Desperate times call for desperate measures, an old saying which explains why the world’s diamond miners have started “high grading” their assets, risking rapid depletion of reserves.
The large-scale entry of laboratory grown diamonds over the past three years has caused a collapse in prices for all gems, natural or man-made, especially at the cheaper end of the market.
It’s a more encouraging picture for the miners at the top end where big and high quality diamonds continue to command a premium price.
The problem for a miner in hunting for the biggest and best gems is that it can mean disregarding, or simply discarding smaller, unprofitable, stones which will probably never be recovered.
In diamond producing countries such as Botswana and Namibia in Africa the focus on the biggest gems could become a political issued as high grading inevitably leads to shorter mine life.
De Beers, the diamond business controlled by London based Anglo American put the spotlight on diamond size and quality in its third quarter production report released last week.
It revealed a surprisingly big 25% fall in overall diamond output blamed on a prolonged period of lower demand, and higher than normal inventories in diamond processing centres.
Production falls were reported in Botswana, Namibia, and Canada with the company’s South African mines the only division to increase output.
But a significant split can be seen in the prices of diamonds sold by De Beers with the overall average price up 4% to $160 per carat, a rise attributed to a higher proportion of top value stones whereas the average rough diamond price was down 18%.
The high-grading picture was clearest in the Debmarine business which “sweeps and vacuums” the ocean floor off the coast of Namibia for diamonds carried into the South Atlantic by the Orange River.
Anglo American said overall production in Namibia declined by 14% in the third quarter to half-a-million carats “reflecting intentional action to lower production at Debmarine, partially offset by higher grade mining and better recoveries”.
Just how tough the overall market for natural mined diamonds has become is shown in the De Beers average price index which slipped one point lower in the latest quarter from 108 to 107.
Seemingly not a big decline, the index was at 125 in the third quarter of last year, and the starting point for the index, which measures average prices of De Beers was 100 in 2006.
That means the average price of a De Beers diamond is slipping back to the same level of 19 years ago.
Anglo American said in its third quarter report that it was considering a reduction in diamond production caused by the weak market and oversupply of gems
Pressure in the diamond market from an excess of easily grown laboratory gems can be measured in the weak share prices of stock exchange listed miners (De Beers is not listed).
Two Down One Up
Petra Diamonds has seen its share price fall by 25% over the last six months. Burgundy Diamond Mines is down 39%.
An exception to the downward trend is Canadian-listed Lucara Diamond Corporation which has enjoyed a 48% share price increase largely because it has been finding massive, premium quality gems at its Karowe mine in Botswana.
In August, Lucara reported the discovery of a diamond weighing 2492 carats, one of the biggest ever found, eclipsed only by a handful of gems such as the 3106 carat Cullinan diamond discovered in South Africa in 1905 which was cut to form the centerpiece of the British Crown Jewels.