RAPAPORT... "The sources of supply of these pieces of crystalline carbon are absolutely critical to the strategy of your business,” stated Des Kilalea, director for Royal Bank of Canada (RBC) Capital Markets in the London equity research division. Kilalea kicked off the annual Rapaport International Diamond Conference (IDC), held September 10 at TheTimesCenter in New York City, with the first presentation of the day.
Kilalea, who has been analyzing the diamond-mining sector for the past 17 years, pointed out that the top four producers — De Beers, ALROSA, Rio Tinto and BHP Billiton — mine about 90 percent of the diamonds in the world. “The juniors actually count for almost nothing in the scheme of supply.”
Diamonds are extremely difficult to mine, Kilalea stressed. “You’ve probably all seen the ‘Ice Road Truckers’ show on television. That’s how they supply Diavik. These are the kind of challenges that producers have to face,” he said.
Globally, Botswana is the top producer of rough diamonds by value, with Russia second, Canada third and South Africa and Angola in fourth place, according to Kimberley Process (KP) data for 2008. “Political influence is quite important in many of these places and that also has an impact on how production will unfold in years to come,” Kilalea explained.
New mines take eight years to develop on average and miners take on high risks, Kilalea contended. “Less than 1 percent of all kimberlites, the host rock of diamonds, ever become an economic mine.” Because of these risks, investment in exploration and new mines will be limited, Kilalea noted.
Current mines are aging and it can cost up to $1 billion to go underground, according to Kilalea. The most notable new mines are “still a long way off” and will not contribute much to worldwide diamond production, which is pegged at 160 million carats per year. For example, Canada’s Gahcho Kue mine will possibly generate a mere 2 to 3 million carats per year starting in 2012.
“Rough prices have probably bottomed,” Kilalea reported. He stressed that rough and polished do not move in concert in the short term, but “the fact is, in the long term, they have to.”
“I believe rough is moving to a more free market. I think that’s good, because there was no true price. No one had any idea — and that’s including the bankers, I might add — about the value of your inventory,” Kilalea remarked. Polished prices are in large part based on the U.S. economy, but rough prices are more about supply dynamics in the pipeline, he went on to say.
Going forward, “there is a new competitor for rough, and that competitor is your supplier,” Kilalea warned, observing that more miners are becoming interested in downstream profits. Overall, “the outlook is that the supply side is seriously constrained in the long term. There will be shortages. But with the recovery fragile, De Beers restarting all its mines and ALROSA reselling, rough prices are likely to be extremely fragile in the short term,” Kilalea concluded.
Article from the Rapaport Magazine - October 2009. To subscribe click here.