Rough diamonds show resilience

[] — THE rough diamond market is holding up well and conditions may be even stronger than believed, according to RBC Capital Markets analyst Des Kilalea.

His assessment is based on continued reports of strong demand from diamond producers, and the way the market is coping with the burgeoning supply from the Marange diamond field in Zimabwe.

Kilalea said the impact of Marange on rough supply is a major unknown factor.

He said: “Increasingly, it appears as if production from the alluvial deposits will be much higher than many had forecast, with estimates ranging between $500m and $1bn on an annual basis.

“How long the weathered portion of the conglomerate deposit lasts is also unclear, but what does appear more certain is that the Marange goods are not having a dampening impact on the market right now despite the growing supply from the mines.

“Unconfirmed reports suggest the monthly production could be running at an annualised plus 20 million carats per year, with average values of $20 to $35 per carat.

“While the average diamond prices which are mentioned are low, there are large stones in the production with an average of 2 carats to 3 carats, and reports of some parcels containing rough of plus 10 carat stones.

“If these diamonds are indeed finding their way into traditional cutting centres – how Kimberley Process (KP) certificates are obtained is not known – it raises the question as to whether conditions in the rough market might be stronger than thought.

“If the market has been able to absorb these diamonds, there is a suggestion that the middle to low end of the market demand is firmer than anticipated.

“Longer-term the impact of the Marange deposit will be determined by the longevity of the mining, and the KP decision on the legitimacy of the gems from a certification point of view.’

Kilalea said the life of Marange would be determined by the cost of extraction once the “easy-to-recover’ deposits were exhausted and the conglomerate had to be drilled and blasted.

Regarding KP certificates, he said: “If the KP refuses its sanction, it seems clear that the diamonds will find their way into the market as is happening at present with several diamantaires reporting supplies in cutting centres, mainly India.’

The KP monitor for Zimbabwe is South African businessman Abbey Chikane – a former CEO of the South African State Diamond Trader – who visited Marange early in March.

According to an April 7 report in authoritative diamond industry newsletter Rapaport News, Chikane is scheduled to visit Zimbabwe again in the coming weeks to assess whether individual shipments of Marange rough diamonds have met minimum KP requirements.

According to Rapaport News, Chikane’s report after his March visit cited data from the Zimbabwe Ministry of Mines and Mining Development that 4.4 million carats had been produced from Marange between October 2006 and February 2010. Of this, 1.634 million had been sold with the rest held in stock.

Kilalea said: “The strength in rough diamonds will see significant gains in revenue and cash flow for all diamond miners in 2010.

“This will continue, we believe, to attract investor interest to a sector characterised by a scarcity of investment opportunities. We continue to favour companies which are in production or near to production.

“The list is very small and includes Petra Diamonds, Harry Winston, Gem Diamonds and a few, near-to-production developers in Canada and southern Africa.’

A number of diamond juniors have taken advantage of the improved market conditions to raise funds to continue various projects.

These include African Diamonds, which has just raised ₤9.6m to increase its stake in the AK6 project in Botswana to 40%, and DiamondCorp, which has raised ₤7.1m to pay off debt and continue with the underground development of the Lace kimberlite mine in the Free State.

DiamondCorp will need to raise a further ₤3.5m in about a year’s time to ramp up production at Lace to anticipated full output.

Interviewed in Johannesburg this week, DiamondCorp CEO Paul Loudon told Miningmx: “We do not foresee raising the next amount being anywhere near as difficult as what we have just been through.

“The investors who have backed us have done so knowing that we will need more money, and they will support us again if we deliver the forecast results when we access the Lace orebody.’

Loudon attributed improvements in the rough diamond market to the return of “real demand’ in the business and the success of De Beers in refinancing its operations.

He said: “Cut and polished diamonds are moving for the first time. Stock levels are dropping.

“I believe De Beers’ success in raising $1bn from its shareholders through a rights issue was crucial, because it takes the pressure off them to raise production.’

Kilalea said: “The message in the restraint from the market leaders is that while China and India remain strong buyers of polished diamonds for use in jewellery, there is residual concern about the United States which is still the largest single market.’