De Beers Reports Sharp Decline In Diamond Sales

De Beers Reports Sharp Decline In Diamond Sales
March 6, 2019

 

De Beers, the largest supplier of uncut and unpolished diamonds by value and a subsidiary of Anglo-American PLC (OTC: NGLOY, LSE: AAL.LN), revealed on Tuesday that the revenue generated from the sales of rough diamonds has declined in the second cycle of the year. However, the company has pointed out that there are signs of a reversal as Indian diamond cutting and polishing industries have begun re-stocking. Following this announcement, the stock of Anglo-American PLC lost most of its gains made earlier in the trading session to close at $13.34, up $0.01 or 0.08% from the prior close.

 

De Beers struggles to keep the shine on diamonds

The multinational mining company operating from Johannesburg, South Africa and the United Kingdom usually conducts ten sales events every year. The company sells specific diamonds to nearly 80 of its hand-picked clients at events dubbed ‘sights in Gaborone’, in addition to auctions.

The company disclosed that it generated $490 million in its second sale of 2019, signaling a weak beginning to the year. The previous (first) sale fetched $500 million. Notably, even the revenue generated in the first sales of 2019 were below the previous sales. Precisely, the company realized $617million, $553 million and $563 million, respectively, in the second sales event since 2016. The revenue generated in the second sales event this year was the lowest since the company started publishing the data in 2016. So far for this year, the value of rough diamond sales is $990 million. It is the first time that the company’s total sales have fallen below the $1 billion mark in the first two events of a year after the world’s largest producer of platinum started releasing sales data.

In 2018, De Beers recorded sales of $5.39 billion worth for rough diamonds. This compares with $5.31 billion in the value of rough diamonds in 2017. The company produced 35.30 million carats in 2018, up 6% on a y-o-y basis.

De Beers CEO, Bruce Cleaver, said: “Demand for rough diamonds remains consistent during the second sales cycle of 2019. While overall demand for lower-value rough diamonds remains subdued, we did see an increase in demand from India as factories begin to restock.”

Cleaver further said, “In the second half [of 2018], the low-priced product segment came under considerable pressure due to weak demand and surplus availability, the rapid depreciation of the rupee and a reduction in bank financing in the midstream.”

Notably, in the 2018 annual report, Cleaver had mentioned about the difficulties faced by the slightly inferior (low) value diamond segment. Cleaver explained the reason behind the issue faced by the low-value diamond segment. He explained that the mid-segment of the diamond industry, which involves cutting and polishing, requires a considerable amount of cash to operate. The diamonds need to be bought with cash, working costs need to be managed, and then the waiting period involved for payments to be released by jewelry traders/retailers, who are increasingly opting to pay for diamonds after the completion of the sale to the end customer.

Another reason for the issue faced by the low-value diamond segment is that the production of diamonds has reached its highest in the past four years, with Canada’s Gahcho Kué mine reaching its maximum capacity. De Beers believes that the pending closure of the Argyle mine in Australia in the forthcoming years will limit the availability of small (low value) diamonds and reinstate the balance in the diamond market.

So, according to Cleaver, “This resulted in a surplus of low-priced polished diamonds at the end of the year, leading to lower sales at the start of 2019.”

Commenting on the drop in sales, RBC Capital Markets analyst, Tyler Broda said, “Today’s result shows that the restock following the seasonally busy Christmas period has underwhelmed, and sales so far are tracing out well below previous periods. The market remains in the process of rebalancing following a pop in supply from smaller mines from 2017-18, although with Rio’s lower value Argyle mine coming offline in the next couple of years, this should help to restore balance.”

Regarding the impact on overall profitability, Broda said: “In terms of impact to Anglo, there is potential that they are holding back sales from lower value diamonds, which would mean profitability would not necessarily be as impacted, but this is clearly not a positive sign. We expect De Beers to produce $1.4bn in EBITDA of a total $10.5bn on the product level or 13% of the group.”

Therefore, the drop in sales is expected to harm the stock price of Anglo American PLC.

The historical price chart indicates resistance for the stock at 13 levels. Additionally, the stochastic oscillator is also in the overbought region. As a result, we can expect the stock to move down in the short-term.

ang-american - technical analysis - 6th March 2019

Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.

Ian Maguire

Ian Maguire

Ian is our resident contributor to the latest going ons in the cryptomarket, keeping up to date with the latest icos and coins


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