Rough Diamond Drama

Gem Diamonds, one of only two listed primary diamond stocks with a market value of more than USD 100m, along with Harry Winston, has announced a hugely dilutive rights issue, already 91% supported, says Barry Sergeant in the article posted on MineWeb. Issued shares will more than double from 62m by a further 75m, of which 68m have already been "firmly placed". The offer is at a discount of roughly 50% from recent stock prices of GBP 1.50 a share, at GPB 1.00 a share, to raise a total target of USD 107m equivalent. 

Gem Diamonds' London stock price slumped on the news to levels around GBP 1.28 a share. The stock has now fallen 88% from its 2008 highs. Stock pricing patterns of resources stocks around the world show that diamond miners, developers and explorers rank among the most decimated. Even unlisted De Beers, long the world's biggest miner of rough diamonds, is taking the strain. In its 2008 results, released on 20 February 2009, De Beers disclosed loans from shareholders (Anglo American, 45%; the Oppenheimer family, 45%, and the Botswana government, 10%) of USD 248m. 

In its 2008 results, released on the same day, Anglo American disclosed that further shareholder loans of some USD 500m would be made to De Beers during 2009. This would take total net debt at De Beers to around USD 4.5bn, of which USD 3.6bn is interest bearing.

While showing some signs of life in the past few weeks, diamond prices have slumped, forcing a number of diamond mines, from the biggest to the smallest, into care-and-maintenance. Not even the Letšeng mine in Lesotho, 70% held by Gem Diamonds, producer of the highest percentage of big diamonds from any kimberlite pipe in the world, has been able to keep the wolves from the door.

Gem Diamonds requires additional funds to meet the obligations of Kimberley (holding 100% of the Ellendale Mine in Australia) to repay its Société Générale loan of some AUD 30m, and finance the posting of the associated substitute Kimberley environmental bonds of some AUD 6.4m, and to repay outstanding convertible bonds of some USD 16m which become due in October 2009, as well as repaying Kimberley trade creditors.

Already in November 2008, Gem Diamonds announced an operational review focusing on profitability; De Beers announced production cuts to come. In December BHP Billiton announced plans to withdraw from diamond exploration agreements in the Democratic Republic of the Congo; Canada's Diavik (Rio Tinto) said it would delay planned underground mining, and Petra Diamonds reduced exploration in Angola, Botswana, and Sierra Leone. In January 2009, Debswana, a joint venture between the Botswana government and De Beers, and the world's biggest diamond miner, suspended production at its four mines. 

Russia's Alrosa said it would target non-core cost reductions (excluding underground mining) of about USD 150m during 2009; Australia's Argyle (Rio Tinto) halted production for three months for extended maintenance, and slowed underground development. A phalanx of smaller diamond companies announced any number of drastic measures, as seen from, for instance, Namakwa Diamonds; for some names, such as, BRC Diamondcore, listed stock prices have not only fallen 90% from peaks, but are close to 100% off the top. 

In February BHP Billiton said it would reduce production at Canada's Ekati; De Beers cut production at Snap Lake and Victor mines, also in Canada; Diavik deferred capital expenditure and trimmed operating expenditure further, and Debswana confirmed that Damtshaa and Orapa No.2 are closed for 2009. In March, Namdeb (Namibian government and De Beers) considered closing production for three months, and Kinross, a global Tier I gold digger, said it would make "a net investment of USD 150m in exchange for an indirect interest in the Diavik Diamond Mine in Canada's Northwest Territories and a 19.9% shareholding in Harry Winston".