The current man-made global crisis has all the chances to dramatically change the landscape of the global diamond industry. I am not saying that the habits of the world’s richest people in the way they consume luxury goods will change greatly (there will be changes, but evolutionary, not revolutionary - this class will never refuse to buy diamonds, LVMH products or airplanes and yachts), I just want to draw your attention to businesses engaged in diamond mining.
Due to the fact that the current crisis, caused by the pandemic, forces entire countries and regions to get physically isolated grinding the trade turnover in the global diamond pipe to a halt with no one able to predict any prospects for its recovery, it is premature to talk about the timing for this recovery until India, as the main participant in the natural circulation of stones, will not come out of lockdown. Add to this Antwerp’s diamond trading platforms, which practically did not work for three months and now are just beginning to restore trading activity.
All this led to a massive loss of liquidity in the global diamond pipeline and put individual enterprises on the brink of survival. If the flagships of the industry, De Beers and ALROSA, can afford to practically stop trading and spend the resulting free time to optimize production and increase work efficiency (which both declare in their press releases), the companies, which do not belong to the top league, but stay in the first league are facing problems, which require major changes to survive.
It is very interesting to observe the fate of three diamond mining companies, which are very different in history, geography, but similar in terms of their diamond output and sales. These are Petra Diamonds, Dominion Diamond Mines and AGD Diamonds - the three leaders of the “first league” which can significantly change during the recovery from the current crisis. I will not describe their business profiles, as you can easily find them in open sources, but I will draw your attention to something else: Petra and Dominion actually put their businesses up for sale due to discontinued cash flows, while AGD (although this company feels good from the point of view of production and finance) – due to the recent claims from the country’s Federal Antimonopoly Service to a deal closed three years ago - is now hanging between its three potential shareholders, Otkritie, VTB and Lukoil, being a non-core asset for each of them.
Thus, at the end of 2020, the market may see a move to sell diamond mining assets, which have a total diamond production capacity of ~ 15 million carats per year and a diamond sales potential of ~ $ 1.3 billion with operations in diversified geography (Africa, Canada and Russia’s Arkhangelsk Province). Moreover, given the general state of the world diamond market, the offer price may be at a historic low.
All the three companies under consideration have their own sales systems based not on sightholders, but on regular market auctions with simple and transparent regulation, ensuring high mobility and efficiency of sales in today's complex market. All the three companies use state-of-the-art, safe-diamond-recovery mining technologies to ensure the lowest possible damage to large-size, high-value rough, whose share in revenue generation will be growing rapidly. And, finally, all the three companies are practically free of historical obligations, which can be nominally described as "social load" and which have a profoundly serious impact on the balance sheets of De Beers and especially ALROSA. The above circumstances may contribute to the emergence of a bold investor who will be ready to spend quite affordable funds to consolidate these assets with the aim of creating Player No. 3 in the diamond market in 2021.
Where may such an aggressive and bold investor come from? If one will finally emerge, it will most likely come from Dubai, as local diamantaires are ready to give their eye teeth to seize a part of the world's diamond pipeline from India, and the creation of such a player is in their best interests. After a sharp drop in oil prices, the idea of diversifying the economy is very popular in the Middle East, so candidates for creditors to fund such a deal may be found at the level of corporations and at the level of sovereign wealth funds.
The main obstacle to the creation of a new diamond mining holding may be the significant difference between business environments in Canada, Africa and Russia. Nevertheless, this obstacle is not fundamentally insurmountable, and the emergence of a new sufficiently powerful and competitive player would bring a significant share of positive feelings to the market. This would permit, firstly, to balance the positions of India, whose influence on the market, especially after the introduction of a moratorium on the import of rough diamonds into the country, may be negative, and secondly, would impart diamond pricing with the flexibility that is so necessary today.
Igor Kulichik, CFO of ALROSA in 2002-2017, member of the Board of Directors at AGD Diamonds since 2018
