Diamond sales truly collapse

Sales by De Beers for January and February were at about $210m, compared to some $1.3bn for the year-ago period, according to RBCCM.

JOHANNESBURG - 

The full impact of the slowdown in rough diamond demand has not yet played out for De Beers or other diamond producers, according to Des Kilalea and Patrick Morton, analysts at RBC Capital Markets. 

Market conditions have led to De Beers "materially reducing its sales", the analysts say; "in the second sight of 2009 (De Beers sells to a select client group through 10 "sights" per year) De Beers sold, we believe, some $100-$120m of rough diamonds and diamantaires say prices were down between 7% and 15%, on average. This means that De Beers' sales for the first two months of 2009 appear to have totaled about $200m-$220m which compares with in excess of $1.3bn in January-February 2008". 

The analysts argue that while some improvement in sales is possible once credit conditions ease, and inventories of rough and polished diamonds are reduced throughout the diamond pipeline, "in our view it is still highly likely that De Beers will sell no more than $3.5bn in 2009 after $5.9bn in 2008. Even this may be too high a number". 

Diamond miners of all sizes are in deep depression. Debswana (a 50:50 joint venture between the Botswana government and De Beers), the world's biggest diamond miner, has suspended all production until May, with two plants likely to remain closed for the whole year. In 2008 Debswana accounted for 32.3m carats of De Beers' total 48.1m carats production; world production is about 160m carats a year. 

In its 2008 results, released on 20 February 2009, De Beers disclosed loans from shareholders (Anglo American, 45%; the Oppenheimer family, 45%, and the Botswana government, 10%) of $248m. In its 2008 results, released on the same day, Anglo American disclosed that further shareholder loans of some $500m would be made to De Beers during 2009. This would take total net debt at De Beers to around $4.5bn, of which $3.6bn is interest bearing. 

The RBCCM analysts also state that debt levels in cutting centres, where rough diamonds are processed, appear to have reduced slightly to around $14bn, "though the health of some of the larger companies remains at risk given debt levels. Market speculation suggests five or six large companies could account for $2.5bn of total industry debt. This is worrying". 

The RBCCM analysts note that production by De Beers over the period 1978-2009 (including an estimate by RBCCM for 2009) shows that even during the last major recession in the diamond industry (1980-83), "production was not as severely curtailed as we expect in 2009". While global diamond production fell from 47m carats to 45m carats in 1981, De Beers's output was not as heavily impacted. 

Lesotho's Letšeng mine (majority owned today by Gem Diamonds) was closed in

1982, and production at some of the South African mines was curtailed; Botswana production was maintained. In the result, De Beers stockpiled diamonds at its own mines and, through its offtake contracts with Russia and the Argyle mine in Australia (then Ashton Mining), forced these producers to hold diamonds back from the market. 

The result for De Beers was a building in rough diamond inventory from $496m in 1979 to $1.8bn in 1983. To fund this, De Beers started building its own debt, to a peak of $5bn by the late 1990s. 

The analysts conclude that while the long-term forecast of a shortage of gem-quality rough diamonds appears intact, "we believe the next year or two will remain challenging. It is not just prices that are testing diamond miners, but for larger producers it is also the difficulty of moving rough diamonds in volume. 

"Industry operators are feeling the pinch of lower sales volumes and lower prices, with most companies now in ‘cash preservation' mode. We expect several juniors to look for ways to raise funds, though capital market conditions will be made more difficult by the need for some larger players, such as Harry Winston Diamond Corporation, to raise new capital".

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why is everyone so surprised...??? It always mystifies me as to why the "so called experts" are surprised when the inevitable happens. For decades, BeBeers greedily contolled the diamond market, convincing all of their rarity and value., for were they not rare they would have no . .more value at all. Then about a decade ago, I was contracting in the NWT for new diamond miners and being in the industry, I was hearing about all the finds. It would seem that diamonds were being found everywhere from Australia to almost every province in Canada, as well as South Americaand Russia. Simple economics here...DeBeers could no longer control the market and the rarity of diamonds was no longer a viable story, rendering them virtually worthless except for the "vanity factor". As I suggested to friends and acquaintances then, wile all the lemmings were running to invest in new diamond finds, put your money in top grade gravel projects instead as it is actually useful and will be far more valuable in the next couple of decades. You haven't even seen the tip of the iceberg yet.....in another 4-6 years the only market for diamonds will be as needles if they reintroduce record players. . .less by N.Quarmby on March 09 2009, 00:20 Find this comment inappropriate? Report it

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