Heavy debt looms over mining shutdown

Leah Meirovich

A number of diamond-mining companies that have halted production during the COVID-19 crisis will find it difficult to resume operations amid their struggles with debt, analysts have predicted.

The warning comes after several miners announced their assets would remain on care and maintenance until rough-diamond prices returned to a level at which their operations are viable to restart.Firestone Diamonds plans to keep its Liqhobong deposit in Lesotho closed for at least a year, it said earlier this month. The company was uncertain when it would be able to sell its diamonds, what price it may get, and whether it could operate sustainably, it noted.

Similarly, Stornoway Diamonds said it would halt operations at its Renard site in Canada until “favorable market conditions return,” while BlueRock Diamonds has suspended operations at the Kareevlei mine in South Africa for the foreseeable future. Petra Diamonds, which has reestablished production at its South African mines, will prolong the shutdown at its Williamson asset in Tanzania indefinitely to “preserve the mine’s cash position” and protect its long-term sustainability, it said.

Miners’ debt levels are the largest factor impacting operations, not diamond prices, Panmure Gordon analyst Kieron Hodgson observed.

It’s the financial issues preventing them from reopening,” he stressed. “If they were not encumbered by the levels of debt that they have, they would be operating now. The simple fact is that they can’t generate the revenue to satisfy operational costs. They are structurally flawed from a balance-sheet perspective that cannot be blamed solely on diamond-market prices.

A nice little mine

Liqhobong, which has had financial issues since its inception, is highly unlikely to come back under Firestone’s ownership, Liberum analyst Ben Davis predicted. 

It has always underperformed…since commissioning, either from the quality of the stones, or the running of the operation. It’s been fairly difficult for them,” he opined. “It will take a very brave person to take it on. Anyone who was buying that asset today would need to believe much higher prices are coming, roughly where the market was in the fourth quarter of 2019, plus another 20%.” 

Berenberg investment bank analyst Richard Hatch agreed that Liqhobong carried too much debt to be viable. “Firestone is an example where Liqhobong is a nice, profitable little mine, but the issue is the debt consumes the equity value,” he said.

The companies may have a difficult time resuming operations even after diamond prices rise to post-coronavirus levels.

You don’t go into a crisis situation with a lot of debt and expect to come out of it unscathed,” Hodgson emphasized. “The debt-holders could restart the businesses, but they would never come back to — or it’s highly unlikely they would come back to — the equity market.”

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Source Rapaport

Photo © Lucara Diamond Corp, Karowe mine.

Miners’ debt levels are the largest factor impacting operations, not diamond prices.