian Arctic not seen since 19th-century British explorers sought a short route to Asia through the treacherous waterways and islands of the North-West Passage. For most Canadians, the Arctic is still little more than a vast, thinly populated expanse of tundra. The Northwest Territories, Nunavut and Yukon, the three federally administered regions that make up the Canadian Arctic, cover an area roughly the size of western Europe. They have a combined population of about 100,000, with Inuit and other aboriginal people making up more than half the total. But southerners are increasingly taking note of the far north. This month the Canadian Broadcasting Corporation produced its main evening news show for a week from a coastguard ice-breaker patrolling the North-West Passage. "The economics and the strategic value of northern resource development are growing ever more attractive and critical to our nation," Stephen Harper, Canada's prime minister, said last week during a tour of the region. That view has been lent substance by global warming, which shows signs of transforming the Arctic into a bustling economy and trade corridor. The prospect of ice-free waterways for much of the year has drawn attention to the region's potential as a fishing ground and a destination for tourists. Ice-free access would also improve the feasibility of mining known deposits of such metals as copper and iron ore. But the Canadians are increasingly nervous that others - specifically the US, European nations and Russia - may push them aside in a rush to exploit the Arctic's resources. Foreign submarines are suspected of moving regularly through waters claimed by Ottawa but without its permission. Canada's small navy and coast guard are presently powerless to stop or often even detect them. "It is no exaggeration to say that the need to assert our sovereignty and take action to protect our territorial integrity in the Arctic has never been more urgent," Mr Harper added last week, referring to an earlier promise to ensure that "Canada's jurisdiction over the islands, waterways and resources in the High Arctic is respected by all nations". The US and European Union have in the past taken issue with Canada's claim to a 370km (200 mile) "exclusive economic zone" in Arctic waters. In a small but symbolic dispute, Denmark and Canada traded barbs last year over ownership of a tiny island off the coast of Greenland. Mr Harper last week outlined plans to beef up aerial and undersea surveillance and said that Canada was "exploring options" for a deep-water naval base. Canadian troops have mounted two military exercises in the Arctic over the past
month, while extra troops and aircraft are being assigned permanently to the modest military base in Yellowknife. The push to assert Canada's political and military presence coincides with a fast-growing appreciation of the region's economic possibilities. "The Canadian north is vast almost beyond imagination; the potential is huge," says Peter Gillin, chief executive of Tahera Diamond Corporation, a Toronto-based mining company. Mr Gillin was speaking last Thursday aboard a Boeing flying almost 100 investment bankers, diamond experts and other Tahera guests to the official opening of the company's Jericho mine in Nunavut, just south of the Arctic circle. Mr Harper also flew in to cut the ceremonial ribbon. Jericho is the third diamond mine to open in northern Canada. The other two, controlled by BHP Billiton and Rio Tinto, began production in 1998 and 2003 respectively. A fourth mine, owned by De Beers, is scheduled to start production in late 2007 and there are hopes of a fifth within a decade. Diamonds now make up more than half the Northwest Territories' economic output. Royal Bank of Canada estimated in a recent study that the four northern mines combined will contribute C$2.1bn (1bn, US$1.9bn, 1.5bn) a year to Canadian exports. Their total lifetime contribution to gross domestic product - as measured by exports plus capital spending - is projected at C$46bn. The Royal Bank study concluded that "the potential employment, training and business opportunities associated with the diamond industry are enormous". The three mines employ about 1,600 people, at wages far above the average in northern communities. Tiffany has set up a cutting and polishing factory in Yellowknife, employing 44 staff, including experts several from Mauritius. "We know a tremendous quality of stones is coming out of the north," says Andrea Hopson, head of Tiffany's Canadian unit. "It makes sense to make use of as many of these opportunities as possible". Tiffany helped finance the Jericho mine with a C$35m line of credit in exchange for a first option on its gemstones. The retailer was also a minority shareholder for a time in the Diavik mine, now controlled by Rio Tinto. Tiffany sold its equity stake but still buys stones from the mine. Yet significant obstacles remain to be overcome if the opportunities of the far north are to be fully exploited. In the Mackenzie river delta of the western Arctic, for example, the development of natural gas fields and the construction of a pipeline to carry the gas to the south have been delayed for years by tortuous negotiations between the federal government, aboriginal groups and oil companies. The Northwest Territories government estimates that pipeline construction and the development of the gas fields and would cost C$7.7bn over five years, creating almost 14,500 local jobs. Hopes have risen recently that remaining disagreements will soon be resolved, allowing construction to start next year. The issues have included aboriginal land claims, a raft of environmental concerns and revenue sharing. "It's a very sensitive place, both environmentally and culturally," Mr Gillin says. In Nunavut, however, Inuit leaders have warmed to investments from the south, thanks partly to a 1993 land claims settlement with the federal government that requires outside investors to draw up "impact benefit agreements" with local communities. The diamond mines use Inuit-controlled logistics, catering and road-clearing contractors among others. Tahera has pledged that Inuit will make up at least 60 per cent of production workers at Jericho within five years. "The decisions used to be made in Ottawa," says James Eetalook, vice-president of Nunavut Tunngavik, an Inuit agency set up to implement the 1993 agreement. "It isn't like that any more." Investors are encouraged by the new regime. As Gordon Peeling, president of the Mining Association of Canada, puts it: "You've established who the owner of the land resource is, and you have an owner who recognises that mining is one of the
few opportunities they have to be in control of their own economicdestiny". Margot Naudie, a natural-resources portfolio manager at TD Asset Management in Toronto, adds that "there is a premium on high-quality resource assets in politically stable regions and Nunavut fits that". Even once cultural and environmental objections have been overcome, the harsh climate and inhospitable terrain of the far north make transport infrastructure a big headache. Nunavut, covering an area the size of France, has less than 30km of paved roads. The only way of reaching many mines and communities by land is on ice roads built across frozen lakes during the winter months. Authorities in the Northwest Territories build about 1,450km of winter roads each year. While a warming climate may open up sea access to the north in coming decades, it could impose extra short-term costs on new projects. Anne Snider, chief of environmental policies in the federal department of Indian and northern affairs, says that the authorities now require companies to include the impact of higher-than-normal temperatures in their project assessments. The potential disruption from climate change was illustrated this year when unusually warm weather melted many of the busiest routes, forcing them to close early and leaving many mines, exploration sites and remote communities short of bulk supplies. De Beers was unable to ship a quarter of its cargo, including housing for 200 construction workers at its Snap Lake diamond project in the Northwest Territories. "If we have two years of seriously foreshortened winter roads, these issues would become much more serious," Mr Gillin says. As an alternative to ice roads, a project has been mooted to build a port at Bathurst Inlet on the Arctic Ocean, linked to mining areas by a 210km all-weather road. But government funding has yet to be approved. Wolfden Resources, a Toronto gold exploration company, has proposed linking its sites by road to a new port on the nearby Coronation Gulf. A slump in metal and energy prices could pose an even bigger threat to the current boom. Sliding prices put several gold mines in the Northwest Territories out of business in the 1990s. But for the time being, none of these risks seems likely to dampen interest in the Arctic. Many Canadians ridiculed Mr Harper last week for criss-crossing the north rather than attending the biennial international HIV/Aids conference his country was hosting in Toronto. But viewed from the north, at least among those attending the Jericho mine opening, the perspective was different. "If he went to the conference, it would do nothing to speed up a cure for Aids," said Jonathan Goodman, chief executive of Dundee Precious Metals, a Toronto mining finance group that is Tahera's biggest shareholder. But, Mr Goodman added, "by coming here and announcing that the north is open for development, [the prime minister] will bring investment dollars to this part of the world". All going well, those dollars look likely to benefit big business and Inuit communities alike. Copyright The Financial Times Limited 2006 "FT" and "Financial Times" are trademarks of the Financial Times. Privacy policy | Terms Copyright The Financial Times Ltd 2006.