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Rough Diamonds Gleam - Brendan Ryan

[ozramesh]

Rough diamonds gleam

Brendan Ryan | Fri, 18 Dec 2009 11:53
[miningmx.com] -- THE rough diamond market has ended 2009 in better shape than expected. However, everything now depends on Christmas jewellery sales in the major markets, in particular the United States.

RBC Capital Markets (RBC) analyst Des Kilalea said in a report he expected De Beers’ 2009 rough diamond sales to total $3.2bn - 46% down on 2008 levels, but still above the $3bn level he predicted just three months ago.

He said: “While the rough market has shown surprising resilience, the public markets have also turned friendlier to diamond miners.”

Kilalea cited a string of recent fund-raisings including $120m by Petra Diamonds, $110m by Canadian junior Lucara and C$9m by Mountain Province, another Canadian junior.

He noted Rockwell Diamonds intended raising up to C$12.5m through a private placing early in 2010. It was also likely that African Diamonds would come to the market to raise about £5m to increase its stake the AK6 mine in Botswana.

On top of this, De Beers is about to receive an equity injection of about $1bn from its shareholders.

“All in all, it has been one of the busiest capital-raising periods for the diamond sector in some years,” Kilalea said.

He commented the continued strength in rough diamond prices was surprising, because the last quarter of the year was usually quieter.

He pointed out the December tender by Gem Diamonds realised average prices of $2,091/carat. This was the highest sale price achieved this year, and compared with a low of $900/carat in January and an average of $2,111/carat for 2008.

Kilalea said: “Both bankers and diamantaires have expressed some concern about the level of rough prices, which are now not that far off the peaks set in September/October 2008.

“At a recent diamond symposium in Antwerp, some of the presenters cautioned about price levels and suggested that speculation may have driven prices too far in the near term.”

He added the supply of rough diamonds would certainly recover strongly in 2010 because De Beers had restarted all its major mines. There would also be more Russian supplies, while Canadian producer Diavik’s planned winter shutdown had been cancelled.

“This additional supply could keep a lid on price increases in quarter one and quarter two. The longer-term outlook remains bright for rough diamond prices, however.

“A recovery in global growth should stimulate demand for diamond jewellery, particularly in the depressed US market.” He added it was improbable that output would revert to the roughly 160 million carats a year reached in 2007.

“A figure of 120 million to 140 million carats is more likely as older mines need to move underground (Diavik), or require major investment in pushing back pit walls to maintain production (Jwaneng and Venetia).”

Kilalea said Diavik’s production would drop initially from 2 million tonnes (mt) per year of ore mined to 1.5mt/year as the mine went underground.

He said: “Small mines, such as De Beers’ Namaqualand alluvial operations (about 330,000carats/year) are also being closed as resources are exhausted and costs become uneconomic.”

Kilalea also reported that Namakwa Diamonds had bought the alluvial diamond projects owned by Gem Diamonds in the Democratic Republic of Congo (DRC) for $5m. This would enable Namakwa to boost its DRC production in 2010 from 90,000 carats to 160,000 carats.

RBC has lifted its price target for Petra Diamonds to 115p a share from 105p previously. This was because of close examination of the company’s production and grade forecasts at its Cullinan and Koffiefontein mines in South Africa, carried out as part of the $120m fund-raising.

Kilalea said: “When viewed against De Beers’ historical budgets and actual production records, in our view Petra management does not appear to have created overly ambitious targets.

“In addition, Petra management has shown at Koffiefontein that it is able to deliver production and large stones at reducing costs.

“With its corporate structure now simpler and capital available to complete the expansion projects at Cullinan and Williamson, as well as the prospect of higher diamond prices over the next few years, we believe Petra is in a position to build its production to nearly 3 million carats a year by 2016.

“This gives it the best growth profile of any listed diamond mining company.”