ANOTHER ‘sight’, another respectable showing for De Beers which said earlier this month diamond sales for its ninth cycle had amounted to $470m compared with $494m at the same time last year.
De Beers holds ten sights a year, meetings between it and its customers – the hand-picked cutters and polishers to whom De Beers supplies its rough stones. The signs this year are that the diamond market has stabilised, albeit off a low base.
“Encouragingly, the ninth sales cycle of 2016 showed continued good demand for De Beers rough diamonds with sales in line with expected seasonal demand patterns,” said Bruce Cleaver, CEO of De Beers, in a company statement. The final sight of the year is planned for December 5 – 9.
There are two ways of looking at the diamond market presently. On a short-term basis, conditions are still delicate. “There are some encouraging signs with rough trade through Antwerp and rough imports into India picking up in September,” said Myles Allsop, an analyst for UBS. Overall, however, the market is fragile as “… meaningful price increases appear unlikely near-term”.
The other perspective is the long-sighted lens where the prospects of the diamond industry have long been trumpeted owing to a significant dearth in new diamond finds.
Diamonds are discovered either near rivers where they have been cast aside through erosion or near the throats of old volcanoes, known as kimberlites. Whilst there are hundreds of volcanoes, there are very few kimberlites containing diamonds of sufficient quality to warrant cutting and polishing.
Analysts think that by around 2018 to 2020, the lack of new discoveries will start to exert a positive influence on diamond prices.
“Our proprietary global model confirms the attractive long-term dearth of new supply of diamonds post 2018,” said Macquarie Bank in a recent report. “There is a real shortage of natural stones post 2020 as exploration success hitherto has been poor,” said another analyst.
This is good news for Anglo American which owns 85% of De Beers, although it should be noted that the UK group’s participation in the diamond business is not entirely reflective of this shareholding as its 15% partner, Debswana, takes a disproportionate share of the stones produced from its mines in line with an agreement between them.
Nonetheless, diamonds are expected to give Anglo American’s restructuring a boost as it seeks to focus on them, along with platinum and copper. It’s also worth noting that its rival BHP Billiton has left the diamond market whilst Rio Tinto’s diamond operations are winding down.
Naturally, there are risks to this high optimism.
One is the extremely fickle nature of the so-called ‘mid-stream’; the diamond cutters and polishers to whom De Beers sells its diamonds. The mid-stream normally operates on wafer-thin margins and add an element of volatility to the sector, especially when credit is hard to secure. This has increasingly been the case and although the mid-stream is currently looking good, conditions can change rapidly.
Secondly, there’s the consumer. The US has long been the largest market for diamond jewellery – accounting for about 40% to 50% of consumption – an ‘eggs-in-one-basket’ phenomena that worries analysts. The US market has recorded 11 straight quarters of growth in diamond jewellery sales which has helped to soften shrinkage elsewhere, but world diamond jewellery sales still fell 2% to $79bn last year.
It’s for this reason that De Beers has over the last decade pushed marketing campaigns for bridal diamond jewellery hard in China. As the Chinese economy converts from investment to consumer and services driven, diamond sales should flourish, but this hasn’t been the case lately.
“In China, jewellers continue to report dismal results,” said Macquarie, although it added there were “nascent signs of recovery” with a recent increase in total diamond imports. “Overall, our luxury goods research team expects modest market growth of 4% over the medium term from 8% over 2005 to 2015,” it said.
From an investor perspective, Anglo remains the leader in diamond mining. But Macquarie Bank thinks investors should also consider the share picking opportunities of Firestone Diamonds, Petra Diamonds and by extension of the luxury goods theme, Gemfields in which the JSE’s Pallinghurst Resources has a 47.5% stake. These are companies that have emerged and will fill the void left by the likes of BHP Billiton.
Firestone is ramping up production from its Liqhobong mine in Lesotho to one million carats a year with potential for a 62% increase in net asset value, said Macquarie.
Gemfields, meanwhile, is nearly doubling production of ruby and emerald mines over the next three years while Petra Diamonds – after nearly ten years of investment, could lift free cash flow yield 20% in its 2018 and 2019 financial years.