Through Q1 2015 Diamond Industry More Stable But Pressures Remain

Image: Underground at the Finsch mine in South Africa. Source: Petra Diamonds Ltd

April 17, 2015By Paul Zimniskypaul@paulzimnisky.com

Rough diamond prices were relatively unchanged in Q1 2015 as credit availability for mid-stream participants remained constrained, however yesterday Petra Diamonds (LSE: PDL) mentioned reports of "new sources of financing becoming available to diamantaires."

Last year rough diamond prices were down 3-to-5%, as the closure of Antwerp Diamond Bank in October led to industry-wide liquidity concerns for rough diamond buyers and global economic and geopolitical tensions pressured prices.

So far in 2015, the U.S. dollar has continued its ascent making diamonds more expensive for buyers in Japan and the EU on a dollar-adjusted basis, which has also hindered demand.

China which is the industry's fastest growing market, and now the second largest market in the world for diamonds only after the U.S., recently cut interest rates and lowered reserve requirements aimed at buoying GDP growth which is estimated to come in at 7.1% this year, compared to 7.4% last year, and a peak of 14.2% in 2007, according to the World Bank.

The 6th largest diamond miner in the world by production value, reported quarterly production results on Thursday. London-listed Petra produced 791,443 carats during the 3-month period ending March 31, which was down 1% QoQ and up 6% YoY.

The company's average price per carat during the period was $116.20, compared to $153.20 (-24.2%) 90 days prior, and $180.90 (-37.5%) 12 months prior. Petra notably produced lower quality diamonds at the company's second largest mine, Cullinan, resulting in a lower average price per carat achieved for the company during the period.

Image: 122.52 carat blue recovered from Cullinan in June 2014. Source: Petra Diamonds

Cullinan, which has a history of producing exceptional diamonds, did not recover any noteworthy stones during the period, but the 122 carat fancy blue recovered last year was cut into 4 stones and is expected to be sold in coming months; Petra retained a 15% interest in the net sale proceeds of the stone when the company sold it to an undisclosed cutter for $27.6M last year.

Cullinan is estimated to produce 800,000 carats this year, and Finsch, the company's bellwether mine, is estimated to produce 1.9M carats. Global rough diamond production is forecast to reach 135.5M carats in 2015, which would be an increase of 3.4% YoY.

Petra's shareholders responded by sending the stock down 19.30GBp to 165.00GBp, or -10.5%, during trading in London yesterday. However, the stock is still up 6.7% over the last 52 weeks. Last year the company reported plans to commence a maiden dividend program in 2015. Petra currently has $48.1M of cash on the balance sheet.

Image: Mila Kunis wearing a Gemfields emerald. Source: Gemfields

Gemfields (LSE: GEM), a pure-play emerald and ruby miner with ambitions to be the "De Beers of emeralds," hit an all-time high of 67.50GBp on Thursday. This week the company said it would gain new access to local emerald supply when a purchasing office is opened in Zambia this month. In 2012 the company acquired 150-year luxury outlet House of Fabergé for £89M as an integrated distribution channel for selling its highest-end gems. A year later the company hired American actress Mila Kunis to be the company’s spokesperson. The £371M market-cap company's stock is up 24.5% since April 1st, and up 67.5% over the last 52 weeks.

Toronto-listed diamond explorer North Arrow Minerals (TSX-V: NAR) also hit an all-time high this week. The company has been credited with Canada's newest diamond discovery since it hit diamond-bearing kimberlite in east-central Saskatchewan in 2013. The project appears promising as last month the company discovered 3 more kimberlites on the property. The company also has a 26 million carat inferred resource in Nunavut which has shown an occurrence of fancy yellow diamonds. The C$52M market-cap company's stock hit C$1.08 on Thursday and is up 29.5% over the last 52 weeks and 359% over the last 2 years.

This was published in print in the London Mining Journal and Kitco.

Within the last 6 months the author was compensated by a media company of which North Arrow Minerals is a client. At the time of writing the author did not hold stock a position in any of the companies mentioned.