[miningmx.com] – ANGLO Anglo American is facing the possibility its
77%-held listed platinum subsidiariy, Anglo American Platinum (Amplats), may pass
the interim dividend. The evidence so far is that the mining group won’t receive
much support from De Beers either. De Beers is forecast to report a 7% decline on
full-year diamond sales of $6bn if its revenue to date continues at the current clip.
De Beers contributed only 6% to Anglo’s full-year earnings in the 2011 financial
year (although it made a higher contribution to underlying earnings than Amplats:
$443m vs $410m), but having spent $5.1bn buying the shares in De Beers it didn’t
already own, the diamond business warrants investment focus.
According to RBC Capital Markets analyst, Des Kilalea, the positive long-term
fundamental story for diamonds remains intact, but the short-term outlook is less
rosy. Rough diamond prices are set to linger at current levels amid a flat market in
the US; worth 40% of the diamond market. Declines in diamonds demand from
China and obvious distress in the Eurozone fill out the picture.
The view is supported by BMO Research in a recent report. “Ongoing uncertainty
related to the Eurozone debt crisis and the sustainability of economic growth in
other parts of the world may weigh on sentiment in the rough diamond
market,’ it said. “BMO Research expects rough diamond prices to remain at current
levels for the remainder of 2012.’
According to Kilalea, De Beers’ Diamond Trading Company (DTC) even took the
unusual step of allowing sightholders at the latest sight during June to defer up to
50% of purchases. Sightholders are contractually allowed to defer purchases until
the following sight, but De Beers has allowed the rollover to March next year.
The concern from a short-term perspective, however, is that the industry may
struggle to incorporate fresh goods notwithstanding the deferrals, and the fact rough
diamond sales usually improve in the second half of the financial year as
Thanksgiving, Christmas, and the wedding season in India kick in.
The likelihood is that diamond sales for the DTC will be significantly lower year-on-
year. Says Kilalea: “The result may well be that H2 sales for the DTC will remain
under pressure unless market conditions pick up. Our figures for H1 suggest that
total sales . will be around $3bn compared with $3.5bn a year ago.’ Full-year sales
will come in around $6bn compared to $6.5bn a year ago.
Echoing the expectations of BMO Research, James Campbell, CEO of Rockwell
Diamonds, one of the JSE’s few listed operating diamond miners, said rough prices
were likely to remain stable for the remainder of the year. In the polished market,
there has been some pricing pressure related to global financial uncertainty,
Campbell said. Demand for diamonds of two carats and above – representative of
80% of Rockwell’s sales – have been solid.
Diamond equities have predictably struggled, especially from around April. The
South African-focused Petra Diamonds and Gem Diamonds, which produces most of
its production from Lesotho, recorded share price declines of 34% and 38%
respectively. Rockwell is also weaker, especially from June 19 when shares in the
company slipped to 45 Canadian cents/share from 48 cents previously. Only Trans
Hex, edging towards its purchase of De Beers’ Namaqualand assets, has improved –
gaining 4% since April.
Companies that can fund short-term growth from debt or cash – such as Petra and
Gem – would be in a stronger position when the upturn in the diamond market
arrives, as it almost certainly will.
“China and Indian demand should recover and the US remains a source of
approximately 40% of global diamond jewellery sales. When these recover we
expect to see rough prices start climbing again; perhaps not until early 2013 if the
year-end sales season is sufficiently robust to encourage restocking in cutting
centres,’ Kilalea said.
