The name Tiffany conjures up images of beauty, elegance, and Audrey Hepburn gazing in the window. It does not conjure up miners doing the unglamorous work of digging for stones in the Arctic.

Today, however, Tiffany is not only a diamond seller but also an investor in a diamond mine and owner of a cutting factory. In 1999, it paid $71 million for almost 15% of Aber, the minority partner (40%) in Diavik, the second mine in Canada’s Northwest Territories. The deal calls for Tiffany to purchase $50 million in stones annually from Diavik for 10 years—approximately one-fifth of Aber’s share of production. Tiffany also is building a $4 million polishing factory in the Northwest Territories.

At the time, the deal stunned the market. Although it has become commonplace to hear about miners like De Beers or Alrosa going retail, Tiffany is the world’s first—and so far, only—retailer-turned-miner.

“When investors first heard about this, they were skeptical,” admits Marc Aaron, vice president of investor relations. “They said, ‘What do you mean? How do you know there are diamonds there?’ Now they all say, ‘What a brilliant move by Tiffany!’ “

Paula Kalandiak, a research analyst with Wells Fargo Securities, says the deal struck her as unusual at first. “[Back then] the mine hadn’t opened, and it was a great unknown,” she says. “There was a lot of legal red tape with the local populations, and the road to get to the mine was frozen. But they just started mining, and it seems the quality is at least meeting or exceeding what they predicted.”

Regular supply. Tiffany executives took this unusual route because they were in search of that much-sought-after commodity in the diamond industry—a steady supply.

The company has its pick of $50 million annually of Aber’s “Tiffany-quality” rough. It says something about the company’s size that this amount meets only one-half to one-third of its diamond needs, and it still buys from polished suppliers.

“No jeweler has a bigger appetite for high-quality diamonds than we do,” says Aaron. “There’s a relative scarcity of high-quality diamonds. This made sense.”

Of course, there are monetary savings as well. Kalandiak expects that Tiffany will more than make up the money it’s invested in the cutting factory and Antwerp sorting facility by going to the source. She also thinks Aber will fetch better prices than if it sold the stones to the rough market. “It’s a win-win,” she says.

Aber also has been helped by its association with Tiffany. “The deal was important to us early on when it came to bank financing, because it showed we already had an off-take agreement,” says Bob Gannicott, president and CEO of Aber Diamond Corp.

Tiffany has one other reason for hooking up with Aber: It wants to ensure that its stones are mined in an environmentally sensitive and socially conscious way—assurances that Diavik can provide.

Of course, any mention of “socially conscious” and “diamonds” brings to mind the “conflict diamond” issue, which was just heating up when the deal was announced. Tiffany has been very active in regard to the issue, especially since its stores were the targets of two protests.

But Andy Hart, vice president of Tiffany’s diamond division, says the deal wasn’t done with the conflict-diamond issue in mind. “We just like to ensure the environmental and social responsibility of what we sell,” he says. He notes that the company has no plans to market

the diamonds as specifically Canadian, despite articles touting Canadian diamonds as more politically correct than others. “Even with the conflict diamond issue over the last few years, we haven’t had people ask whether the stones are Canadian,” Aaron says.

Ready and Aber. The first goods delivered under the contract arrived in March and May, ahead of Diavik’s official opening in July, and the rough was sent to Tiffany’s new sorting office in Antwerp. Some stones will be sent out to independently contracted cutters, others returned to the Territories and the Tiffany factory, and some may be sold on the open market.

Could this deal be a harbinger of more changes to come in the diamond supply chain? Tiffany plans to keep moving upstream. In addition to its deal with Diavik, it has bought rough from Ekati, the other Canadian mine, and hopes to do business with Rio Tinto, Aber’s partner in Diavik. Since last year, it has bought gold and silver from the Bingham Canyon mine in Utah, and the jeweler has a gold and silver manufacturing facility in Rhode Island. “The vertical integration will continue for us,” Aaron says.

Gannicott notes that, besides Tiffany, there aren’t many industry names that can pull off this kind of deal, but he doesn’t think it will always be that way.

“[In 1999] Tiffany was the only jewelry retailer that was significant enough to do a deal like this,” he says. “But the future suggests that jewelry retailing will increasingly be in the hands of large corporate entities.”