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Prospects for global diamond mining in 2021 - highly cautious optimism

24 may 2021

According to the estimates of the international consulting company Bain & Company, the world diamond production in 2020 decreased relative to 2019 by 20% to 111 mn cts1. Industry analyst Paul Zimnisky gives a similar estimate of 113 mn cts2. One question currently worries all those involved: How quickly will the diamond industry recover from the COVID-19 crisis? In February-March 2021, many diamond miners published their data on their performance in 2020 and the guidelines for 2021. Based on the data, we try to understand the current situation in the upstream, which is basic for the industry.

ALROSA

In 2020, the Russian ALROSA company reduced its diamond production by 22% compared to the previous year to 30 mn cts. At the same time, the reduction in its diamond production was part of the company’s plans, but only by 11% to 34.2 mn cts. The production target was lowered in May 2020 due to the COVID-19 pandemic when the company announced the suspension of its Aikhal and Zarya mines. According to the latest ALROSA’s forecast (March 2021), the company plans to slightly increase the diamond production in 2021 to 31.5 mn cts3. It is expected that the main growth will come from the Verkhne-Munskoye deposit (+2 mn cts), Udachny underground mine (+1.5 mn cts), and the Botuobinskaya pipe (+1 mn cts), with a significant reduction in the alluvial diamond production (-2.2 mn cts at the Almazy Anabara division) and the Nyurba pipe with the associated placer (-1.2 mn cts).

Also, the Russian diamond mining giant plans to increase its capital expenditures by almost 1.5 times in 2021, from 17 bn roubles (in 2020, it was originally planned to spend 26 bn roubles) to 25 bn roubles. About a third of this amount (8 bn roubles) will be allocated for the mine development - the operating mines on the basis of the Udachnaya pipe and Verkhne-Munskoye deposit, as well as the mines under construction on the basis of the Mayskoye deposit. In addition, by the end of 2021, ALROSA expects to make a decision on the feasibility of the mining resumption at the Mir underground mine. If it is positive, the work will begin approximately in 2025 and about $1.2 bn will be spent on the work during 6-7 years.

In 2020, the rough diamond sales by ALROSA decreased by 19% by value and by 4% by volume compared to 2019 and amounted to 32.1 mn cts for $2,652 mn. In Q4 2020, the growth was high by 29% by value (compared to Q4 2019) and by 2 times by volume4. The sales results in January 2021 were also encouraging5.

It is important to take into account that ALROSA (unlike its foreign competitors) has a unique opportunity to sell its rough diamonds to Gokhran (State Precious Metals and Gems Repository), which was successfully used by the company in the global financial and economic crisis of 2008-2009. In this regard, in 2021, the Russian government increased the payments for the purchase of precious stones and precious metals by Gokhran to 39.82 bn roubles (in 2020, the limit was 10.5 bn roubles)6. So far, ALROSA has not taken this advantage, but it is just the beginning of 2021 and such an opportunity to have a “rainy-day fund” inspires confidence, certainly.

De Beers

De Beers (part of the Anglo American holding), the main ALROSA’s competitor, reduced its diamond production in 2020 by a comparable amount - by 19.4% to 25.1 mn cts. The main reason for the decline was the lockdowns in South Africa. But in 2021, De Beers plans to catch up and outperform the Russian giant through increasing the diamond production to 32-34 mn cts7. The optimistic expectations are based on an increase in the ore production and average diamond grades at the company’s two large assets - Jwaneng in Botswana and Venetia in South Africa. The life extension projects are underway at both mines - at the Venetia mine (CAPEX is $2.1 bn) where the plans are to switch to the underground operations from 2023, and at the Jwaneng mine ($2 bn) where they plan the expansion starting from 2027 under the Cut-9 project.

In 2020, the De Beers’ rough diamond sales decreased by 30% by value and by 27% by volume against the previous year and amounted to $2.8 bn and 21.4 mn cts, respectively.

The sales results at the beginning of 2021 inspire optimism as at the first sight (January 18-22), $663 mn worth of rough diamonds were sold, which was by 20% more than at the first sight in 2020, while at the second sight (February 22-26), according to preliminary data, the sales amounted to $550 mn, up 55% compared to the second sight in 20208.

Rio Tinto

The main event for Rio Tinto - as well as for the entire diamond industry - was the closure of the Argyle lamproite pipe mine in Australia in November 2020. The mine had operated since 1983 and had been the largest diamond mine in the world for the last several years. In total, the deposit produced over 865 mn cts of rough diamonds, including rare fancy pink stones. In 2020, Rio Tinto recovered 14.7 mn cts, which was by 14% less than in 2019. In addition to the Argyle mine, the company also holds a 60%-share in the Canada’s Diavik mine, which is now its only active diamond asset. In 2021, Rio Tinto forecasts its diamond production at 3-3.8 mn cts9. At the current production rate, the Diavik deposit reserves will last for about 3.5-4 years. It is likely that by 2025, Rio Tinto will exit the industry, as BHP Billiton did.

Dominion Diamonds and Arctic Canadian Diamond Company

Dominion Diamonds owns the remaining 40% in the Diavik mine, but in April 2020, it filed for bankruptcy. In February 202110, Dominion sold its second asset, the Ekati mine, to the Arctic Canadian Diamond Company and thus gained the opportunity to reduce its debt obligations. The mine was suspended in March 2020 due to the COVID-19 pandemic. In January 2021, the production recovered. In 2021, Arctic plans to produce 4.5 mn cts at Ekati and increase its production up to 5 mn cts by 2022.

Catoca

The Angolan Catoca company (ALROSA holds a 41%- share, 41% belongs to Endiama, 18% to LLI Holding) that operates the Catoca mine also reduced its production in 2020 by about 8%11 and recovered about 6.8 mn cts of rough diamonds. The main prospects for increasing the Catoca’s diamond mining volumes are associated with the planned commissioning of the Luaxe kimberlite pipe discovered in 2013 in co-operation with ALROSA. The mining operations may begin as early as 2021, and by 2023, the mine is expected to produce 5.7 mn cts of diamonds12.

Petra diamonds

The Petra Diamonds company, which mines diamonds in South Africa and Tanzania, publishes its statements for financial years, so its production in 2020 can be estimated approximately only and it is about 3.5 mn cts. During 2020, the company experienced serious difficulties, however, it remained afloat thanks to the successful restructuring. Nevertheless, Petra is very cautious about the development prospects in 2021 and does not exclude further financing problems. The company’s Tanzanian asset, the Williamson mine, is still under care and maintenance, and Petra has not yet published its forecasts for 2021.

Mountain Province Diamond

Canada’s Mountain Province Diamond owns a 49%-stake in the Gahcho Kué mine in partnership with De Beers. In 2020, the company’s share in the diamond production amounted to 3.2 mn cts, 4% less than in 2019.13 Despite the increase in demand for diamonds, the company has so far refrained from publishing its production forecasts for 2021 due to the suspension of the operations at the mine for 3 weeks in February due to the COVID-19 pandemic.

Stornoway diamonds

Another Canadian mine, Renard, owned by Stornoway Diamonds, remained under care and maintenance from March to September, 2020. Despite the permission from the authorities to resume mining, the mine did not reopen due to the downturn in the global diamond market.

Lucara Diamond

Lucara Diamond operating the Karowe mine in Botswana recovered 381,700 cts in 2020, down 12% from the previous year. In 2021, the company expects to recover even less stones - from 340 to 370 thousand cts14. At the same time, the forecasted sales volume is slightly higher and makes 350-390 thousand cts. The Karowe deposit is a source of special size diamonds (larger than 10.8 cts). In 2020, 34 stones weighing over 100 cts were recovered, including the rough diamonds weighing 998 and 549 cts. At the same time, the diamond sales in 2020 decreased to $125.3 mn (by 35%) compared to 2019, and the average price for rough diamonds sold dropped to $335/ct (by 28%).

Gem Diamonds

Gem Diamonds, another company focused on the production of large size diamonds, recovered 100,800 cts in 2020 at its Letseng mine in Lesotho (down 12% compared to 2019). Interestingly, 2020 was a record year for the company in terms of the number of large size stones as it recovered 762 rough diamonds weighing more than 10 cts, including 16 stones weighing over 100 cts15. At the same time, the average price for the diamonds sold was $1,908/ct, which is by 16.5% higher than in 2019. In 2021, Gem Diamonds plans to increase its diamond production to 123-127 thousand carats.

analyt_26042021_eng.png

Fig. 1. The rough diamonds production by major diamond mining companies in 2020 and the forecast for 2021, mn cts.

If we put all these numbers together, we can see a very positive trend (Figure 1). In 2021, according to the companies’ forecasts, the diamond production may increase by 2.5%. However, if the very optimistic expectations of De Beers or, more likely, the Arctic Canadian do not come true, the production level may equal the current one or even drop below it. In general, when describing the industry sentiment at the end of Q1 2021, the words “very cautious optimism” can be used. “Very” - because any forecasts, especially favourable ones, in the so-called “new reality” are made with a high degree of probability, and this situation is unlikely to change in the short and medium term.

Anastasia Smolnikova, analyst, The Institute for Natural Monopolies Research (IPEM), for Rough&Polished

 

1Bain & Company. Brilliant Under Pressure: The Global Diamond Industry 2020–21. 08.02.2021. URL: https://www.bain.com/insights/global-diamond-industry-2020-21/
2Investing News. Diamonds. Diamond Outlook 2021: Market Poised for Growth. 25.01.2021. URL: https://investingnews.com/daily/resource-investing/gem-investing/diamond-investing/diamond-outlook/
3ALROSA. To investors and shareholders. Presentation - Strategy Day 2021. 02.03.2021. URL: http://www.alrosa.ru/documents/
4ALROSA. ALROSA Group operating results for Q4 and 12M 2020. 21.01.2021. URL: http://www.alrosa.ru/wp-content/uploads/2021/01/ALROSA-Q4-2020-Trading-Update-IR-release-21-01-2021-RUS.pdf
5 ALROSA. Press center. ALROSA presents sales results for January 2021. 10.02.2021. URL: http://www.alrosa.ru/
6TASS. Economy. Alrosa has no plans to sell rough diamonds to Gokhran in 2020. 12.11.2020. URL: https://tass.ru/ekonomika/9988269
7AngloAmerican. Integrated Annual Report 2020. 2021. URL: https://www.angloamerican.com/~/media/Files/A/Anglo-American-Group/PLC/investors/annual-reporting/2021/aa-annual-report-full-2020.pdf
8De Beers Group. Rough Diamond Sales. 2021. URL: https://www.debeersgroup.com/reports/rough-diamond-sales
9Rio Tinto. Presentations & Webcasts. Annual Results 2020. 17.02.2021. URL: https://www.riotinto.com/invest/presentations
10Business Wire. Dominion Diamond Mines Sells Ekati Mine to Arctic Canadian Diamond Company Ltd. 03.02.2021. URL: https://www.businesswire.com/news/home/20210203005998/en/Dominion-Diamond-Mines-Sells-Ekati-Mine-to-Arctic-Canadian-Diamond-Company-Ltd.
11Rough and Polished. News. Catoca registers losses in the first half of 2020. 16.09.2020. URL: https://www.rough-polished.com/ru/news/118664.html
12Mining.Com. Angola seeks to boost diamond output, negotiating with major players. 02.03.2021. URL: https://www.mining.com/web/angola-seeks-to-boost-diamond-output-negotiating-with-major-players/
13Mountain Province Diamond. Financial Reports. December 31, 2020 - Year-End Management Discussion & Analysis. 2021. URL: https://www.mountainprovince.com/financial-reports
14Lucara Diamond. Presentations. 2020 Results Conference Call. 23.02.2021. URL: https://www.lucaradiamond.com/site/assets/files/62783/lucara_q4_2020_investor_call_presentation.pdf
15Gem Diamonds. Full Year Results 2020.   11.03.2021. URL: https://www.gemdiamonds.com/downloads/2021/reports/presentation.pdf
Sources: company reports, peer review (for Catoca, Petra Diamonds (2021), Dominion (2021), Arctic Canadians (2020))