Diamond sector continues to bleed

11:07, 04 February 2009
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Diamond shares have plunged to rock bottom levels...

DIAMOND shares have plunged to rock bottom levels and look like staying there for the foreseeable future as producers chop back on production in response to falling prices, according to Mining MX. RBC Capital Markets analyst Des Kilalea said rough diamond prices could fall another 30% this year.

James Allan, director of mining consulting firm Allan Hochreiter, said the drop in rough diamond prices could be even worse than that during the first six months of 2008, before showing some recovery in the second half. Allan`s reason for predicting a second half recovery is based on expected massive production cuts by De Beers, the world`s largest producer of diamonds.

De Beers has confirmed it intends reducing production in the first half of 2009 but has yet to specify the extent of the cuts. Said Allan: "De Beers will be lucky to sell $3bn worth of diamonds this year. It has yet to announce sales for 2008 but I expect De Beers` sales last year to be around the same as the 2007 level at $5.9bn."

Allan said the expected radical production cuts by De Beers should eventually reduce the high levels of unsold rough diamond stocks currently held by diamond cutting and trading firms. Though high stock levels are one reason diamond prices have dropped, Allan pointed out other key reasons are the high debt levels of diamond traders and cutters and the impact of the global financial crisis. "Banks have cut off credit lines to diamond cutters, which means they don`t have the cash to buy rough diamonds," he said.

So it`s not surprising the share prices of junior producers, such as Rockwell Diamonds, BRC DiamondCore (BRC), Trans Hex and Diamondcorp, have collapsed. While the shares are sitting at or near their 12-month lows anyone buying now has to do so looking at longer-term prospects from 2010 onwards.

Rockwell closed its operations early in December 2008 for an extended shutdown over the Christmas period. CEO John Bristow said last month the suspension would continue for four weeks. He also reported Rockwell was holding more than 6,000 carats of diamonds in stock it didn`t intend selling until rough diamond prices had improved. Rockwell can take such action because it had cash at hand of $6.8m at end-September, giving it some leeway.

BRC is not so fortunate. At end-September 2008, it had cash of $1.2m and receivables of $1.3m but accounts payable were at $6m, plus debt of $6m. BRC`s only source of revenue was the bulk sampling operations at its Northern Cape projects but those have now been shut down, bar a limited "one shift a day" operation at its Silverstreams alluvial mine.

So BRC has no money coming in but wants to continue to fund extensive prospecting operations in the Democratic Republic of Congo (DRC), as well as more limited prospecting in SA. BRC president Mike de Wit is looking to get those funds from joint venture partners. He`s already signed up Rio Tinto to fund work on BRC`s projects in the northern DRC and said recently he was close to finalising a similar deal for BRC`s projects in the southern DRC.

De Wit won`t name BRC`s partner. The two most likely candidates are De Beers and Gem Diamonds, both having exploration programmes alongside BRC in that region. Gem Diamonds is also under financial pressure and has cut back its operations in Australia, Indonesia and the DRC - although, significantly, it left its kimberlite exploration operations in the DRC untouched.

Rio Tinto is also cutting back on developing its new underground mine at its huge Argyle diamond operation in Western Australia.

After BRC, down 97% over the past year, one of the worst performers has been Trans Hex, currently sitting at a 12-month low of 255c, which is 77% down on its 12-month high of 1100c/share. Though Trans Hex has paid dearly for the problems it`s encountered in Angola over the past few years its current weakness is puzzling, given negotiations under way with De Beers to acquire its Namaqualand division. That deal could transform Trans Hex`s future if secured on the right terms.


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