Diamonds scary outlook

Sales at De Beers's January "sight" estimated to be the smallest in some 25 years, according to RBC Capital Markets.

JOHANNESBURG - 

With the exception of nickel stocks, listed diamond stocks rank as the worst performing subsector in the global mining universe - with no end yet in sight. Sales figures reported and recorded over the past few weeks by mines and companies linked to the diamond trade have dealt yet further blows to investors with interests in the broader diamond market. 

Sales at De Beers's first rough diamond "sight" of 2009, estimated by RBC Capital Markets to be the lowest in some 25 years, "is evidence of the level of demand in cutting centres". RBCCM analyst Des Kilalea states in a report that De Beers has deliberately tailored its offering to its clients (starting with a very small December sight of less than $100m) and is selling a fraction of what it did in the equivalent period in 2008. 

Antwerp diamantaires estimate the De Beers 2009 January "sight" (the name given to the ten sales De Beers carries out each year to some 75 selected customers) at $80m-150m, the lowest first sight in some 25 years according to RBCCM's records (De Beers does not publish these figures). The 2008 January sight, by contrast, was circa $650m. Kilalea says that the 2009 January sight is normally around 8-12% of the year's total and "sets the tone for the busier first six months". 

The size of the January sight is also seen as a reflection of the pace of Christmas sales because, argues Kilalea, it highlights the cutting centres' expectations of how quickly they expect their receivables to be converted into cash. As such, Kilalea argues that the rough diamond market "is facing its worst trading conditions in more than two decades as demand has virtually evaporated in the face of poor jewellery sales, as evidenced by Tiffany's Christmas trading, and lack of liquidity in cutting centres". 

The US accounts for just under 50% of global retail diamond sales. But the general uncertainty about the diamond market is also seen as aggravated by an ongoing investigation of leading diamond companies in Antwerp for alleged transfer pricing and tax fraud which, states Kilalea, "has dented confidence and demand even further". 

RBCCM's view is that "there will be no material improvement in underlying market conditions" until the second half of 2009, "at the earliest". Diamond producers have responded fast by cutting production; "cash conservation is now the priority of all miners, large and small, with even the likes of De Beers and Rio Tinto having to watch their balance sheets because of high debt levels". 

Major retail chain Tiffany & Co reported US sales down 35% over the Christmas period and offers little hope of any recovery in the near future. The prospect of this slowdown continuing, says Kilalea, "will likely ripple back to the diamond miners in the form of lower demand and prices. Our view is that the diamond market will worsen before improving, simply because the chill of global recession is going to become increasingly evident in the form of accelerating job losses. People don't rush out to buy luxury goods in a recession". 

This week luxury goods company Richemont (brands include Cartier, Piaget, Van Cleef & Arpels and Mont Blanc) also reported slow sales over Christmas. Richemont says it is facing its most difficult trading conditions since it was founded 20 years ago and assumes "no significant recovery in the foreseeable future". 

Rough diamond prices have already fallen in excess of 30% since peaking last year, notes Kilalea: "De Beers is believed to be tackling the biggest cut in output with market reports suggesting well in excess of 30% of production will be curtailed". As such, the foundation for a strong recovery in diamond prices is being laid as producers "brutally cut back output. However, until final jewellery demand bottoms and liquidity improves, prices will remain depressed". 

Debt levels in cutting centres remain stubbornly high at around$15bn, in Kilalea's estimation: "This is likely to persist in the near term as slow final jewellery demand will limit the cash flowing back to cutters and polishers as customers are slow to pay off credit. In India this will probably cause some bankruptcies among cutters". 

As such, Kilalea concludes that "investment merit in the diamond sector is hard to find. With prices and production falling, the priority is cash conservation. Companies that are the most likely targets for rationalisation are probably going to be the best performers, but the pace of corporate action is likely to remain low with acquirers more likely to take a ‘wait and see' approach". The vast majority of stock pricing valuations for listed diamond stocks have, for now at least, been trashed. 

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter
Related Links ARTILCES:  BRCDiamondCore keeps alluvial ops closed, but says diamond market to recover  Rio slows Argyle diamond mine underground development and cuts output  Poor diamond market forces Tahera to relinquish Jericho mine  Fading sparkle, fading hopes  Gem Diamonds bloodied  OTHER PAGES:  DIAMONDS AND GEMS AFRICA

Back

 

responses to this article

Name
Subject
Comment