botswana june 20009
TRANSCRIPT
Diamond Market
James AllanBotswanaJune2009
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Allan Hochreiter is a corporate finance boutique based in Johannesburg (www.allanhochreiter.co.za)
Allan Hochreiter
Subsidiary – Partners Drilling20 drills in SA and 6 in Africa in (Anglo Plats and De Beers and Rio main clients in SA)
Ken GreveCorporate finance executive for 15 years: Gold Fields/JP Morgan/Kumba/BHP Billiton Unbundling of Kumba from Iscor
Rene HochreiterRated top platinum analyst 10 years in rowRaised capital for Eland Platinum
James AllanLast 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 shareholdersPredicted the coming shortfall of diamonds when De Beers stocks were ~$5bn….
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Contents
Diamond MarketRough supply and demand
Diamond MarketShare market
Conclusion
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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
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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
Recent diamond newsTiffany’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)
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Polished Prices Indexwww.polishedprices.com
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2.6%
5.9% 7.0% 6.0% 5.0%
-8.0%
8.5%
-12.0%
-8.0%
-4.0%
0.0%
4.0%
8.0%
12.0%
2002 2003 2004 2005 2006 2007 2008
3.6%
-0.2%-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
94-98 99-03
World Retail Sales (USD)
Driving Growth
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Retail Sales of Diamond Jewellery 2008 ($70bn) (-10%)
51%
15%
6%
6%
6%
16%USA
Japan
Europe
Asia-Pacific
Asia-Arabia
Others
10
Diamond Content 2008
43%
12%8%
8%
15%
14%USA
Japan
Europe
Asia-Pacific
Asia-Arabia
Others
11
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
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THE RISKS – Debt and no Liquidity in the Cutting Centres
Diamonds-Pipeline Debt
Source: Company reports and RBC Capital Markets estimates for 2008
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
197919801981198219831984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008
Year
$m $m
DTC inventory
Cutting Centre debt
Cutting Centre Bankruptcies are likely – even among De Beers’ clients!
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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
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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….
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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
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Seen on the way to Venetia?
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Global Supply (carats) Global Rough Diamond Supply 2005-2015 (Carats)
-
20,000.0
40,000.0
60,000.0
80,000.0
100,000.0
120,000.0
140,000.0
160,000.0
180,000.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cts
(000
's)
South Africa Botswana Namibia Russia Angola Australia Canada DRC Tanzania Sierra Leone Zimbabwe Other
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Global Supply $ terms
-
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
14,000.0
16,000.0
18,000.0
20,000.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
US
$ (M
)
South Africa Botswana Namibia Russia Angola Australia Canada DRC Tanzania Sierra Leone Zimbabwe Other
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Impact on the Botswanan economy
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US Jewellery Sales- DJ and Consumer confidence: Leading to a reverse ripple?
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US Jewellery Sales- Dow JonesDow Jones Industrial Average 1 Year Chart
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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?
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Demand Scenarios and Mine Supply (Botswana-July 2007)
10000
12000
14000
16000
18000
20000
22000
24000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
$m
HIgh
Medium
Low
Supply
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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
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Diamond reservesReserves of major operating mines (years) at current annual production
Source: BHP Billiton
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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
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Conclusion on the Diamond MarketDemand 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….
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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…
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Listed Diamond Companies
37 companies
9 Producers; rest developers or explorers
Combined market capitalisation ($1.5bn) (2008:$5bn)
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Market Cap. Top Ten Diamond Companies (2008) ($4bn)
Updated on 18/07/2008
0
200
400
600
800
1,000
1,200
1,400
Gem
Dia
mon
ds L
td
Har
ry W
inst
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Sho
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Pet
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Ltd
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Min
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Tran
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exG
roup
Pan
gea
Dia
mon
dfie
lds
Plc
Fire
ston
eD
iam
onds
Plc
$m
31
Market Cap. Top Ten Diamond Companies (2009) ($1.1bn)
Updated on 08/06/2009
0
50
100
150
200
250
300
350
400
450H
arry
Win
ston
Gem
Dia
mon
ds L
td
Pet
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Ltd
Mou
ntai
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Nam
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Pan
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Plc
Arc
hon
Min
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s
Fire
ston
e D
iam
onds
Plc
Per
egrin
e D
iam
onds
$m
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Market Cap. 2nd Ten Diamond Companies 2008 ($617m)
Updated on 18/07/2008
0
10
20
30
40
50
60
70
80
90
100
Afri
can
Dia
mon
ds
Arc
hang
elD
iam
onds
Eve
rfor
Dia
mon
ds
Roc
kwel
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Inc
Sto
rnow
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Cor
p
Man
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iver
Res
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Dia
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Vaa
ldia
mR
esou
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San
atan
aD
iam
ond
Dia
nor
Res
ourc
es
$m
33
Market Cap. 2nd Ten Diamond Companies 2009 ($212m)
Updated on 8/06/2009
0
5
10
15
20
25
30
35P
ereg
rine
Dia
mon
ds
Afri
can
Dia
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c
Man
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Res
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es
Dia
mon
dcor
p P
lc
Eve
rfor D
iam
onds
$m
34
Remaining Diamond Companies Over $10m (2008) ($173m)
Updated on 18/07/2008
0
5
10
15
20
25
30
35
BR
CD
iam
ondC
ore
Dia
mon
ex
Dia
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dex
Kop
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Dia
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Targ
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Blin
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Per
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onds
Kim
cor
Dia
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Nor
thA
ustra
lian
Dia
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Cap
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iam
onds
Pl
Kar
elia
nD
iam
ond
Tahe
raD
iam
ond
Cor
pora
tion
Taw
ana
Res
ourc
es N
l
$m
35
Remaining Diamond Companies Over $1m (2009) ($58m)
Updated on 8/06/2009
0
2
4
6
8
10
12
14
16
Dia
nor R
esou
rces
Vaa
ldia
mR
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Dia
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Kar
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Wes
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Pl
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BR
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Sun
rise
Dia
mon
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$m
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Selected Diamond Shares
Company Date HighHighest
Share PriceCurrent
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%
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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%
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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%
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TSX Venture Exchange Index (July 2008)
30% Decrease
40
TSX Venture Exchange Index (June 2009)
63% Decrease
41
Diamond Sector Index- AH
4%Rockwell
4%Firestone
4%Pangea4%African Diamonds4%Trans Hex
8%Mountain Province15%Petra
24%Shore
34%GEM
All rounded
42
Diamond Index
86% Decrease
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The Market Spiral
• Disappointing news• Few buyers• More sellers
“Bottom?”
Value Buyers/Corporate Action
• Market uncertainty
• Sector disappointments•Delays in production
• Buying Slows
• 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
Is the glass half full or
half empty?
44
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!)
45
Diamond IndustryConsensus doesn’t mean that you are right!
Too much debt and stock in the pipeline ultimately leads to tears
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
• Ripple effect is still there
• Thank goodness for production cuts
46
Conclusion
And what of my two friends…Asterix and Obelisk?
On their way back up?
Or still looking for the druid Getaifx?
Questions?
Allan Hochreiter (Pty) LtdCorporate finance and advisory
+27 11 325 5457 (office)+27 82 565 4507 (mobile)