Flat diamond prices expected

Rough and Polished

Assurances by diamond miners at last week’s Victoria Falls conference that they would seek to persuade the US and EU to lift sanctions against stones from Marange may not generate the floods of dollars that Zimbabwe expects, writes Charlotte Mathews in an article published on 22 November by the www.fm.co.za portal.


Civil society organisations, which have slammed human rights abuses at the Marange diamond fields and the diversion of diamond revenue to enrich the political elite, exert considerable influence on the US and EU governments. Besides, even if Marange diamonds could be sold freely, global diamond prices are weak – and will stay weak, if Marange stones flood an already depressed market. Marange may hold 25% of the world’s diamonds, but they are not of first-rate quality.

Diamond miners across the world have had to contend with volatile prices this year, since weak consumer demand rippled back through the diamond retail and manufacturing pipeline.

One of the few diamond miners maintaining momentum is London-listed Petra Diamonds, which has expanded through acquisitions and careful management of its projects.

Petra’s shares gained 1,7% to 101p after it released quarterly results last week, and though they are below last April’s 183p peak, they are still four times the April 2009 low of 25p.

Petra grew production 70% to 654690ct in the September quarter compared with the same quarter last year, mainly because of the inclusion of the Finsch mine (in the Northern Cape), which it purchased last year.

Gross revenue almost trebled to US$51,1m from $17,7m, but this reflected only one tender sale of diamonds, because of industry holidays. A second tender was held in early October. According to Petra Diamonds CEO Johan Dippenaar, prices were slightly ahead of expectations at the second tender.

Petra has managed to renegotiate and increase its debt facilities, which provide $244m in funds to further its expansion plans. The two biggest expansion projects, at Finsch and Cullinan (near Pretoria), will replace current diluted underground areas with new sublevel caves.

Fellow London-listed diamond miner Gem Diamonds also reported last week but presented a different picture. Gem’s shares, which peaked at £11.77 in mid-2008, were at 157p last week. They shed about 7p after quarterly results were released.

Gem owns the Letseng diamond mine in Lesotho, which is famous for the exceptional quality of its diamonds, and Ellendale in Australia. It is building a new mine, Ghaghoo, in Botswana, where work had to be suspended in June when the tunnel collapsed, killing two workers.

Letseng recovered 27054ct in the September quarter, 9% fewer than a year ago, as a severe winter hit Lesotho. Ellendale produced 28% more, at 41680ct. But the prices realised for Letseng production are far better.

In the four months from July 1 to November 11, Gem realised an average $1673/ct from Letseng (down from $2426/ct a year ago) and $620/ct from Ellendale (down from $1015/ct).

Gem CEO Clifford Elphick also reported that rough diamond prices improved at the October tender sales, with Letseng realising $1922/ct.

He warned that Ellendale may be written down at the end of the year as it is reaching the end of its life. Gem has also withdrawn from the Chiri project in Angola, which will require a write-off of the $14m spent so far, because of tight economic conditions. At Ghaghoo, progress on tunnelling has resumed but is slow because unexpectedly hard material has been encountered.

Gem held $94m in cash at the end of the year and has raised another $20m debt facility from Nedbank.

Dippenaar says diamond prices are expected to be flat (which will reflect in financial results) in the six months to December. The biggest producers have sold fewer diamonds than last year as a result of normal production issues, and this tightness of supply will underpin prices. But US demand for second- and third-quality stones is relatively strong and Chinese demand for stones in the $200-$2000 price range is also growing.

Though Elphick also expects better US holiday season sales, he says the market will be influenced by supply from other major diamond producers and the aftermath of storm Sandy.

Of the two, Petra Diamonds remains the more attractive investment.

Source Rough & Polished