Between the Lines

Mining: Stornoway Tries to Woo Investors

Stornoway Diamond Corporation this week went to the market to raise about $11.5 million (CAD 10 million) to fund exploration activities at its Renard Diamond Project. The news comes after the Canadian company issued a report on January 22 that significantly increased the indicated and inferred mineral resource at Renard. Stornoway now believes the project to have a total resource of 23 million carats, giving the main kimberlite pipes at the site a diamond valuation of $117 per carat.

As a diamond exploration company, Stornoway has one of the more impressive portfolios among its peers, with the Renard and Churchill projects being its most promising. However, it remains an exploration company, with only the prospect of future diamond production and revenues to lure investors. Analysts do not foresee a mine operational at Renard before 2014. Such production and revenue projections have become all the more relevant and critical to investors in the economic environment of the past year.

Still, the company should not have a problem raising the funds, especially given its stock performance of late. Stornoway shares have garnered strong interest in the market over the past two years, with fluctuations that saw them drop to lows of CAD 0.09 a share in early 2009, to end the year at CAD 0.69, before retreating to their current level of around CAD 0.50.    

Manufacturing/Wholesale: India’s Listed Companies Post Strong Third Quarter

India’s diamond and jewelry manufacturers showed some healthy growth in the three months that ending December 31, 2009, as reflected in the results of listed companies reported to the Bombay Stock Exchange (see table below). Sales at all exchange-listed companies except one  company, — Classic Diamonds —, increased compared to the same period a year earlier, while only Asian Star saw a slight slump in profits. Notably, all the companies were profitable during the quarter. Some of the larger companies, including DTC sightholders Gitanjali Gems, Suashish Diamonhds and Shrenuj & Co., outperformed the others. Those companies that reported separate sales for their respective diamond and jewelry segments, revealed stronger growth in their jewelry divisions, with the exception of Shrenuj.

Retail: Out of the Blue

Amazon.com reported sales growth of 42 percent to $9.42 billion during the fourth quarter 2009, beating Wall Street’s expectations. Sales rose 37 percent after discounting exchange rate fluctuations and the online retailer raised its revenue guidance for first quarter 2010. The increases were buoyed by strong holiday sales, with electronics emerging as the hot consumer item. Electronics sales were up 60 percent from a year earlier, and accounted for close to half the sales total. “Millions of people now own Kindles,” said Jeff Bezos, Amazon chief executive officer (CEO). While Amazon did not provide further breakdown of its product category performance, the positive numbers indicated a strong overall trend toward online buying this past Christmas season.

However, it may be premature to extend the positive Amazon experience to other companies, particularly in the diamond and jewelry sector. Amazon’s results were exceptional. Notably, Blue Nile reports its fourth quarter’s next week, which many view as an indicator of the online trend for the industry, as it has been in the past. However, as James Altucher, a managing partner at asset management firm Formula Capital, suggested in a recent op-ed in The Wall Street Journal, there is reason to be cautious about Blue Nile’s pending results.

Significantly, there are reports that Blue Nile’s unique visitor count fell about 15 percent in the fourth quarter, while its market share dropped 27 percent. As a side note, analysts attributed part of Amazon’s growth to rising market share. But, as Altucher noted, Blue Nile faces stiff competition from brick-and-mortar retailers, who have increased their online presence and sales. Even embattled retailer Zale Corporation has reported that its unique visitors and online revenues grew by 17 percent.

Altucher explained that online retail sales generally follow the unique visitor trend, which does not bode well for Blue Nile. But the fact that the company’s relevance as an indicator for the online jewelry market may be diminishing does not necessarily mean the overall trend is following suit.  

Global Markets

United States: Reports out of New York’s Diamond District indicate stable trading activity, with rounds and fancy shapes below 2.00-ct. most popular. There is also good demand for 3.00-ct.+, D-F, VS+ stones. Retailers have entered the traditional wedding season with high hopes, but have not yet reported any clear style trend developing. They report that 1.00-ct., F-H, SI1-SI2 remain the popular category for the center stone of engagement rings.

Belgium: Dealers and manufacturers in Antwerp remained skeptical about market conditions as larger volumes of rough surfaced during the week. Many seemed to be testing the market with this rough after the January price hikes, and they appear uncertain whether to hold onto the goods or not. There is concern about growing speculation on rough prices. The polished market was active this week despite some resistance to the recent price increases. There is good demand for 1.00-ct. stones and larger, while in the pointer sizes, clean goods are selling well.  

Israel: Market activity is stable and there is good trading in the bourse. There is still good demand for 0.90-ct., 1.00-ct., 1.50-ct. and demand for 3.00-ct.+ stones continues to improve after the recent price increases. There is also good demand for 0.30-to- 0.50-ct., and 0.71-ct.+ size stones. Dealers and cutters are mainly focused on selling to the Far East but some are trying to dispose of SI, I1 goods in the U.S. There are not many foreign buyers in Ramat Gan, but trade between the locals remains healthy.

India: Demand for polished remains steady but there is concern regarding price speculation on the market, particularly on stones below 3.00-ct.  There is good demand for melee goods in J+ colors, lower piqué and SI clarities, and strong activity in 1.00-ct. stones in all categories. Shortages are apparent in the 1.00-ct., G-I categories, while demand for D-F colors is improving. The rough market remains very active, with continued strong demand for goods despite the high asking prices.

China: Trade in the Shanghai Diamond Exchange(SDE) grew quieter because many companies have already closed for the Chinese New Year vacation. Still, the wholesale market is stable and there has been an increase in imports through legal channels at the SDE since the January smuggling bust in Shenzhen. In general, the market is optimistic for the new “Year of the Tiger.” Demand is good for 0.30- to- 1.10-ct., D-J, VVS-SI, GIA-certified, EX cut stones, especially from online retailers. Traditional retailers appear more flexible in their cutting and selling and are buying a wider range of goods.

Hong Kong: Demand for goods has tapered off this week as buyers from China appear to already be in vacation mode in advance of next week’s national New Year holiday. There remains a steady presence of foreign sellers, particularly from Israel, trying to push goods, but prices from the cutting centers remain high for the locals. Wholesalers are looking forward to the next “rush” following the holiday, when they intensify preparations for the March Hong Kong show.

The Week Ahead

·         U.S. preliminary January Unemployment Data                                   February 5, 2010

·         U.S. December and 2009 Diamond Import / Export Data                February 10, 2010

·         Israel Foreign Trade data                                                            February 10, 2010

·         Blue Nile 4Q and 2009 earnings report                                           February 11, 2010

Quote of the Week

“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.”

-          Jeff Bezos, co founder and chief executive officer of Amazon.com

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