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Volatile diamond prices 'not forever'

Jun 21 2012 08:22 Reuters

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BHP BILLITON PLC [JSE:BIL]

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Market cap 593.05bn

Last Updated: 26-11-2014 at 04:24. Prices are delayed by 15 minutes. Source: McGregor BFA

ANGLO AMERICAN PLC [JSE:AGL]

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Market cap 326.81bn

Last Updated: 26-11-2014 at 04:24. Prices are delayed by 15 minutes. Source: McGregor BFA

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Johannesburg - A weakening Indian rupee is likely to contribute to volatility in rough diamond prices for the rest of the year, but longer-term price prospects are bright, the chief executive of London-listed miner Gem Diamonds said.

Clifford Elphick, who formed Gem Diamonds in 2005, said prices would eventually resume their upward trend because of the simple fact that demand will continue to exceed supply.

“There’s no question that the volatility in Europe is having an impact, and on top of that the appreciation of the dollar against the rupee is a big issue,” Elphick said in an interview.

“But at the end of the day, supply and demand determine price and I’m confident that prices will get better,” he said.

“There are only so many diamond mines, and the population of the world is wanting ever-more diamonds... people are consuming diamonds more than they are being mined.”

India is the world’s biggest importer of rough diamonds and vies with Japan and China as the second-biggest consumer of polished diamonds.

However, a 6% decline in the value of the rupee against the dollar since January has made it more expensive for Indians to import raw diamonds, while exports of cut diamonds are being restrained by the eurozone debt crisis.

Economic growth in India has also slowed markedly.

Rough diamond prices fell sharply in the second half of 2011 as markets tumbled and investors retreated. Prices stabilised in the first few months of 2012 but have since turned volatile.

“In the very short-term, between now and October-November, we may well be in for choppy rides as confidence disappears,” Elphick said.

“Prices will continue their upward trend over the long term, definitely over the medium term. Over the short term, I can’t be so confident.”

Elphick’s optimism about the longer term is shared by BMO Capital Markets, which said earlier this month that it expected rough diamond prices to rise by between 3% and 7% a year from 2013.

Gem Diamonds said earlier this week that initial production at its Ghaghoo mine in Botswana, which is under development, would be delayed until the first half of 2014, following a ground collapse that killed two employees.

Elphick declined to say when he expected operations to return to normal at the site.

“They’re not back to normal today; they may well be quite soon,” he said. “I don’t want to get back to normal operations if there is any risk of such a thing happening again.”

Production at Ghaghoo was scheduled to start in 2013 at an initial rate of 100 000 carats per year, rising to a peak steady-state production of 780 000 carats per year, according to the company’s website.

Gem Diamonds has two mines in production, the Letseng mine in Lesotho and the Ellendale mine in Australia.

The company considered buying the Ekati mine in Canada earmarked for potential sale by BHP Billiton [JSE:BIL] last year but decided not to proceed.

A deal could have edged Gem closer to FTSE 250-listed Petra Diamonds or even put it ahead of its rival in a sector dominated by giants De Beers - soon to be majority-owned by Anglo American [JSE:AGL] - and Russia’s state-owned Alrosa.

Gem Diamonds, which counts upscale jeweller Tiffany & Co among its customers, continues to explore options for the Ellendale mine, famous for its prized yellow diamonds.

“This is a mine that has a short life,” Elphick said. “It probably has another three or four years of life to it, and short-life operations are not really what we want to have in our portfolio,” Elphick said.

“If a buyer emerged at the right price, we would certainly consider an offer.”

Gem Diamonds’ shares, which have fallen about 18% over the past 12 months, have risen 4% since the beginning of this year. They closed at 200.5 pence on Wednesday on the London Stock Exchange.

 
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