No pain, no gain for diamond juniors

Brendan Ryan | Fri, 05 Jun 2009 16:00
[miningmx.com] -- IT has gotten really ugly in the diamond junior space and, ironically, that is happening just as the first signs of improvement in rough diamond demand and prices are appearing.

To provide a flavour of what's going on, consider that Trans Hex has just reported a loss of R797m for the year to end-March after taking a net impairment charge against its assets of R537m.

At TSX and JSE-listed Rockwell Diamonds a feud is under way between three of the directors - chairman David Copeland, CEO John Bristow and his brother Mark - and Swiss-based Pala Investments.

The rest of the board - including Sandile Zungu from empowerment partner African Vanguard Resources - appears to be supporting a bid by Pala Investments to get rid of the three at a special shareholders' meeting on 17 June.

The Rockwell price has collapsed to the point that it has joined what Canadian investors are terming the "95% club", which consists of junior resource companies that have lost 95% of their former value in the past year's market meltdown.

Another member of that club is TSX and JSE-listed BRC Diamondcore (BRC). Applications for the liquidation of two BRC subsidiaries were lodged in the Kimberley High Court in April and will be heard in June.

The state of BRC's finances is such that it has been kept going through cash advances from several of its directors "to meet certain critical near-term creditors".

Yet Trans Hex CEO Llewellyn Delport last week reported that average rough diamond prices received by his group appeared to have bottomed out by February at around $488/carat.

Since then these prices have risen to $672/carat in March and $920/carat in May, which is a healthy rise although still well short of the levels of $1 400/carat received in July last year.

That bears out a research report published recently by RBC Capital Markets' Des Kilalea highlighting the recovery in rough diamond prices.

Kilalea noted the May tender of rough diamonds from London-listed Gem Diamonds - which runs the Letseng mine in Lesotho - had realised around $1 600/carat compared with below $1 100/carat in the previous two tenders.

But Kilalea cautioned the revival in the rough diamond market might be short-lived because the jewellery market, which consumes the end-product - polished diamonds - was not yet showing signs of revival.

He said rough diamond demand and prices had improved because the diamond cutters had to rebuild inventories. These had been depleted through the action taken by major producers De Beers, Alrosa and Rio Tinto to stop production at most of their mines for around two months.

De Beers has now restarted operations at its massive Jwaneng mine in Botswana.

According to Kilalea "daily evidence that global unemployment has not yet peaked does not give us confidence that the retail jewellery market has come through the storm as yet".

The question facing investors being tempted by the current rock-bottom prices of various diamond juniors has to be when to buy-in.

The short answer would appear to be "not yet". Diamonds are the ultimate in luxury goods. Jewellery demand is not likely to get going again until consumer confidence is fully restored, meaning it should lag the overall economic recovery.

But market trends are fickle. Investors are already piling into platinum shares in anticipation of the global recovery, despite continuing poor fundamentals, in particular the collapse in global car sales.

Trans Hex's recent investment track record is appalling but, as Delport points out, what it has going for it right now is a healthy cash balance of R205m at end-March.

Anyone taking an interest in Rockwell would be advised to await the outcome of the 17 June meeting. The issue there is about future management and it will be crucial to see who ends up running the show.