Petra Diamonds’ rough prices decreased at its latest tender, with the market weakening amid high inventory levels and manufacturing shutdowns.

The May trading session brought in $42.1 million from the sale of 468,817 carats, while like-for-like prices fell 13% versus March, the miner reported Friday. Of the total, $5.6 million came from the sale of a 354.04-carat stone from the Cullinan mine in South Africa.

“Petra’s fifth tender…in line with others in the market, saw a softening in demand,” said Petra CEO Richard Duffy. “The softer demand is attributed to inventory levels in the midstream and extended shutdowns by certain manufacturers following the recent India holidays.”

The sales value was down 42% from March’s $72.1 million and was 51% less than the equivalent tender a year earlier, which occurred in May 2022. Sales volume dropped 7% from March and 26% year on year, while the average price fell to $90 per carat, compared to $143 per carat at the previous tender.

Like-for-like prices of rough diamonds under 2 carats declined by double-digit figures relative to March, Petra added. Stones between 2 carats and 10.8 carats were down between 3% and 5%.

The miner withheld diamond parcels containing 75,880 carats of gem and near-gem quality rough in all size ranges due to the lower prices, it explained. The company expects demand to return in the next few weeks as the Indian holiday period comes to an end.

“With the extended holidays set to end in the coming weeks, demand is expected to improve, and the withdrawn parcels will be offered for sale at Petra’s Antwerp facilities during May and June 2023,” Duffy said. “This approach reflects Petra’s strategy of maintaining flexibility at its tenders to optimize pricing. We continue to see a supportive diamond market in the medium to longer term as a result of the structural supply deficit, despite the volatility seen in this current sale.”

Image: Ore processing at the Cullinan mine. (Petra Diamonds)

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De Beers’ rough revenues declined at the company’s fourth sales cycle of the year as the global diamond market faltered amid shaky US and Chinese retail demand.

The trading session grossed $480 million — 21% less than in the equivalent period of 2022, the miner reported Wednesday. Sales dropped 11% compared with this year’s third cycle, reflecting a seasonal slowdown, management said. Most of the proceeds were from the May sight in Gaborone, Botswana, with a minority coming from auction sales.

“Rough-diamond demand was also influenced by ongoing macroeconomic uncertainty and a slower pace of recovery in consumer demand from China than was widely anticipated,” said De Beers CEO Al Cook.

The rough market has had a tough May as manufacturers reduce production and inventory. De Beers merged its May and July auctions in response to the conditions, while Okavango Diamond Company (ODC) saw a number of items unsold at its spot auction.

Source: De Beers’ Orapa mine in Botswana. (Ben Perry/Armoury Films/De Beers)

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Lucara Diamond Corp.’s revenue and earnings fell in the first quarter as the market weakened and the miner had a lower average value of rough available to sell.

Sales declined 37% year on year to $42.8 million, the company reported last week. It sold $41.3 million worth of goods from its Karowe mine in Botswana, including top-up payments as part of an arrangement with HB Antwerp. The remaining $1.5 million in revenue came from sales of other companies’ goods on Lucara’s Clara online platform. Net profit slumped 95% to $1 million.

The miner experienced a planned weakening of the product mix in early 2023. A smaller proportion of diamonds came from the high-value south lobe, and more came from the center and north lobes, which produce fewer stones weighing 10.8 carats or more. Like-for-like rough valuations also dropped relative to a year earlier.

“As anticipated, [the first quarter] delivered lower revenues than in the comparative period [of 2022], owing to the change in ore mix processed and diamond-pricing weakness resulting from continued geopolitical and economic uncertainty,” said Lucara CEO Eira Thomas.

Proceeds from the HB deal — under which the miner is contracted to sell all of its stones of 10.8 carats or more to the Belgian manufacturer — fell 46% year on year to $24.5 million, including $6.6 million in top-up payments Lucara received based on the final polished value. This reflected the changes to the product mix at Karowe as well as the fact that a number of higher-value and more complex stones were still at the manufacturing and polished-sales stages when the quarter ended.

The company maintained its revenue projection of $200 million to $230 million for 2023, noting a positive long-term outlook for the diamond industry.

While late 2022’s soft pricing continued into this year, “prices are beginning to show signs of stabilization as China begins to open up post-Covid-19, a trend [that] is anticipated to continue towards the end of the year,” management added.

Image: The Karowe mine at dusk. (Lucara Diamond Corp.)

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Net profit jumped 16% year on year to CAD 28.2 million ($21.1 million) in the first quarter, the company reported Wednesday. Revenue rose 52% to CAD 128.7 ($96 million), reflecting the occurrence of three sales, compared with two in the same period of 2022.

“The company achieved record sales on the back of a three-sale first quarter, which included three full-production shipments and buoyant prices for smaller diamonds,” said Reid Mackie, the company’s vice president for sales and marketing.

The average selling price dropped 20% year on year to CAD 134 ($100) per carat as the product mix weakened and overall valuations declined from the record high of early 2022, Mackie added. Sales volume soared 90% to 961,000 carats.

The company, which holds 49% of Canada’s Gahcho Kué mine in a joint venture with majority owner De Beers, saw its share of production rise 11% to 647,000 carats for the three months. It expects the mine to yield a total of 5.6 million to 6.1 million carats in 2023 and 4 million to 4.4 million carats in 2024.

Image: Haul trucks at the Gahcho Kué mine. (Mountain Province)

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Sales slid 30% year on year to $36.7 million for the three months ending March 31, the company said last week. Sales volume fell 10% to 25,687 carats, while the average price decreased 22% to $1,431 per carat.

The result reflected an unfavorable comparison with the same period in 2022, when rough demand was strong, driving prices up.

Additionally, the company sold seven diamonds for more than $1 million each during the quarter, contributing $11.1 million to the total revenue. That compares with nine diamonds a year ago, for $16.2 million. A 6.63-carat, pink diamond, which sold for $282,889 per carat, garnered the highest price. Meanwhile, the best price for a white diamond was $34,441 per carat.

However, revenue rose 13% from the fourth quarter of 2022, with sales volume up 14%. The average price was flat.

Production for the period slipped 2.3% to 27,774 carats as the company mined lower-grade ore. During the period, Gem Diamonds recovered a 122-carat, white, type II diamond, which it plans to sell in the second quarter, it added.

Image: The Letšeng diamond mine. (Gem Diamonds)

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De Beers’ production was flat year on year at 8.9 million carats in the first quarter as the company transitions its Venetia deposit in South Africa to underground mining.

The company is currently processing only lower-grade surface stockpiles from the site, which completed open-pit mining and has yet to fully ramp up the new underground section, De Beers said Tuesday. That decrease outweighed a strong performance from the miner’s other deposits, it explained.

Production in South Africa slid 56% to 739,000 carats for the period. Output in Botswana rose 12% to 6.9 million carats as the company treated higher-grade ore and saw increased processing levels at its Orapa plant.

Output in Namibia — where most diamonds come from marine mining — grew 37% to 619,000 carats, reflecting the contribution from the Benguela Gem vessel, which began production in March 2022. Production in Canada advanced 11% to 673,000 carats, despite unplanned maintenance challenges, De Beers noted.

Demand was a bit sluggish in the first quarter as sightholders remained cautious in planning their 2023 allocation schedules as a result of the uncertain macroeconomic outlook. The company expects sales to pick up as the year progresses, it said. Sales rose 23% year on year to 9.7 million carats. The company also benefited from holding three sights in the first quarter of 2023, compared with only two a year ago.

De Beers expects production for the full year to be between 30 million and 33 million carats, it added.

Image: Trucks hauling ore at the Venetia mine. (Ben Perry/Armoury Films/De Beers)

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Storm Mountain Diamonds has recovered a 108.39-carat diamond from its Kao mine in Lesotho.

The company, a joint venture between Namakwa Diamonds and the Lesotho government, found the fancy-intense-pink, type IIa diamond on March 23, it said last week. The stone is one of the largest pink diamonds ever unearthed, the miner claims.

“It is one of the most significant diamonds found to date in Lesotho,” said Mohlomi Moleko, minister of natural resources for Lesotho.

Before this discovery, Kao’s biggest diamond of that color was the Pink Eternity, a 47.80-carat stone found in October 2022. The deposit has also yielded other high-value pinks, including the 29.59-carat Rose of Kao, the 25.97-carat Pink Dawn, and the 21.86-carat Pink Palesa.

Kao, one of the largest diamond mines in Lesotho, has approximately 18 years of operation remaining. It is expected to provide an additional 12.7 million carats of rough over that time.

Image: The 108.39-carat pink diamond. (Storm Mountain Diamonds)

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Production at Rio Tinto’s Diavik mine in Canada slipped in the first quarter after the miner had trouble accessing ore from its open pit.

Output fell 4% year on year to 954,000 carats for the three months ending March 31, Rio Tinto said last week. Production was 28% lower than the previous quarter. During the period, the company faced temporary restrictions on retrieving material from the mine site, it explained.

The miner processed 427,000 tons of ore during the quarter, a 14% drop from the same period the year before and a 20% fall from the previous quarter.

During the first quarter, Rio Tinto revealed it would spend $40 million to initiate underground mining below its existing A21 open pit. That expansion is set to add an extra year and 1.4 million carats of rough to the mine’s life. Diavik is expected to end commercial production in the first quarter of 2026.

The company predicts total diamond recoveries for the full year will come to between 3 million and 3.8 million carats, after production for 2022 reached 4.7 million carats.

Image: The Diavik mine. (Rio Tinto)

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De Beers is embroiled in momentous negotiations with the Botswana government that are threatening to derail their model partnership. For the first time in their 54-year relationship, the two are simultaneously in talks for a new 10-year marketing deal as well as the 25-year license governing their Debswana mining joint venture.

Naturally, the marketing agreement has garnered more attention as it facilitates the country’s beneficiation program — the process of adding value to its mining operations by enabling services further along the supply chain such as manufacturing and trading. It’s also the area that appears to present more wiggle room for De Beers.

In a politically charged environment, in which diamonds are responsible for such a large part of the country’s economic welfare, it may be easy to perceive the company as taking a disproportionate part of the country’s sales.

Botswana reportedly wants to raise its share of the pie. President Mokgweetsi Masisi was quoted as saying the government wants a higher percentage of the local output for its own sales, and that the government was prepared to walk away from the talks if its demands weren’t met.

The exact nature of its conditions has not been disclosed. It is likely they revolve around the share of production that goes to Okavango Diamond Company (ODC) — the parastatal that conducts rough sales on behalf of the government. The distribution of specials, large diamonds above 10.8 carats, may also be on the table, as might be how the sales take place and the percentage of De Beers rough supplied to Botswana-based factories. 

Mining Leverage

Whereas the government appears to have some bargaining power when it comes to the pending marketing agreement, De Beers holds the cards with regard to the mining one. And diamond mining carries more weight than sales when it comes to Botswana’s fiscal strength.

Consider that an estimated 80.8 cents from every dollar generated by De Beers mining operations in Botswana goes to the government in the form of royalties, taxes, and dividends. In terms of gross domestic product (GDP), mining makes the biggest contribution of any sector, accounting for some 20% of the total, of which diamond production makes up the vast majority.  

Mining is where De Beers has its strongest influence in these talks. The company invests enormous amounts to ensure production continues, largely through majority shareholder Anglo American, and it has the technical know-how and experience to manage projects of such a scale.

As De Beers cochairman Bruce Cleaver explained recently on the Rapaport Diamond Podcast, decisions need to be made on major expansion projects that are due at the Jwaneng and Orapa mines. De Beers cannot make such investments — which could amount to billions of dollars — without the mining licenses in place, he stressed. 

While the marketing agreement and mining license have historically been signed independently of one another, this time they connect the interests of both parties, suggesting one might be used as leverage to influence the other.

Complex Ownership

It is therefore no simple matter for either party to walk away if their demands aren’t met. And perhaps in that context it is understandable the agreement has been postponed three times already. But there is some expectation that the June deadline must be the final one.

If so, it is difficult to consider a worst-case scenario in which a deal is not reached and what that would mean for the broader relationship between De Beers and the Botswana government. Their partnership and ownership structure are already complex, adding an extra layer of complication to the negotiations.

Botswana owns a 15% stake in De Beers Group, with Anglo American holding the remaining 85%. The government and De Beers are also equal joint owners in Debswana, which oversees De Beers’ Botswana mines, as well as in Diamond Trading Company Botswana (DTCB), which sorts and values that production.

Essentially, production from Debswana’s four mines — Jwaneng, Orapa, Damtshaa and Letlhakane — is sold to DTCB where it is sorted and valued for distribution to its two clients: 75% going to De Beers Global Sightholder Sales (GSS) and 25% to Okavango under the current arrangement. At GSS, the DTCB goods are mixed with production from other De Beers mines in Canada, Namibia and South Africa and aggregated into categories for distribution to sightholders. 

Given that complex ownership structure, what would it mean for GSS if a marketing deal were not reached? After all, GSS relies on DTCB and therefore also on Debswana for two-thirds of its supply, playing a key role in helping De Beers meet its long-term commitments to sightholders.

The government has an interest in GSS’s success too. It earns dividends from DTCB’s sales to GSS and, as a 15% owner of De Beers, would be compromising its potential revenue there. Furthermore, GSS employs 234 people, of which 220 are Batswana, and reducing GSS activity would put their jobs on the line.

The Okavango Factor

And what would failure to sign an amicable marketing agreement mean for half-government owned Debswana and DTCB? That production could arguably go to Okavango. But does Okavango have the capacity to handle such large volumes?

Okavango sells via auctions held 10 times a year, coinciding with the De Beers sights. It sold an estimated 5.9 million carats for $1.27 billion in 2022, according to Rapaport calculations. Yet auctions are volatile and dependent on market conditions. The De Beers sight system, with its long-term contracts, offers greater stability and protection from a downturn, thus giving some assurances for stable revenue to DTCB that Okavango currently cannot provide. 

Okavango doesn’t have the capacity to implement a sight system. But the government’s deal with HB Antwerp announced in late March might provide an interesting alternative. The government intends to acquire a 24% stake in HB Antwerp and supply the manufacturer with rough through Okavango. No further details were disclosed, such as how much of Okavango’s supply will go to HB Antwerp — whether it will be all, a percentage of its run of mine, or just the specials. 

Viewing itself as a disrupter, HB Antwerp is looking to replicate with Okavango its arrangement with Lucara Diamond Corporation, the owner of the Karowe mine in Botswana. HB Antwerp has the exclusive rights to all of Lucara’s specials, through which Lucara gains a profit share from the sale of the resulting polished stones by the Belgian company.

HB Scaling Up

The government has taken note of that agreement, while strengthening its ties to Lucara through the Karowe operation, and to HB Antwerp, which in late March opened a state-of-the-art factory in Gaborone. At the very least, it seems to want to sell Okavango’s specials through HB Antwerp, in a similar way that Lucara does.

For its part, HB Antwerp plans to ramp up its Botswana operations. Its new facility is “the most advanced diamond facility in the world,” claimed cofounder and managing partner Rafael Papismedov in his speech at the opening. And the company is currently breaking ground on a second factory there, “an even more ambitious plan that is 15 times the size,” he added.

HB Botswana, as the local subsidiary is known, has committed to scale up its business in Botswana by as much as 10 times in the coming years, growing to 485 employees by 2026, from the 30 it currently employs, President Masisi said at the factory inauguration. 

For HB Botswana to operate at such scale, it will need more than just Okavango’s specials. It will require a fair share of Okavango’s run-of-mine commercial goods as well, with a promise to add value on those goods too. 

Perhaps Lucara can play a role there. Lucara is looking for third-party suppliers to sell rough through its Clara platform, which it claims is an innovative way to market goods according to the buyers’ polishing needs. While Clara has been a slow burn for the company, Lucara still claims that diamonds sold through the system gain a premium.

While HB Botswana clearly plans to increase its manufacturing of rough to polished in Gaborone, it may have excess rough, through its deal with Okavango, to sell through Clara. A speculative scenario in which Okavango supplies HB Botswana its run-of-mine supply, and HB Botswana places a portion of the non-specials from Okavango on Clara, while the Belgian company sells the specials of both Okavango and Lucara, might not be farfetched. At press time, Lucara did not reply to a request for comment on whether it was in talks with the government or HB Antwerp for such an arrangement.

De Beers’ Bargain Chip

Given the scale of its production, De Beers cannot offer the government a profit-sharing arrangement. Such a deal is manageable for Lucara given that it has one mine, with relatively small production of 335,769 carats in 2022, and one client to sell its specials to — HB Antwerp. De Beers produced 34.6 million carats in 2022 and has long-term sales contracts with some 80 sightholder clients with whom it would be difficult to involve in any profit-sharing deals.

All De Beers can do is offer Okavango a greater share of DTCB supply: Perhaps it could raise it from 25% to 30%, or 40% at a stretch. Debswana’s 2022 production reached 24.1 million carats and had an average sales price of $193 per carat, according to Anglo American’s annual report. Every 5% increment of that amounts to 1.2 million carats valued at around $232 million.

Another negotiation point could be on the split of Debswana/DTCB’s specials of 10.8 carats and above. Under the current arrangement, these higher value goods are sold to De Beers GSS and Okavango in the same 75-25 split as are the rest of the goods. Perhaps the government would be content to keep those proportions in place for the run-of-mine goods but raise Okavango’s share of the specials?

Either way, is De Beers willing to depart with such volumes, and can it afford to? After all, it has commitments to provide consistent supply to sightholders, and it relies heavily on Debswana and DTCB to meet those demands.

Taxing Issues

The government might also be pushing De Beers for clarity on an alleged tax dispute relating to its moving GSS from London to Gaborone in 2013.

As a De Beers spokesperson explained: When De Beers agreed to set up GSS in Botswana, it was effectively transferring part of its UK business to Botswana, including the revenue from the sale of rough diamonds to sightholders. However, the UK business continued to undertake functions which were critical to the success of the diamond industry such as synthetic research, the development of synthetic development technologies as well as creating and delivering a marketing strategy. The cost of these activities beneficial to the functions of GSS are covered by intercompany transactions – a marketing charge and royalty of 2% of total rough sales that GSS pays to De Beers UK.

A leaked report from the Botswana Unified Revenue Service (BURS) contends that De Beers management knowingly presented “unreasonable, unrealistic, dishonest, baseless and misleading” forecasts to the government and tax authority to justify the royalty, the local press published in January. The report claims that between 2013 and 2020, De Beers made gross profits of as much as $1.35 billion from GSS through royalty, marketing, and research and development fees charged by De Beers UK.

In response to the allegations, De Beers contended there were periods when the trading business was in fact unprofitable during the reported timeframe. The company could not foresee in its initial projections the market downturns of 2015 and 2019 that led to significant operating losses. The spokesperson further stressed the contribution De Beers had made to the country’s fiscus.

“Despite De Beers making no profit globally from diamond trading activities between 2013 and 2020, our Botswana-based diamond trading business still paid billions of pula in taxes in this period… [and] far greater tax contributions have also been delivered by the Debswana diamond mining joint venture,” the spokesperson stressed. “During the most challenging economic periods, De Beers has continued to purchase rough diamonds in Botswana, supporting Debswana and the economy even when such activity is unprofitable, and continued to invest in consumer marketing to support the long-term value of the industry.”

“We are committed to ensuring we pay the right amount of tax at the right time, and we engage with BURS in an open, transparent and constructive manner to ensure this is the case,” he added.

Balancing Needs

Still, the miner might make some concessions on this issue as the negotiations reach their climax — perhaps reducing the royalty paid to the UK business moving forward.

But the Botswana government will also need to soften its stance. In speaking to officials on condition of anonymity, one sensed there’s a split within government circles on how to approach the final talks. There are those who understand and value the long-term relationship with De Beers, while others are pushing for change, fueling the perception that Botswana has got a raw deal from the company.

The result may be a compromise between the two.

The government ought to recognize the tremendous contribution De Beers has made – and can continue to make – in the country. As President Masisi noted, today there are 48 cutting and polishing companies operating in Botswana, with employment in the sector nearly doubling in the past year to 4,001 workers as of January 15, 2023.

He might be reminded that none of that would have been possible without the contribution of De Beers. While a fresh approach may be needed on the sales side, Botswana needs to incentivize De Beers to invest in the country’s mining operations and maintain the strong trading presence that has inspired growth of Botswana’s manufacturing sector.  

De Beers, meanwhile, will walk a fine line between protecting its heritage in the country and bringing innovation not only in mining, but facilitating new added value for Botswana in its sales mechanisms, too – especially as others are tempting the government with a shiny new business model.   

This article first appeared in the March edition of the Rapaport Research Report. Subscribe here.

Main image: david polak/midjourney

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Petra Diamonds’ revenue fell in the third fiscal quarter as the Williamson mine remained offline and the company held fewer tenders.

Sales slumped 52% year on year to $67.8 million for the three months ending March 31, the miner said Tuesday. Although prices for the company’s rough diamonds increased, that boost was more than canceled out by a lack of contribution from the shut Tanzanian deposit, it explained. An unfavorable comparison with the previous year, when Petra held two tenders during the period, as opposed to one in the third quarter this year, also led to the drop. Sales volume declined 37% to 465,138 carats.

Output for the January-to-March period slipped 21% to 653,700 carats, primarily due to Williamson’s temporary closure and the placing of the Koffiefontein mine in South Africa on care and maintenance. However, the miner believes it will still hit its guidance of 2.75 million to 2.85 million carats for the full fiscal year, thanks to improved grades at its Cullinan deposit and increased ore processing at Finsch, it noted.

During the period, Petra’s debt increased to $124.7 million as of the end of March, from $90.8 million on December 31.

For the first nine months of the fiscal year, Petra’s revenue fell 31% to $278.5 million, while sales volume decreased 24% to 1.8 million carats. Production slid 21% to 2.1 million carats.

Petra believes the resumption of operations at Williamson in the first quarter of fiscal 2024 will allow the company to raise production by 1 million carats in fiscal 2025, leading to overall output of between 3.6 million and 3.9 million carats for the year, it said. It also expects the market to continue to improve.

“[We have seen] recently improved diamond pricing, which we largely attribute to a post-Covid-19 recovery in demand from China,” noted Petra CEO Richard Duffy. “We continue to expect a supportive diamond market in the medium to longer term as a result of the structural supply deficit, while noting potential volatility in the near term owing to recent geopolitical and macroeconomic uncertainty.”

Image: The new processing plant at the Cullinan mine. (Petra Diamonds)

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