Brendan Ryan | Thu, 11 Jun 2009. [miningmx.com] -- THE rough diamond market had bottomed out but remained “fragile”, according to a research report released by RBC Capital Markets analyst Des Kilalea.
He said: “While diamond prices overreacted on the downside from 2008’s euphoric levels, it is likely the recent recovery has gone further than justified.
“This uncertainty and still-depressed consumer markets lead us to maintain a cautious investment stance to the listed diamond companies.”
Kilalea said demand for rough diamonds was being driven by a shortage of certain commercial categories. This had been created by De Beers and Russian producer Alrosa “starving the market of new goods”.
He added the fact that De Beers had restarted its Botswana mines while Alrosa was looking to start selling rough diamonds again was causing concern, because retail sales of diamond jewellery in the major US market remained under pressure.
“China offers a more optimistic picture, but this is not enough to pull the industry out of recession.”
De Beers is at present holding its June sight, at which it offers rough gems for sale to the diamond trade. Kilalea said predictions were that the sale could amount to about $450m.
That is high in relation to the previous four sights, at which cumulative sales were estimated at no more than $700m. However, Kilalea pointed out that this level would still be one of the lowest June sights experienced in the past 15 years.
He estimated De Beers’ total sales for January to June would be about $1.1bn, making this the lowest first half sales level since 1985 when the market “was recovering from the last brutal downturn in sales of rough diamonds”.
Kilalea said: “Normally, in the first half the DTC (Diamond Trading Company) sells 55% to 60% of its annual total. This year the second six months could account for around 80% of the total, on the basis that the DTC sells some $2bn in the July-December period.”
Kilalea pointed out De Beers had brought all its mines in Botswana back into operation in mid-April except for Orapa 2 and Damtshaa. The mines had been shut during the first quarter of 2009.
He said it was unlikely De Beers would sell the extra production aggressively into the “fragile” market. The firm would probably stockpile some of it, but he noted there was “growing evidence” that De Beers had raised prices for the June sight.
The diamond cutters were concerned about the impact of higher prices on their margins, but Kilalea pointed out De Beers had its own financial problems to deal with.
The group had $3.5bn of interest-bearing debt and had to refinance a further $1.5bn next year.
“Given this pressure and the prospect that it will have to build some inventory now that its Botswana mines are ramping up, De Beers will be looking to rebuild its own cash flow.”
Kilalea said: “The key to stability in rough prices now will be continued patience from the major producers, since a rapid resumption of rough diamond supplies to the market would lead to prices falling.
“While we do not believe De Beers and Rio Tinto will push unwanted goods onto the market because they will probably boost prices first, the danger is that the rough stockpiles built up in Russia could start being unloaded more quickly despite assurances to the contrary from Alrosa.”
