Published on August 25, 1998
Analyst-Hilton Ashton
(27 11)302 1208
diamond industry review
Rough and polished prices have started to decline.
S. African Sector Weighting 3.5% Our Recommendation 2.5%
recommendation
The market remains extremely fragile with a strong possibility that the rate of bankruptcies amongst manufacturers and dealers will pick up towards year-end. Only the strong industry players will survive the current downtrend, which could last for another 12 months.
Sell all the major producers including De Beers, Dia Met and Aber. This is an opportunity to pick up cheaply those exploration stocks and the smaller producers with excellent long potential. This includes Mountain Province, Archangel, ODM, and DiamondWorks.
highlights
De Beers' 7th sight, at US$440 million, was higher than the 6th sight.
Prices of rough and polished stones have fallen by 2% to 3% and are expected to fall further over the next few months.
De Beers and Alrosa have agreed that the supply contract between the two should be renewed for another three years. The present sales contract is due to expire at year-end.
Leading Equities (Prices as at August 24,1998)
Share Share Price Market Cap.(US$ m) 12 month (Hi/Low) Forecast EPS Recommendation
De Beers ZAR86.00 5 205 151.50/86.00 ZAR10.16 SELL
Dia MetC$19.50 414 31.15/19.50C$(0.08)SELL
Aber C$10.75 334 22.70/10.75 - SELL
Ashton A$0.76 149 2.26/0.76 - SELL
SouthernEra C$6.10 11320.50/4.65 C$0.80 HOLD
Mountain Prov. C$2.80 72 6.50/2.20 - BUY
DiamondWorks C$1.00 71 2.20/1.00 BUY
Namco C$1.95 47 7.15/1.95- HOLD
Analyst: Hilton Ashton (27 11) 302 1208 August 25, 1998
DE BEERS' CSo sales - SIGHT NO. 7-98 ESTIMATE
Sight No 1997 US$'MM Cumulative US$'MM 1998 US$'MM% Ch. Cumulative US$'MM% Ch.
1 585 585 315 -46.2 315-46.2
2 635 1 220 290-54.3 605 -50.4
3 610 1 830 290-52.5 895 -51.1
4 560 2 390 390-30.4 1285 -46.2
5 490 2 880 415-15.3 1700 -41.0
Half Year 2 880 1700 -41.0 1700 -41.0
6 383 3 263 42511.0 2125 -34.9
7 478 3 741 440-7.9 2565 -31.4
8 358 4 099 350f -2.2 2915 -28.9
9 273 4 372 300f 9.9 3215 -26.5
10 2684 640 275f 2.63490 -24.8
Half Year 1 760 1790f 6.5
Full Year 4 640 3 490f -24.8 -24.8 ÿ
f = forecast
The 7Tth sight, at US$440 million, is lower than our previous estimate of US$500 million. The sight is higher than the 6th and is in line with De Beers' management statement at the presentation of the interim results that sales will be increased in the second half. Gary Ralphe said that diamond stocks in the pipeline had reduced by about US$1 billion as a result of De Beers restricting sales and de-stocking during the first half.
The industry is starting to take strain because retailers are squeezing manufacturers for better prices with the result that polished prices are falling. In the past 4-6 weeks both rough and polished prices have fallen by about 2% to 3%. Prices would have fallen further had it not been for the mid-season break, therefore we expect a further decline in prices during the next few months. The end result is that we project a fall of 7% to 8% in rough and polished prices between June and October 1998.
We are now concerned that the lack of liquidity in the market will lead to stiffer competition, which coupled with declining prices and a high level of debt in the industry, will lead to a spate of bankruptcies. This will knock confidence further and trigger a downward spiral in sales. The kind of scenario that we have been warning investors about for some months.
recent MAJOR events
Russian sales agreement
De Beers and Alrosa have agreed that they should re-new the sales contract for the next three years. This comes as no surprise because both parties have, in the past, made positive statements about the prospects of renewal. The reason for the relative ease with which the contract will be renewed has to do with the poor state of the industry. It would simply be suicide for any of the major players to enter into competition with the others at this time.
DIAVIK PROJECT UPDATE
Aber Resources (40% interest in the project) announced the latest resource position. The resource estimate to the 400 metre depth has increased by 10 million carats from 123 million carats to 133 million carats. The most significant change to the resource has been to the upper 90 metres of the A154S pipe where the grade has increased by 18% from 4.4 carats per tonne to 5.2 carats per tonne.
Pipe A-418 A-154S A-154N A-21 Total/Average
Total ResourcesTonnes 000 9,000 12,000 11,500 4,900 37,400
Grade ct/t 3.7 4.8 2.4 3.0 3.56
Resources Millions carats 33.3 57.6 27.6 14.7 133.2
Previous estimate Millions carats 33.9 52.2 21.9 15.1 123.1
VALUATIONS Value US$/ct 56 63 35 38 56
Resource grade US$/tonne 207 302 84 114 199
The valuations of the diamond samples from pipes A-154S and A-418 were confirmed again in June 1998 by 12 diamantaires. The changes has increased the average resource grade from US$185 per tonne to US$199 per tonne.
The feasibility study is due to be completed in the 4th quarter of 1998 with production expected in the 2nd quarter of 2002. The change in resource has made no difference to our forecast production profile of 6 to 7 million carats per year during the first 15 years, falling to just under 4 million carats per year for the next 7 years.
SouthernEra interim report
The company reported net income of 8cps for the 6 months ending June 30, 1998 compared with a loss of 6cps for the same period last year.
At Klipspringer the Sugarbird Blow was mined, initial bulk sampling was started on Marsfontein M1 and development work continued to expose reserves on the Leopard fissure. The plan is to stockpile Leopard fissure ore until a mobile processing plant of 30-40 tonne per hour capacity is in place in February 1999. Production is expected to increase substantially in the 2nd half mainly sourced from the M1 pipe. Initial bulk sampling yielded 22 390 carats during the first few days.
Operations are progressing satisfactorily in Angola but are being hampered by the outbreak of fighting by revolutionaries. The Chicapa river diversion has been delayed by the intersection of granite, which will require blasting. Camafuca drilling has established a resource of 13.5 million carats at an average grade of 0.15 carats per cubic metre. Large diametre core drilling continues.
We expect 1998 earnings of about 80cps if the company achieves its M1 planned production.
Conclusion. On the basis of the relative rating with South African shares SouthernEra rates a HOLD.
ASHTON MINING
John Robinson, chief executive for seven years, resigned suddenly with no reason given for his departure. Nobby Clarke, the chairman who was due to retire at year-end, also resigned. The departures are clearly due to investor concern about Ashton's recent price performance and future prospects.
Finance director, Doug Bailey is acting as CEO until a replacement is found for Robinson while Paul McClintock the deputy chairman has taken over the chairmanship.
De beers nav
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The discount has widened to 57% and continues to be worse than the average of 37% during the past 4 years.
The World's Largest Listed Diamond Companies
The following table shows the major listed diamond companies with the recent trading data.
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Share Prices at August 24 1998
conclusion
The market remains extremely fragile with a strong possibility that the rate of bankruptcies amongst manufacturers and dealers will pick up towards year-end. Only the strong industry players will survive the current downtrend, which could last for another 12 months.
equity recommendations
Sell all the major producers including De Beers, Dia Met and Aber. This is an opportunity to pick up cheaply those exploration stocks and the smaller producers with excellent long potential. This includes Mountain Province, Archangel, ODM, and DiamondWorks.
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