No pain, no gain

The di­a­mond com­pa­nies are re­ally hurt­ing but help may be at hand

Finweek English Edition - - Companies & Markets - BREN­DAN RYAN bren­danr@fin­week.co.za

IT HAS GOT­TEN RE­ALLY UGLY in the di­a­mond ju­nior space and, iron­i­cally, that is hap­pen­ing just as the first signs of im­prove­ment in rough di­a­mond de­mand and prices are ap­pear­ing.

To pro­vide a flavour of what’s go­ing on, con­sider that Trans Hex has just re­ported a loss of R797m for the year to end-March af­ter tak­ing a net im­pair­ment charge against its as­sets of R537m.

At TSX and JSE-listed Rockwell Di­a­monds a feud is un­der way be­tween three of the direc­tors – chair­man David Copeland, CEO John Bris­tow and his brother Mark – and Swiss-based Pala In­vest­ments.

The rest of the board – in­clud­ing Sandile Zungu from empowerment part­ner African Van­guard Re­sources – ap­pears to be sup­port­ing a bid by Pala In­vest­ments to get rid of the three at a spe­cial share­hold­ers’ meet­ing on 17 June.

The Rockwell price has col­lapsed to the point that it has joined what Cana­dian in­vestors are terming the “95% club”, which con­sists of ju­nior re­source com­pa­nies that have lost 95% of their for­mer value in the past year’s mar­ket melt­down.

An­other mem­ber of that club is TSX and JSE-listed BRC Di­a­mondcore (BRC). Applications for the liq­ui­da­tion of two BRC sub­sidiaries were lodged in the Kim­ber­ley High Court in April and will be heard in June.

The state of BRC’s fi­nances is such that it has been kept go­ing through cash ad­vances from sev­eral of its direc­tors “to meet cer­tain crit­i­cal near-term cred­i­tors”.

Yet Trans Hex CEO Llewellyn Del­port last week re­ported that av­er­age rough di­a­mond prices re­ceived by his group ap­peared to have bot­tomed out by Fe­bru­ary at around $488/carat.

Since then th­ese prices have risen to $672/carat in March and $920/carat in May, which is a healthy rise al­though still well short of the lev­els of $1 400/carat re­ceived in July last year.

That bears out a re­search re­port pub­lished re­cently by RBC Cap­i­tal Mar­kets’ Des Ki­lalea high­light­ing the re­cov­ery in rough di­a­mond prices.

Ki­lalea noted the May ten­der of rough di­a­monds from Lon­don-listed Gem Di­a­monds – which runs the Let­seng mine in Le­sotho – had re­alised around $1 600/carat com­pared with be­low $1 100/carat in the pre­vi­ous two tenders.

But Ki­lalea cau­tioned the re­vival in the rough di­a­mond mar­ket might be short-lived be­cause the jew­ellery mar­ket, which con­sumes the end-prod­uct – pol­ished di­a­monds – was not yet show­ing signs of re­vival.

He said rough di­a­mond de­mand and prices had im­proved be­cause the di­a­mond cut­ters had to re­build in­ven­to­ries. Th­ese had been de­pleted through the action taken by ma­jor pro­duc­ers De Beers, Al­rosa and Rio Tinto to stop pro­duc­tion at most of their mines for around two months.

De Beers has now restarted op­er­a­tions at its mas­sive Jwa­neng mine in Botswana.

Ac­cord­ing to Ki­lalea “daily ev­i­dence that global un­em­ploy­ment has not yet peaked does not give us con­fi­dence that the re­tail jew­ellery mar­ket has come through the storm as yet”.

The ques­tion fac­ing in­vestors be­ing tempted by the cur­rent rock-bot­tom prices of var­i­ous di­a­mond ju­niors has to be when to buy-in.

The short an­swer would ap­pear to be “not yet”. Di­a­monds are the ul­ti­mate in lux­ury goods. Jew­ellery de­mand is not likely to get go­ing again un­til con­sumer con­fi­dence is fully re­stored, mean­ing it should lag the over­all eco­nomic re­cov­ery.

But mar­ket trends are fickle. In­vestors are al­ready pil­ing into platinum shares in an­tic­i­pa­tion of the global re­cov­ery, de­spite con­tin­u­ing poor fun­da­men­tals, in par­tic­u­lar the col­lapse in global car sales.

Trans Hex’s re­cent in­vest­ment track record is ap­palling but, as Del­port points out, what it has go­ing for it right now is a healthy cash bal­ance of R205m at end-March.

Any­one tak­ing an in­ter­est in Rockwell would be ad­vised to await the out­come of the 17 June meet­ing. The is­sue there is about fu­ture man­age­ment and it will be cru­cial to see who ends up run­ning the show.

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