After enjoying more than two decades of almost uninterrupted price increases amid buoyant demand, the global diamond business is suffering along with many other luxury businesses, says International Herald Tribune. But the diamond industry is different from other luxury businesses since it is based on a commodity. And that commodity is no longer entirely under the control of De Beers, which used to be able to maintain high diamond prices by restricting supply.
Hopes that the growing wealth in India and China would fill the demand gap were dashed once recession spread to Asia, prompting prices for diamonds around the world to drop by roughly 30 percent from an August peak.
De Beers, in which the mining giant Anglo American owns is 45 percent stake, controls about 40 percent of the diamond market. The company said in January that it would reduce the production of rough gems by about 50 percent through April.
A De Beers unit also recently shelved a deal to acquire half of a Russian gem miner because of the financial crisis; another subsidiary just terminated a production agreement at a mine in South Africa.
Other producers are also suffering. Alrosa, the Russian state-run diamond miner, sharply reduced its annual profit forecast in December, citing falling demand.
But the seeds of the diamond industry's troubles were planted even before the economic downturn, as producers accumulated a large inventory and took on excessive debt.
The immediate outlook for the industry might look bleak, but some analysts said that once the production overhang worked itself through the system, prices would recover. Without new discoveries, Even-Zohar expects the world to run out of new diamonds within 20 years.
As demand recovers, any diamond shortage would drive up prices and revive mining. "The long-term fundamentals look good," Even-Zohar said. "But in the meantime countries and populations will suffer."
In the opinion of the miningmx web portal, another authoritative source on problems in the mining industry, diamond shares have plunged to rock bottom levels and look like staying there for the foreseeable future as producers chop back on production in response to falling prices. RBC Capital Markets analyst Des Kilalea said rough diamond prices could fall another 30% this year.
James Allan, director of mining consulting firm Allan Hochreiter, said the drop in rough diamond prices could be even worse than that during the first six months of 2008, before showing some recovery in the second half. Allan's reason for predicting a second half recovery is based on expected massive production cuts by De Beers, the world's largest producer of diamonds.
De Beers has confirmed it intends reducing production in the first half of 2009 but has yet to specify the extent of the cuts. Said Allan: "De Beers will be lucky to sell $3bn worth of diamonds this year. It has yet to announce sales for 2008 but I expect De Beers' sales last year to be around the same as the 2007 level at $5.9bn."
Allan said the expected radical production cuts by De Beers should eventually reduce the high levels of unsold rough diamond stocks currently held by diamond cutting and trading firms. Though high stock levels are one reason diamond prices have dropped, Allan pointed out other key reasons are the high debt levels of diamond traders and cutters and the impact of the global financial crisis. "Banks have cut off credit lines to diamond cutters, which means they don't have the cash to buy rough diamonds," he said.
So it's not surprising the share prices of junior producers, such as Rockwell Diamonds, BRC DiamondCore (BRC), Trans Hex and Diamondcorp, have collapsed. While the shares are sitting at or near their 12-month lows anyone buying now has to do so looking at longer-term prospects from 2010 onwards.
Rockwell closed its operations early in December 2008 for an extended shutdown over the Christmas period. CEO John Bristow said last month the suspension would continue for four weeks. He also reported Rockwell was holding more than 6,000 carats of diamonds in stock it didn't intend selling until rough diamond prices had improved. Rockwell can take such action because it had cash at hand of $6.8m at end-September, giving it some leeway.
BRC is not so fortunate. At end-September 2008, it had cash of $1.2m and receivables of $1.3m but accounts payable were at $6m, plus debt of $6m. BRC's only source of revenue was the bulk sampling operations at its Northern Cape projects but those have now been shut down, bar a limited "one shift a day" operation at its Silverstreams alluvial mine.
So BRC has no money coming in but wants to continue to fund extensive prospecting operations in the Democratic Republic of Congo (DRC), as well as more limited prospecting in SA. BRC president Mike de Wit is looking to get those funds from joint venture partners. He's already signed up Rio Tinto to fund work on BRC's projects in the northern DRC and said recently he was close to finalising a similar deal for BRC's projects in the southern DRC.
De Wit won't name BRC's partner. The two most likely candidates are De Beers and Gem Diamonds, both having exploration programmes alongside BRC in that region. Gem Diamonds is also under financial pressure and has cut back its operations in Australia, Indonesia and the DRC - although, significantly, it left its kimberlite exploration operations in the DRC untouched.
Rio Tinto is also cutting back on developing its new underground mine at its huge Argyle diamond operation in Western Australia.
After BRC, down 97% over the past year, one of the worst performers has been Trans Hex, currently sitting at a 12-month low of 255c, which is 77% down on its 12-month high of 1100c/share. Though Trans Hex has paid dearly for the problems it's encountered in Angola over the past few years its current weakness is puzzling, given negotiations under way with De Beers to acquire its Namaqualand division. That deal could transform Trans Hex's future if secured on the right terms. However, it seems investors are taking a pessimistic view on the outcome.
