No sparkle for diamonds after hopes of 2020 recovery - Markets news - KOTLYARS.COM

No sparkle for diamonds after hopes of 2020 recovery

The diamond industry was optimistic at the start of 2020. After a tough 2019, where diamond prices hit multi-year lows and jewellery demand was lower thanks to the Hong Kong protests and general macroeconomic uncertainty, Anglo American (AAL) subsidiary De Beers had reported a year-on-year increase at its first sale of the year, which they call a sight. Now, mine closures threaten smaller diamond and precious stone miners, while the cut in supply might not be enough to make up for the fall in demand from Covid-19.

Operations in South Africa, Canada and Lesotho have been put on care and maintenance for at least a few weeks to stop the spread of the virus. London companies Petra Diamonds (PDL) Gem Diamonds (GEMD) have shut or significantly slowed their mines in South Africa and Lesotho respectively. Ruby and emerald miner Gemfields (GEM), which returned to the London Stock Exchange last month, has suspended "all but critical operations" at its Kagem mine in Zambia/Mozambique and cancelled an upcoming auction. This cut in supply is not enough to help the market swing to undersupply, according to Liberum analyst Ben Davis. He estimated the cuts would reduce supply by around 12 per cent, with the two largest miners De Beers and Alrosa (Ru:ALRS) not yet closing mines, although De Beers has cut its workforce at the Venetia mine in South Africa by 75 per cent.

Even if prices go up in response to the closures, the smaller miners are still in dire straights. Petra said in its mine closure announcement its rough diamond sale ending 23 March had seen a 24 per cent drop in average prices per carat, because of “severely depressed and opportunistic bidding for its goods”, especially for the larger stones on offer. As a result it only sold three quarters of the diamonds and sent the others to Antwerp for sale later in the year. Petra has been skirting its debt covenants for some time, with its lenders waiving a net debt-to-cash profit ratio of 4.25 times as of 31 December. The company said its lenders remained supportive, but has also hired advisors to help push back the maturity of $650m in loan notes, for which the balance is currently due in 2022.

Gem Diamonds has a healthier outlook because the prices for larger stones (above 3 carats) has held up better recently, Mr Davis said, and selling big stones is easier than running auctions due to the limited pot of potential buyers. As of 31 December, its debt situation was also much healthier than Petra’s, with net debt of $10m and an untapped $70m facility to hand as well. On the other end of the supply chain, things aren’t looking much rosier. US company Signet Jewelers (US:SIG) declined to give guidance for its next financial year, ending 1 February 2021, and suspended its common dividend. Signet chief executive Virginia Drosos said the company would accelerate “optimisation of its real estate footprint” after shutting its stores in North America while also taking out $900m from an existing debt facility.

Luxury retailer Watches of Switzerland (WOSG) has the Goldsmiths and Mappin & Webb brands on top of its watch business, although jewellery only contributed 7 per cent of first half sales. The company said its revenue for the year to 26 April 2020 would be around £810m, after bringing in £594m in the nine months to 26 January, giving it a sales drop of 16 per cent between its last two quarters. A drop this size with all its shops shut would not be a bad quarter for Watches of Switzerland, although judging how realistic this is made harder by the company not separating its online and bricks-and-mortar sales in trading updates.