Diamond Market James Allan Botswana June2009
Allan Hochreiter Allan Hochreiter is a corporate finance boutique based in Johannesburg (www.allanhochreiter.co.za) James Allan Last top rated diamond analyst on the JSE. Represented minorities (25% of the shareholders) in the De Beers privatisation. Gained an extra $2 per share for shareholders Predicted the coming shortfall of diamonds when De Beers stocks were ~$5bn. Rene Hochreiter Rated top platinum analyst 10 years in row Raised capital for Eland Platinum Ken Greve Corporate finance executive for 15 years: Gold Fields/JP Morgan/Kumba/BHP Billiton Unbundling of Kumba from Iscor Subsidiary Partners Drilling 20 drills in SA and 6 in Africa in (Anglo Plats and De Beers and Rio main clients in SA) 2
Contents Diamond Market Rough supply and demand Diamond Market Share market Conclusion 3
How big is the diamond industry? ~150m cts in 2007 ~$14bn in 2008 rough Copper production ~$120bn Gold production~ $70bn Nickel production~ $40bn Platinum production ~$20bn 4
Who are the producers De Beers/Debswana 45% Alrosa 20% Angola 9% Rio Tinto 8% BHPB 4% Harry Winston 3% Around 90% of production from 6 players.. More concentrated than other commodities 5
Recent diamond news Tiffany s profits down 62%(30 May) JCK Las Vegas Buying up..wave of optimism (31May) Harry Winston Quarterly loss of $45m c.f. profit of $21m (4 June) Signet quarterly profit up.(5 June)
Polished Prices Index www.polishedprices.com 7
Driving Growth World Retail Sales (USD) 4.0% 3.6% 3.0% 2.0% 1.0% 0.0% -1.0% -0.2% 94-98 99-03 12.0% 8.0% 5.9% 8.5% 7.0% 6.0% 5.0% 4.0% 2.6% 0.0% -4.0% -8.0% -12.0% -8.0% 2002 2003 2004 2005 2006 2007 2008 8
Retail Sales of Diamond Jewellery 2008 ($70bn) (-10%) USA 16% Japan Europe Asia-Pacific Asia-Arabia Others 6% 6% 6% 51% 15% 9
Diamond Content 2008 USA 14% Japan Europe 15% 43% Asia-Pacific Asia-Arabia Others 8% 8% 12% 10
Supply Changes - 2008 Australia down 6m carats Canada down 2m carats Russia down 1 m carats Botswana down 1 m carats South Africa down 0.3m carats Total supply estimated at 140m carats in 2008 (148m: 2007) But value climbed from $12.8bn to $14.3bn 11
Diamonds-Pipeline Debt THE RISKS Debt and no Liquidity in the Cutting Centres 16,000 14,000 12,000 10,000 DTC inventory Cutting Centre debt $m 8,000 6,000 4,000 2,000 0 $m 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 1979 Year Cutting Centre Bankruptcies are likely even among De Beers clients! Source: Company reports and RBC Capital Markets estimates for 2008 12
Bank funding for the pipeline tightened Credit for funding of pipeline stocks evaporated Diamond bank to client You have a $10m facility with us and have $3m drawn down. The other $7m is no longer available and by the way we would you to start repaying the $3m Without working capital funding the market for rough disappeared overnight 13
The ripple effect De Beers have been trying to get away from this for years. What is it? A small change in retail sales has a large impact on rough sales.why? Because of rough and polished stocks and debt in the pipeline. In the good times the banks extend credit into the pipeline to buy stock because prices are rising and in the bad times>guess what? A 10% change in retail demand can cause a 50% change in rough demand. 14
Producer responses to market in 2009 De Beers (45%) closed mines in Q1 (and they were highly profitable mines) (No cash to fund a stockpile) Alrosa (20%) stockpiling at the Gokhran Angola (9%) Central bank stockpiling Rio Tinto (8%) Postponed u/g development at Argyle; decreased production at Diavik BHPB (4%) Full steam ahead Harry Winston (3%) decreased production 15
Seen on the way to Venetia? 16
Global Supply (carats) 180,000.0 Global Rough Diamond Supply 2005-2015 (Carats) 160,000.0 140,000.0 120,000.0 Cts (000's) 100,000.0 80,000.0 60,000.0 40,000.0 20,000.0-2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 South Africa Botswana Namibia Russia Angola Australia Canada DRC Tanzania Sierra Leone Zimbabwe Other 17
Global Supply $ terms 20,000.0 18,000.0 16,000.0 14,000.0 12,000.0 US $ (M) 10,000.0 8,000.0 6,000.0 4,000.0 2,000.0-2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 South Africa Botswana Namibia Russia Angola Australia Canada DRC Tanzania Sierra Leone Zimbabwe Other 18
Impact on the Botswanan economy 19
US Jewellery Sales- DJ and Consumer confidence: Leading to a reverse ripple? 20
US Jewellery Sales- Dow Jones Dow Jones Industrial Average 1 Year Chart 21
US Jewellery Sales- Consumer Confidence is the key Consumer Confidence improves sharply (26 May) US economy: Consumer Confidence jumps by most in 6 years As far as consumers are concerned the worst is behind us Lyn Franco, Director of the Conference Board Consumer Research Centre 28 point jump in April and May is the biggest two month rally since records began in 1967.. Pent up demand is increasing with each passing day as reflected in these confidence numbers HIS Global Insight But what did the Canadian High Commissioner say last night? 22
Demand Scenarios and Mine Supply (Botswana-July 2007) $m 24000 22000 20000 18000 16000 14000 12000 HIgh Medium Low Supply 10000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 23
Major drivers for the industry Brilliant product Profitable and large kimberlites are hard to find And take even longer to come into production Major mines coming to end of open pit lives (10 years) Margins are generally good US consumer is battered>but recovering China, India and Middle East growing strongly 24
Diamond reserves Reserves of major operating mines (years) at current annual production Source: BHP Billiton 25
Longer Term Diamond Market Outlook Positive In March 2009, BMO forecast a gradual recovery in diamond prices starting mid-2009, as destocking is completed amidst shortages created by the cuts in sales and production from De Beers and Alrosa Diamond Prices Will Rise as the Global Economy Recovers 26
Conclusion on the Diamond Market Demand fell in 2008> the US decline outweighed all other markets Most major producers cut production> no cash to stockpile! Carat supply declined in 2008 by 10mcarats>to ~ 40m carats in 2009 (lower than in 2000!) Prices collapsed in late 2008 because of the banks withdrawing credit lines and a pipeline that was choked with stock Pipeline has destocked to some extent> production resuming. But will only get back to 2008 levels in 2012 US sentiment is improving. 27
And now for the other market.. Fear and greed overcomes reason Highly visible and sometimes very painful Prices can move for seemingly no rational reason 28
Listed Diamond Companies 37 companies 9 Producers; rest developers or explorers Combined market capitalisation ($1.5bn) (2008:$5bn) 29
Market Cap. Top Ten Diamond Companies (2008) ($4bn) $m 1,400 1,200 1,000 800 600 400 200 0 Updated on 18/07/2008 30 Gem Diamonds Ltd Harry Winston Shore Gold Petra Diamonds Ltd Namakwa Diam Mountain Province Diamonds Archon Minerals Trans Hex Group Pangea Diamondfields Plc Firestone Diamonds Plc
Market Cap. Top Ten Diamond Companies (2009) ($1.1bn) 450 400 350 300 250 200 150 100 50 0 Updated on 08/06/2009 31 Harry Winston Gem Diamonds Ltd Petra Diamonds Ltd Mountain Province Diamonds Shore Gold Namakwa Diam Pangea Diamondfields Plc Archon Minerals Firestone Diamonds Plc Peregrine Diamonds $m
Market Cap. 2 nd Ten Diamond Companies 2008 ($617m) $m 100 90 80 70 60 50 40 30 20 10 0 Updated on 18/07/2008 32 African Diamonds Archangel Diamonds Everfor Diamonds Rockwell Diamonds Inc Stornoway Diamond Corp Mano River Resources Diamondcorp Plc Vaaldiam Resources Sanatana Diamond Dianor Resources
Market Cap. 2 nd Ten Diamond Companies 2009 ($212m) 35 30 25 20 15 10 5 0 Updated on 8/06/2009 33 Peregrine Diamonds African Diamonds Trans Hex Group Stornoway Diamond Corp Kopane Diamonds Rockwell Diamonds Inc Mano River Resources Diamondcorp Plc Everfor Diamonds $m
Remaining Diamond Companies Over $10m (2008) ($173m) $m 35 30 25 20 15 10 5 0 BRC DiamondCore Diamonex Diamondex Kopane Diamonds Target Resources Blina Diamonds Peregrine Diamonds Kimcor Diamonds North Australian Diamonds Cape Diamonds Pl Karelian Diamond Tahera Diamond Corporation Tawana Resources Nl Updated on 18/07/2008 34
16 14 12 10 8 6 4 2 0 Remaining Diamond Companies Over $1m (2009) ($58m) Updated on 8/06/2009 35 $m Dianor Resources Vaaldiam Resources Diamondex North Australian Diamonds Archangel Diamonds Diamonex Sanatana Diamond Thabex Explor Ltd Target Resources Karelian Diamond Blina Diamonds West African Diamonds Tawana Resources Nl Carlton Resources Plc Cape Diamonds Pl Lohnro Mining BRC DiamondCore Sunrise Diamonds
Selected Diamond Shares Company Date High Highest Share Price Current Share Price % inc/dec BRC Diamondcore 2008/02/04 35.00 0.70-98% Pangea Diamonds 2007/05/29 0.30 0.02-94% Shore Gold 2007/04/06 7.74 0.58-93% Diamonex Limited 2008/01/08 0.50 0.05-91% Rockwell Diamonds 2007/07/30 0.79 0.11-87% Gem Diamonds 2008/05/08 11.91 1.70-86% TransHex 2007/04/17 15.80 2.75-83% Firestone Diamonds 2008/05/09 2.02 0.38-81% African Diamonds 2007/04/19 1.33 0.26-80% Petra Diamonds 2007/08/07 1.66 0.35-79% Namakwa Diamonds 2007/12/14 1.81 0.41-78% Mountain Province Diamonds 2007/05/23 5.93 1.77-70% Kopane Diamonds Development 2007/07/18 0.25 0.09-66% 36
Diamond Companies not alone- Selected Platinum Shares EXPLORERS (In Cents) Domicile Currency Highest Price Date Current Price % decrease Beartooth CAD 220 29 February 2000 2-99% Consolidated Puma CAD 220 25 May 2007 6-97% Blackthorn Resources AUD 395 26 June 2007 34-91% Platmin CAD 1088 13 July 2007 95-91% Eastern Platinum CAD 407 05 March 2008 60-85% Wesizwe ZAR 1495 19 April 2007 262-82% Anooraq CAD 506 26 October 2007 117-77% Nkwe Platinum AUD 121 23 March 2007 35-71% Platinum Group Metals CAD 440 29 October 2007 137-69% Jubilee Platinum GBP 124 01 June 2007 43-65% Ridge Mining GBP 290 13 June 2002 101-65% Platinum Australia AUD 308 02 July 2008 108-65% Caledonia Mining GBP 11 05 May 2006 4.75-57% Sylvania AUD 328 13 July 2007 155-53% Platinum Group of India RUP n/a n/a Average -76% 37
Platinum Producers also off PRODUCERS (in whole units) Domicile Currency Highest Price Date Current Price % decrease Aquarius ZAR 135 21 Feb 2008 37-73% Lonmin ZAR 612 12 July 2007 189-69% Anglo Platinum ZAR 1460 19 May 2008 595-59% Northam ZAR 79 11 March 2008 35-56% Implats ZAR 368 04 March 2008 187-49% Average -61% 38
TSX Venture Exchange Index (July 2008) 30% Decrease 39
TSX Venture Exchange Index (June 2009) 63% Decrease 40
Diamond Sector Index- AH GEM Shore Petra Mountain Province Rockwell Trans Hex African Diamonds Pangea Firestone 34% 24% 15% 8% 4% 4% 4% 4% 4% All rounded 41
Diamond Index 86% Decrease 42
The Market Spiral Market uncertainty Sector disappointments Delays in production Buying Slows Disappointing news Few buyers More sellers Credit crunch/ Oil price/ Inflation Selling increases Overall market declines Market sells Juniors/Explorers Switch to positive cashflow companies Fund Redemptions Forced Sales No Buyers Bottom? Value Buyers/ Corporate Action Is the glass half full or half empty? 43
Conclusion on the Diamond Shares Low share prices impact on capital raising Corporate action? Who has the cash? Companies should focus on delivery and cash flow In a bear market even good news is discounted Bears seize on bad news Have faith.there is value out there in the listed diamond stocks (more so now than in 2008!) 44
Diamond Industry Consensus doesn t mean that you are right! Too much debt and stock in the pipeline ultimately leads to tears Ripple effect is still there Thank goodness for production cuts Diamantaires were buying because shortages were going to lead to price increases > only have themselves to blame Only production cuts and renewed consumer confidence will save the industry The diamond industry: Things are never as good as people say they are and they are never as bad as people say they are Long term fundamentals/ supply/demand remain in place 45
Conclusion And what of my two friends Asterix and Obelisk? On their way back up? Or still looking for the druid Getaifx? 46
Questions? Allan Hochreiter (Pty) Ltd Corporate finance and advisory james@allanhochreiter.co.za www.allanhochreiter.co.za +27 11 325 5457 (office) +27 82 565 4507 (mobile)