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Midstream diamond business normalizing – De Beers

03 october 2016

De Beers said the diamond industry registered a challenging year in 2015, but more normal trading conditions returned to the industry’s midstream during the first half of 2016 as a result of actions taken to address inventory indigestion.

The group said in its latest diamond insight report that events of 2015 crystallized many of the risks and pressures that midstream diamond businesses can face.

“The issues of finance, technology, reputation and differentiation look set to continue being of paramount importance in shaping the future of midstream participants,” it said.

“A host of new compliance pressures (from banks, regulators and rough diamond suppliers) require midstream diamond businesses to adopt international standards of financial transparency to maintain their business activities.

“This brings with it a need for greater financial robustness, as banks and suppliers generally seek commercial relationships with the businesses that present them with the lowest risk.”

It said improved financial robustness would also position midstream operators more strongly in an environment where volatility was the new normal.

“Those with stronger balance sheets will be better able to ride out periods of depressed demand without the need to liquidate inventories cheaply, and will have greater ability to capture opportunities in a rising market,” De Beers said.

“The adoption of new forms of financing also appears set to change the way the midstream operates. If bank lending remains restricted, then businesses that can find alternative and competitively priced sources of funding will gain a strong competitive advantage.

“A sharper focus on financial efficiency could also play a significant role in shaping the future of the cutting centres.”

Regarding the upstream diamond business, De Beers said, as the rough diamond sales declined last year some producers reacted to weakened demand by reducing production over 2014 levels.

However, investments made in the past 10 years should see production increase in the short to medium term before stabilizing, it said.

“Rough diamond sales - Global rough diamond sales to cutting centres fell by some 30 per cent between 2014 and 2015, to an estimated $13.7 billion,” the group said.

“De Beers remained the largest supplier of rough diamonds by value, albeit with a reduced share of sales of 31 per cent (from 35 per cent in 2014).

“This includes the approximately two per cent of global rough diamond sales made by Diamond Trading Company Botswana (a joint venture between De Beers and the Government of the Republic of Botswana) to Okavango Diamond Company, the Government’s diamond trading company.”

It said the Russian diamond giant, Alrosa, was the second-largest supplier of rough diamonds, with 25 per cent market share by value compared with 26 per cent in 2014.

 Other major suppliers were Sodiam, which sells Angola’s total rough diamond output, with an 8 per cent share compared with 2014’s 7 percent, Rio Tinto, with a 5 percent share as was the case the previous year.

Dominion Diamond Corporation was at par with Rio Tinto as it remained unchanged with a 5 percent share while Petra Diamonds had 3 percent as was the case in 2014.

“More rough diamonds are being sold locally - The trend toward more in-country beneficiation continued during the past year, with the signing of a milestone, 10-year agreement between the Government of the Republic of Namibia and De Beers for the sorting, valuing and sales of production from Namdeb Holdings,” it said.

“This deal will see Namibia benefit from more rough diamonds being made available for domestic beneficiation, with US$430 million of rough diamonds being offered annually to Namibia Diamond Trading Company customers. All Namdeb Holdings’ special stones will be made available for sale in Namibia.

“In addition, 15 per cent of Namdeb Holdings’ run-of-mine production would be made available for sale by an independent, government-owned sales company called Namib Desert Diamonds.”

Rough diamond production

De Beers also said total global rough diamond production was worth $17.5 billion last year, which was 10 percent lower than in 2014.

However, in carat terms, global rough diamond production declined by less than one percent to 141 million carats.

Russia was the largest-producing country in volume terms with a 29 percent share compared with 27 per cent in 2014.

It was followed by the Democratic Republic of Congo with 17 percent compared with 19 per cent in 2014.

Botswana came on third position with 15 percent against 2014’s 18 per cent.

It was followed by Australia with 10 per cent up from 7 percent in 2014 and Canada with an unchanged 9 percent.

Russia also remained the largest producing country in value terms, with a 29 percent share of the total value produced in 2015 slightly above the 26 percent it had in 2014.

Botswana was the second-largest producer in terms of value, with 21 percent compared with 23 percent in 2014, followed by Canada, with 10 percent down from 12 per cent in 2014.

 Angola was fourth with an unchanged 9 percent followed by South Africa with 7 percent, also the same share as in 2014.

“De Beers and ALROSA were again the two largest-producing groups in both volume and value terms. De Beers’ share of production volume was 20 per cent in 2015 (down from 23 per cent in 2014), second to ALROSA, which had 27 per cent (up from 26 per cent in 2014),” it said.

Looking Ahead

The group said 2016 sees two new diamond producers commence production.

These were Mountain Province Diamonds with the Gahcho Kué mine, in partnership with De Beers, in the Northwest Territories of Canada, and Stornoway Diamonds with the Renard mine in Quebec, Canada.

Gahcho Kué is expected to produce an average of 4.5 million carats per year once fully operational. Renard began production in the third quarter of 2016; annual production is expected to average 1.6 million carats.

“These two projects are expected to contribute to an increase in rough diamond production in the medium term,” it said.

“However, beyond the three new mines in 2016 (Gahcho Kué, Renard and Liqhobong Main Treatment Plant), the greenfield pipeline is limited.”

De Beers said that despite a sparse greenfield project pipeline, there are a number of brownfield expansion projects under construction, with production set to start in the medium term.

Dominion Diamond Corporation announced earlier this year that it would proceed with the development of the Sable and Jay pipes at the Ekati mine in Canada, extending the life of production at the mine until 2033.

Rio Tinto and Dominion Diamond Corporation are developing the A-21 pipe at Diavik, also in Canada, which is expected to begin producing in 2018 and extend production life at the mine to 2023.

De Beers was also extending the life of some of its major assets.

The Cut-8 project at the Jwaneng mine in Botswana will begin producing diamonds in 2017, while the development of the Venetia underground project in South Africa was expected to extend production life at that mine beyond 2040.

Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished