Upcoming Christmas season will show if the diamond industry still sparkles

By Leia Michele Toovey- Exclusive to Diamond Investing News

The diamond industry is having a unique year. With the U.S. market in chaos, the anticipation was that the industry would witness a staggering drop in profits. Many companies have been reporting that sales are down, however, sales of top quality gems have risen, and this is causing many companies to churn record breaking profits. The top jewelry sales time is just around the corner, and, not till that milestone is over and the numbers are crunched will companies be able to draw conclusions on the successes and failures of 2008.

Petra Diamonds is an example of a company that is performing beyond expectation. They had earlier reported that their earnings before interest, tax, depreciation and amortization were US$25.5 million for the fiscal year ending June 30, 2008, compared to a deficit of US$5.2 million the previous year. Commenting on the news, Chief Executive Officer Johan Dippenaar stated, “This reporting year saw Petra move from being an exploration company to a global mining company.” Moving forward, Petra has sold its cutting and polishing operations so that it can focus on its core skill of diamond production and exploration.

The increase in profits was spurred by the first full year of production from the Koffiefontein mine, which the company gained control from De Beers in July 2007. For 2009, the company is predicting an even greater increase in profits as news mines – Helam, Sedibeng and Star, in addition to the Kimberley underground, Cullinan and Williamson mines, all of which Petra recently agreed to buy from De Beers, come online. Total production for fiscal 2009 is expected to be above one million carats. The Cullinan deal is Petra’s most recently completed acquisition, negotiations closed in July 2008. The Williamson and Kimberley Underground agreements are slated for closure in October and December, respectively.

Petra said it now has net attributable reserves of 121 million carats with an estimated value of US$13.67 billion, compared to reserves of 9.33 million carats valued at US$1.9 billion in October 2007.
The company also recently bought out BHP Billiton’s share of the Alto Cuilo and Luangue exploration projects in Angola, and started trial mining at its Sierra Leone Kono project.

Petra explained that the substantial growth of its portfolio of assets resulting from these acquisitions motivated its decision to sell the South Africa-based cutting and polishing business, Calibrated Diamonds Investment Holdings, to Gem Diamonds for US$5.9 million. Under the agreement, Petra maintained the right to access Gem Diamonds’ polishing facilities in Mauritius and Dubai for a 30-month period, and has the option to establish a diamond beneficiation facility in South Africa using the Calibrated intellectual property for a 24-month period.

Russian diamond giant ALROSA recently reported on their plunging profits. An announcement made this week indicated an expected profit US$411.67 million in 2008, a decline of 27 per cent from 2007 figures. The Russian diamond giant said its performance targets “reflect the current economic situation,” adding that production costs had risen with increased costs of fuel, materials, machinery, and labor, and higher prospecting and exploration expenses.

ALROSA forecasted that rough diamond production, including from its OJSC Alrosa-Nyurba subsidiary, would reach US$2.29 billion worth in 2008, down 3.4 per cent from the US$2.37 billion value of its 2007 rough production. Rough diamond sales are expected to grow 2 percent to $2.85 billion and polished diamonds sales to rise 21 per cent to US$190 million.
In other diamond mining news, the ongoing debate between De Bees and African Diamonds rover who will mine and auction the diamonds at the proposed AK 6 diamond project has finally come to a close. The Botswana Government rejected De Beers’ application for a retention in the license, but agreed that diamonds from AK 6 will be marketed through De Beers’ Diamond Trading Company Botswana (DTC Botswana). The government had initially preferred auctioning on the open market.

African Diamonds confirmed yesterday that the Director of Mines had informed the parties that the retention license applied for by De Beers had not succeeded. Final details are now being worked out to enable agreement on the terms of a mining license to be completed by September 30. In the light of progress being made toward a mining license, the directors of African Diamonds said they had agreed to seek deferment of the court case, which was scheduled for the Lobatse High Court yesterday (September 22). African Diamonds had brought an urgent application against De Beers and the Boteti joint-venture to prevent the submission by the joint venture of an application for a retention license in respect of the AK6 project. The case against Boteti is still pending.

The move is a part of the Botswana government’s recent campaign to transform the country from a diamond producing nation into a diamond marketing and beneficiation centre over the next ten years. The government has a significant stake in the local diamond industry, including a 15 per cent stake in De Beers and a 50-50 partnership with the same company in DTC Botswana.