Diamonds rebound on broader markets

The diamond industry is poised for a turnaround due to recovery in the U.S. market and growth in Asian diamond markets such as China and India, according to a new comprehensive report by Global Industry Analysts Inc.

While Europe continues to have the world's leading markets for diamonds, rapidly growing Asian economies are expected to form a significant market group, the San Jose, Calif.-based market research publisher said Sept. 16.

The report also predicted that diamond prices are expected to rise in the near future and companies engaged in diamond mining in the southern and central Africa are expected to witness considerable growth in the post-recession period.

Diamond miner and retailer Harry Winston Diamond Corp. shares this view. The 40-percent owner of the Diavik Diamond Mine in Northwest Territories agrees that the industry is changing as demand for the jewels in the rapidly growing Asian markets is outpacing that in Western countries, "We produced and sold more rough diamonds into a market that has paid higher prices for them," Harry Winston Chairman and CEO Robert Gannicott told analysts Sept. 1 on a conference call to discuss the integrated diamond company's much-improved second-quarter results.

The Toronto-based company is witnessing a recovery driven by increasing demand for diamond jewelry and luxury brands, especially in key developing markets such as China where consumer wealth is quickly growing, Gannicott said.

"It is not simply a recovery of the diamond world as it used to be, though, but rather a broadened demand, especially from expanding economies in Asia at the expense of still muted recovery in the U.S., and in the general diamond business, although not our own, in Europe as well," he said.

Harry Winston shares jumped more than 17 percent, or C$1.89 to C$12.64 in midday trading Sept. 2 on the Toronto Stock Exchange, a day after the company reported it reversed a year-earlier loss.

Harry Winston said its second-quarter profit was US$16.5 million, or US22 cents a share, improving from last year's second-quarter loss of US$24.5 million, or US32 cents a share, due to a significant jump in sales.

In 2009, the overall diamond market experienced considerable negative repercussions due to the global economic meltdown in which prices as well as demand for rough diamonds declined by about 25 percent. The diamond-mining sector in South Africa, one of the leading diamond producers worldwide, was among the worst affected during the year.

BHP Billiton, 80 percent owner of the Ekati Diamond Mine in Northwest Territories, said the diamond industry was one of the hardest hit mining sectors during the downturn, with prices for rough diamonds at Ekati dropping by 49 percent.

BHP's share of diamond production at Ekati fell to about 3.05 million carats in the year ended June 30 from 3.23 million carats a year earlier due to the mining of lower grade ore in the most recent 12-month period. However, the mining major posted a 72 percent leap in revenue from its diamond outputs during fiscal 2010 to US$901 million (underlying EBIT of US$465 million). That compares with US$523 million (underlying EBIT of US$59 million), a year earlier.

For the quarter ended July 31, Harry Winston posted a 62 percent jump in revenue to US$153.7 million from US$94.8 million in the year-earlier period, as rough diamond sales rose 89 percent to US$86.8 million buoyed by a 62 percent increase in prices and a 17 percent increase in sales volume. Net earnings from operations climbed to US$28.9 million, compared with comparable loss of US$3.9 million.

Retail sales at Harry Winston's high-end diamond stores climbed 37 percent to US$66.9 million on improved results in Europe, Asia and the United States.

Sales rose 40 percent in Asia, a market that is growing in importance to the company's plans for growth. About half of Harry Winston's retail sales now come from Eastern Asia, Gannicott said.

Revenue from Russia and the Middle East also has improved.

In its report on the superhard materials market, GIA said India and China are emerging as the primary markets for diamond cutting and polishing. Improvements in quality, advancements in mining and cutting procedures and large work forces enabled countries such as China and India to take leading positions.

With a perspective on global production, Russia, Democratic Republic of Congo and Botswana emerged as the largest rough diamonds producers in volume. The market share of De Beers, one of the most influential players in diamond production, witnessed consistent decline from a monopolistic 90 percent share in the past decade or so to about 60 percent since 2004 and even less in the current market.

Meanwhile, the United States, which consumed about of half of the world's diamonds before the recession, is still struggling to regain retail confidence during a broader uncertain economic recovery, Gannicott said.

Harry Winston is expected to continue its recovery in the third quarter. Rough diamond sales by volume will likely be even higher in the second half of the company's financial year, Gannicott said.

Likewise, diamond prices are expected to climb industry wide in the near future, and companies engaged in diamond mining in southern and central Africa are expected to witness considerable growth in the post-recession period, GIA said.

North America - the United States and Canada, however, represents the undisputed market leader, according to the researcher.

The region's prospects continue to appear bright primarily due to dominance of the United States as one of the largest global consumers of industrial diamonds.

The country is also a major producer and exporter of synthetic industrial diamonds.

North America and Europe, mainly propelled by Russia make up a consolidated lion's share of more than 75 percent of the global market.

Contingent upon a new wave of technological developments and the U.S. demand for industrial diamonds, GIA said the North American region is forecast to emerge as the fastest-growing market through 2015.

The Canadian market, renowned for its superior-quality diamonds, is experiencing robust growth opportunities in the Northwest Territories, it added.

Rough diamond production from Harry Winston's share of Diavik's output totaled 650,000 carats in the second quarter, compared with 570,000 carats a year earlier. Rio Tinto plc controls the remaining 60 percent interest in Diavik, which is Canada's largest diamond mine.

Gannicott told analysts that prices for the type of stones produced from Diavik have surpassed the peak experienced in 2008, before the financial crisis hit rough-diamond demand, "by a measurable margin." He also noted that price growth for smaller, cheaper stones in the market has been slowed by large volumes of production coming from Zimbabwe.

In August, Harry Winston said it repurchased a 9 percent indirect interest in Diavik from Kinross Gold Corp. for US$220 million in shares, cash and debt. Kinross has also decreased its stake in the Toronto-based diamond company to 8.5 per cent from 19.9 per cent.

Harry Winston had sold the stake in the mine during the depths of the recession when it needed cash.

Gannicott also said Diavik's owners are now studying possible changes to underground mining methods which have the potential to lower costs and could result in a future extension of the mine's resource estimate.

The miner also continues to seek acquisition opportunities in the diamond mining sector and sees "no better opportunity than owning more of Diavik itself, he added.