According to Antwerp Facets, the sale by De Beers of some of its smaller mines has provided an opportunity for junior mining firms, such as Petra Diamonds to establish a growing foothold in the market.
Among the more striking developments in recent years in the upstream end of the diamond pipeline has been the fractionalisation of rough diamond supply. Where De Beers had a firm hold on global rough supply a decade or so ago, with about 80 percent of the market, that figure has dropped by more than half to less than 40 percent.
That drop in market share is largely due to De Beers' decision to sell off diamond mines that no longer fit in with its business strategy. And that change has enabled smaller miners to acquire those operations, run them successfully, and discover some extraordinary diamonds while simultaneously becoming increasingly important players in the worldwide diamond supply trade.
One of the largest beneficiaries of De Beers' decision to sell off mines has been Petra Diamonds, with six mines in South Africa and one in Tanzania. The latest acquisition was the Finsch mine in South Africa which it bought from De Beers for around $210 million earlier this year. The operation joins the Cullinan, Koffiefontein, and Kimberley underground mines in South Africa which Petra acquired from De Beers, along with its 75-percent interest in the Williamson mine in Tanzania.
With eight operating mines in Africa, the miner has aggressive plans for production, seeing annual production of four million carats by 2014, rising to five million carats by the end of 2019. It says it has a resource base of 309 million carats.
Petra’s rapid development is due to its ability to identify mines that it s able to develop in order to provide added value. "We have completed a number of acquisitions, buying some of the more ‘marginal’ assets in De Beers’ portfolio," it says. "Petra’s approach is to optimise recoveries, simplify the process route and restructure the cost base to maximise margins at such assets, and this strategy is effective in returning positive cash flows to the group." The miner intends to continue raising production, through further possible acquisitions and the continued development of existing mine portfolio where there is the possibility of expansion.
Since Petra Diamonds was created from the acquisition of diamond mines that former owners considered surplus to requirements or which no longer fitted in with their business strategies, how does the company decide from a technical point of view whether to buy a particular mine. Chief Executive Officer Johan Dippenaar says that "due to the relatively small size of the diamond mining industry, there are only a limited number of acquisition opportunities. Petra’s strategy has been to acquire existing kimberlite operations which have long histories of production and therefore the geology and economics of each mine are well understood. This knowledge of the deposits allows management to eliminate much of the risk associated with developing a diamond mine. In addition the mines all have significant resources, and therefore mining lives, left."
That, however, would appear to raise the question as to why the mines that it buys fit in with its business strategy but not with that of De Beers. Although Dippenaar says that only De Beers can answer the question as to why it sold the Finsch mine, for example, it was clearly "a comparatively small project" compared to the huge Venetia mine in South Africa, or Jwaneng in Botswana. "For Petra, Finsch is a core asset and a further important diamond producer which will help to balance and diversify our portfolio by adding an additional 1 million plus carat per annum mine to the group.
"We are not using a different mining technology to De Beers. The difference is that these assets are core to Petra’s portfolio and are treated as such by our management team. Our focus is always to drive efficiencies at these operations and also to ensure that the processing plants are set up to recover the full spectrum of diamonds, including larger and high-value stones. Being a smaller company with lower overhead structures also helps Petra to maximise returns from these acquisitions," Dippenaar explained.
As for further acquisitions, he says there are few opportunities in the diamond mining sphere, but the firm "will always look at new acquisitions". However, "the key is that we already have a very strong organic growth path without the need to do any further deals."
Although the firm has been built on acquisitions, Dippenaar stresses that the firm is also exploring for diamonds, with a highly-focused exploration arm in Botswana, which it sees as "one of the best locations in the world for diamond exploration due to its stable political regime, its attractive cost base and, of course, its geological setting."
The company sells all of its South African mine production in Johannesburg in line with South African laws. "When production starts again from the Williamson mine in Tanzania, we will tender those goods in Antwerp, where we also have a marketing office. Antwerp remains one of the world’s most important diamond centres and works well as a sales point for our Williamson goods."
Dippenaar said the company is comfortable with selling goods at tenders despite the criticism that has been widely expressed in the diamond industry about the sales method being one of the reasons for the ongoing rise in rough prices and for preventing diamond firms from being able to rely on receiving a steady supply of goods. "We believe that the tender system is right for Petra, as an open market system is the best mechanism for price discovery for our goods. The tenders are run in a transparent manner and many of the world`s major manufacturers, dealers and jewellers are accommodated at the Petra sales. The sales are highly competitive and very well attended," he said.
As for the state of the rough diamond market, Dippenaar said Petra has a positive outlook. "Rough diamond prices recovered much quicker than anticipated after the falls in the midst of the global economic downturn, mainly due to the responsible behaviour of the majors who restricted supply to the market. Rough prices continued to strengthen towards the end of 2010 due to the festive buying season and the Christmas sales reported by the major diamond retailers were generally better than expected.
"It is obvious that demand for rough is now underpinned by retail demand, as well as the restocking of cutting centre and manufacturing inventories. The liquidity within the diamond pipeline improved dramatically throughout 2010 and bank debt in the industry appears to have now been reduced to manageable levels. Polished diamonds are also selling well and polished traders are anticipating healthy activity going forward in 2011.
"We think we will continue to see strong prices in 2011, but they won’t accelerate at the pace that they did in 2010, when rough prices were recovering from the lows seen in 2008/2009. The fundamentals of the rough diamond market remain robust and the trend of rising prices will be enhanced should 2011 mark a return to global inflation and growth, given that diamonds are characterised as a late-cycle commodity play," he said.
Despite the still somewhat fragile economic recovery in the United States, Dippenaar said a steady improvement in the U.S. market "coupled with exciting demand growth from emerging markets such as China and India" mean that the longer-term fundamentals of the market are robust.
"China and India clearly helped to take up the slack when U.S. demand fell during the global economic downturn. These markets have grown quicker than anyone expected and clearly they will be the key drivers of the diamond market going forward. We foresee a slow but steady recovery in the U.S. but it’s difficult to put an exact timing on when and how exactly things will get better."
Regarding the important question of whether the diamond-buying habits of American consumers have changed following the financial crisis and economic slowdown, Dippenaar said the American market "is not a large buyer of rough diamonds, so Petra’s dealing with U.S. buyers tends to be quite specialist, with the majority of our American clients looking to buy single large stones and fancy coloured goods rather than larger quantities of commercial goods. Therefore we are not qualified to answer with regards to the specific behaviour patterns of the American consumer. However, it is clear that this important market has stabilised and is expected to record further modest growth this year," he said.
