The following article is published courtesy of Israeli Diamond Industry Portal
Authors: Uri Haviv and Iris Hortman
Intellectual property: Israeli Diamond Industry Portal
Many jewelry companies declared bankruptcy, while the mining companies’ reaction to the recession was to decrease diamond production and supply rates. The global economy has noted a slight recovery over the past few months, but things are far from steady, and the only certainty these days seem to be the uncertainty surrounding the future.
In early March, RBC Economics Research issued a report suggesting the diamond market has retained its strength in early 2010, even if not quite as it did in the second half of 2009. RBC predicted that the increase noted in rough diamond prices would eventually be curbed to a degree, adding that demands have kept both rough and polished prices relatively steady in February.
The financial crisis did not leave the world’s diamond giants unscathed: the first half of 2009 saw three of the world’s major diamond explorers – De Beers, Rio Tinto and BHP Billiton – produce only 15 million carats of diamonds, a 60% drop compared to the same period in 2008. Russian diamond giant Alrosa also cut back on production, and sold most of its rough diamond to Moscow’s State Depositary and its diamond stockpile agency, Gokhran.
Nevertheless, the diamond market’s encouraging recovery is reason for an interim review of the four diamond powers’ actions.
The world’s largest diamond supplier suffered through a decline in both sales and overall activity over the past year. In a recent press release, De Beers summarized its performance in 2009 and outlined its 2010 projections for both the company and the global diamond market.
De Beers’ data suggested that diamond consumption saw a year-round, single-digit decline; but also noted a slight boost, in the form of improved fourth-quarter sales, strong demands in China and India, good holiday season sales and a 24% increase in sales in the second half of 2009, compared to the year’s first six months.
De Beers introduced a six-step plan for dealing with the financial crisis, cutting production and operational expenditures by 45%, from $2 billion in 2008 to $1.1 billion. The steps taken allowed it to gross $654 million in 2009, despite sales shrinking from $6.89 billion to $3.84 billion.
The diamond giant also had to deal with refinancing a $3 billion loan – $1.5 billion of which was due in the beginning of 2010. Major shareholders the Oppenheimer family, Anglo American and the government of Botswana, eventually refinanced $1 billion.
De Beers’ future projections were cautiously optimistic, saying production, sales and prices will see only a gradual increase in the near future, despite growing consumer demand for diamond jewelry.
Alrosa reached a significant milestone in 2009, becoming the world’s largest diamond producer, with 34.7 million carats of rough diamonds, compared to De Beers’ 24.6 million carats.
Nevertheless, 2009 was not easy for the Russian diamond giant: July 2009 saw Fyodor Anderyev become CEO instead of Sergei Vybornov, setting a sales goal of $2 billion. The company met its goal, producing a total of $2.34 billion worth of diamonds. However, the majority of Alrosa’s diamonds were sold to the State Depository and not to foreign markets, in a move meant to both support the struggling industry and weather shrinking demands. The fact that Moscow’s State Depository bought Alrosa’s inventory allowed the company to keep up its rough diamond production despite declining demand. Nevertheless, Alrosa did not disclose the revenue from these sales.
Fitch Ratings Agency has recently expressed confidence in Alrosa, upgrading the Russian diamond giant’s credit rating from B to B+, due to a decrease in its financial and operational risk and ahead of expected growth in the global mining industry. Fitch further predicted that Alrosa’s financial performance will improve in 2010 and that its EBITDA earnings (earnings before interest, taxes, depreciation and amortization) will add 20%, due – among other things – to a foreseeable increase in rough diamond prices.
As for future projections, Alrosa has decided to target the Indian market: the company has met with Gems and Jewellery Export Promotion Council representatives in order to boost mutual ties and has further signed a three-year, $490 million, rough diamond supply contract with three of India’s large diamond manufacturers, Rosy Blue, Diamond India Ltd and Retilal Becharlal & Sons.
The Russian diamond giant, which will supply the diamonds according to quarterly-determined prices and demand, hopes to expand its operations in the Indian market. In 2009, Alrosa exported half of its product, some $500 million worth, to India. The company hopes that forging long-term relations with Indian diamond companies will benefit both sides.
Furthermore, Alrosa has been working to reduce its expenditures and is currently renegotiation its credit line, in a move meant to improve company profitability.
Mining giant Rio Tinto, which, on top of diamonds, also produces aluminum, copper, iron, gold and coal, has also received a vote of confidence from Fitch, which upgraded the British-Australian miner’s credit rating from BBB+ to A-, following, according to the Sydney Morning Herald, a successful debt reduction.
Fitch’s research notes that Rio Tinto has made some wise moves in order to cut debt, adding that it was increased demands by the Chinese market that have helped the company emerge from the financial crisis with its core operation relatively unscathed. The report also predicted further improvement in Rio Tinto’s performance in 2010, due – among other things – to $5.8 billion it stands to get as part of a joint, west-Australian venture with BHP Billiton.
According to Mining Weekly, Rio Tinto’s capital expenditure projection for 2010 stand at $6 billion. CEO Tom Albanese said in a statement that the company will pursue several growth options via careful investments, and that it believes a slight improvement in demand is noticeable. Albanese’s statement further said that the company’s projections for the next few years, based on the urbanization and industrialization of many cities in India and China, were positive.
Rio Tinto responded to the financial crisis like other diamond giants – by cutting production. According to a recent Polished Prices report, the company said the diamond output at the Argyle mine in Australia, which it fully owns, decreased by 33% in the last quarter of 2009.
Despite the improvement in the diamond market in the current quarter, the numbers still suggest a scope of activity lower than its pre-crisis level. Production at the Diavik mine in Canada, of which Rio Tinto owns 60%, was cut by 41% due to the economic slowdown, and in order to maintain price levels ahead of the market’s recovery.
Meanwhile, Rio increased its marketing efforts: in January, the company announced changes in its sales and marketing staff and in February, it opened a Hong Kong office, meant to support clients operating in the emerging Chinese market. The company said it would also continue its sales efforts in the Indian market.
BHP Billiton, the world’s largest mining company, experienced a favorable second half in 2009. In January, the company reported that its diamond and specialty products division grossed $170 million in the six-month period ending on December 31 – a 115.2% improvement from the same time in 2008.
BHP attributed the increase in revenue to an actual increase in diamond prices, continued improvement in operational expenditures and a cut in diamond exploration costs. BHP’s diamond production during this period came to 15.4 million carats (+13%), the majority of which were mined in Canada’s Ekati mine, which noted a 28% increase in production – 760,000 carats. Nevertheless, BHP warned that is was gearing for short-term sale fluctuations, due to the market’s instability.
BHP Billiton is currently dealing with a new taxation bill in Australia, which also stands to affect Rio Tinto: the proposed “rent tax” calls for increasing the levies imposed on mining companies operating in Australia, and may end up costing them billions of dollars in future revenue.
Should the bill mature into legislation, it would cost BHP $2.33 billion annually between 2012 and 2016, while Rio Tinto stands to lose $2.7 billion a year. These projections are very much a thorn in both companies’ side, as they try to remain cautiously optimistic.