DE Beers would experience a rebound in fortunes for the second half of its financial year with sales reaching $1.6bn, according to analysts at Morgan Stanley.
This was despite cutting prices between 6% and 8% ahead of a sales cycle – its seventh of the year- later this week.
De Beers, which is 85% owned by Anglo American, generated revenue of $56m in the second quarter and earnings before interest, tax, depreciation and amortisation (EBITDA) of only $2m in the first six months of the 2020 financial year.
According to Morgan Stanley analysts, Alain Gabriel, Brian Morgan, Dan Shaw and Sandeep Peety, however, De Beers would register EBITDA for the second half of the year of $112m.
The second half performance, partly prompted by the approaching year-end season which is traditionally a period of heightened sales for De Beers, would also reverse a $500m cash outflow from the first half.
A recovery in De Beers was crucial to Anglo American achieving a forecast $1.3bn year-on-year improvement in Anglo American’s EBITDA in its 2021 financial year, the bank said.
Bloomberg News reported on Monday that rough diamond prices would be cut as much as 10% at the sales meeting this week.
De Beers lowered the price of rough diamonds bigger than 1 carat, a size that would normally yield a polished gem of about 0.3 carat in size, said Bloomberg which cited people familiar with the firm’s pricing plans.
The company held the price of smaller stones as there is very little demand for them and lowering prices by a similar amount would be unlikely to spur demand, they said.
“Very few people have seen their goods and received their prices, but there’s been some price alignment in areas where De Beers thought they could see what the polished benchmark was,” a rough-market source told Rapaport.
“De Beers wants to understand the market first before they start carefully bringing goods back to the market, which is a sensible thing to do.”
The diamond market is in a serious hole from which it could take the best part of two years to emerge, according to Goldman Sachs analyst, Jack O’Brien in a research note earlier this month.
Previously, the narrative was for China to start stimulating demand with engagement and wedding jewellery sales beginning in tier one cities before moving to tier two and three cities. This would be supported by sustained existing demand in the US, which comprises about 49% of the market, and falling supply. New diamond mines are thin on the horizon whilst the large Rio Tinto mine, Argyle, is to close imminently.
According to O’Brien, however, the mid-stream market of cutters and polishers has collapsed in India owing to lack of credit leaving behind significant stockpiles. Alrosa, the large Russian diamond producer, expects to end this year with some 30 million carats of diamonds in inventory, roughly the same as a year’s production.