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Weekly Market Report
DIAMOND MARKET OVERVIEW?
Traders have signalled a weakening in prices, reflected on the main PolishedPrices index, which showed polished prices continue their downward trend that started in March. The downward movement in polished comes at a time when the main producers, notably DTC and Russia’s Alrosa, have continued raising prices. The trade is reporting tight liquidity. Luxury and watch brands have indicated a sharp drop in sales compared to this time last year. With the slowing of China’s economy and the Euro zone’s worsening problems, the mood in the trade is very cautious.
?Traders reported a clear slowdown in the rough market. Both DTC and Russia’s Alrosa’s made assortment changes in May, which buyers said translated in a firming in prices. DTC boxes are selling at a loss in the secondary market, Sightholders said. Meanwhile, BHP Billiton's May spot tender saw a drop in prices of around 4 - 6%, traders said. Many in the trade are expecting the rough market to come under further pressure. “The market is likely to see challenging trading conditions in the months ahead,” said an industry source.
CORPORATE AND EVENTS
Africa-focused Petra Diamonds Ltd's quarterly production more than doubled as output from its Finsch mine in South Africa was taken into account for the first time, and the miner said prices for rough diamonds rose,
reported. Petra Diamonds, which operates mainly in South Africa, said demand from the U.S. and Asian markets remained steady even as prices climbed up after the rough diamond market stabilised in December, said the report. "The stronger market is due to a recovery in confidence after the initial impact of the Eurozone debt crisis abated," the company said in a statement. Rival Gem Diamonds said in April rough diamond prices would continue to increase in the second quarter, the report said. Prices for rough diamonds jumped in the first half of 2011 on low inventories and rising Asian demand, but fell sharply in the last five months of the year as markets tumbled and investors took cover, it said. Petra Diamonds' production rose 126 percent to 622,509 carats for the third quarter, prompting the company to back its full-year production target of over 2 million carats. The Finsch mine - South Africa's second largest diamond operation by production which Petra bought from De Beers in September last year - contributed 343,051 carats to overall output in the quarter, the report said.
Goldman Sachs expects IPO hopeful Graff Diamonds' profit to grow an annualized 31 percent from 2011-14, driven by an increase in sales and higher profit margins, a research note obtained by Thomson Reuters publication IFR on Monday showed, Reuters reported. The profit growth at high-end jeweler Graff will be nearly double the 15.8 percent expected for rival U.S. jeweler Tiffany and below the 47 percent forecast for Chow Tai Fook Jewelry Group, Goldman analysts estimated in the report dated May 5, the report said. The research note from Goldman, one of the joint global coordinators of Graff's up to $1 billion Hong Kong initial public offering, gives a first peek into the finances of a company that has remained private since Laurence Graff founded it in 1960. London-based Graff started meeting with investors on Monday to gauge demand for its IPO, with a roadshow set to kick off on May 21, sources told
In the coming two weeks, the company, its bankers and advisers will meet with fund managers and institutional investors around the world, before deciding on a price range for the deal ahead of the roadshow, the report said. Investors will have a better view on Graff's valuation versus its peers after the price range is set, it said. Graff's profit should reach $264 million in 2014 from $117 million in 2011, but the growth rate is forecast to slow in the coming years. Profit was expected to rise 42 percent in 2012 from 2011, 29 percent in 2013 and 23 percent in 2014, the research note showed. Sales are forecast to grow 16.2 percent a year through 2014, above Tiffany's 12.6 percent, but lower than the 38.7 percent for Chow Tai Fook, according to Goldman's estimates. Chow Tai Fook, which trades at a 2012 price-to-earnings ratio of 14.6 times, raised about $2 billion in a Hong Kong IPO in December, said the report. Graff would be tapping Hong Kong equity markets after the worst start for IPOs in the Asia-Pacific region in about four years, with overall equity market activity down about a fifth from last year, according to the
report. The company is betting on resilient demand for diamonds and high-end jewelry in the coming years, its founder said in a interview with
in November. Goldman expects jewelry demand in China to rise 26 percent per year from 2010-20, in line with overall demand for luxury goods and driven by an increase in wealthy individuals in the country. Credit Suisse Group, Deutsche Bank, Goldman, and Morgan Stanley were hired as joint global coordinators on the IPO, said the
The biggest rally in three years for luxury-goods makers in Europe is fizzling on concern slower economic growth in China and renewed euro-area political turmoil after Greece’s inconclusive election will choke off demand,
reported. The nine-company Bloomberg European Luxury Goods Index, whose clothiers and watchmakers get 34 percent of sales from Asia, tumbled 5.5 percent over the past five days, the largest decline since Nov. 24, data compiled by Bloomberg show. The Stoxx Europe 600 Index retreated 2.5 percent. The luxury gauge surged 25 percent in the first quarter as designers Hugo Boss AG and Salvatore Ferragamo SpA gained more than 50 percent, the report said. China’s cooling growth, the political impasse since Greece’s May 6 election and proposed tax increases from France’s new president are hurting the industry, said the report. Francois Hollande, who defeated Nicolas Sarkozy to become the first Socialist in 17 years to control Europe’s second-biggest economy, has proposed a 75 percent levy on incomes above 1 million euros ($1.3 million), it said. Swatch Group AG, the world’s largest watchmaker, gets 38 percent of revenue from China, home to more than a million millionaires, and Burberry Group Plc generates 33 percent of sales in Asia, accoridng to the
report. “With the growth momentum in China slowing, what has been pushing the luxury-goods sector higher and higher is bound to weaken as well, and luxury companies will see an end of their massive rally,” said John Plassard, a director at Louis Capital Markets SA in Geneva. “2012 will prove itself a transition year.” The Bloomberg luxury index retreated 3 percent from April 13, when a report showed Chinese gross domestic product trailed forecasts last quarter, through Thursday. That’s three times more than the Stoxx 600, which slipped 0.9 percent.
Swatch, Burberry, the U.K.’s largest luxury-goods maker, and Hugo Boss were the gauge’s worst performers in that period. The index rose 0.6 percent Friday, the report said. The measure tumbled 62 percent from the end of the second quarter of 2007, when Chinese growth was an annualized 14.5 percent, through the first quarter of 2009, when economic expansion bottomed at 6.6 percent, data compiled by
show. The Stoxx 600 dropped 57 percent over that period. The number of dollar millionaire households in China climbed 31 percent in 2010 to 1.11 million, ranking the country third behind the U.S. and Japan, according to a Boston Consulting Group survey released last year. The rally in luxury stocks has pushed Burberry’s valuation to 19.9 times estimates earnings, compared with a low of 5.5 in November 2008, according to
data. Swatch shares have risen to 15.1 times forecast profits from a low of 6.5 and LVMH Moet Hennessy Louis Vuitton SA has increased to 16.9 times from 8.7. The Stoxx 600 as a whole is trading at 10.5 times projected income, the data show. “I’ve become more cautious on luxury goods as the valuations don’t look as attractive,” said Peter Braendle, who helps manage $60 billion at Swisscanto Asset Management AG in Zurich. “I’ve reduced positions in recent months to a light buy, down from a strong buy.” Braendle said he would reduce his weighting to neutral if growth in Asia, especially China, slowed further. China’s economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years. Foreign direct investment sank for a fifth month in March, while house prices fell in a record 37 of China’s 70 cities tracked by the national government, according to the
Geologists at Debswana are studying the viability of a new diamond deposit near the existing Jwaneng mine lease area, which could potentially breathe more life into the 30-year-old operation,
reported. While Debswana has known about DK7's existence for decades, various factors such as the company's decision to focus on existing operations and vacillating profitability over the years, have held back the deposit's development, said the report.
However, with known resources and existing operations only guaranteeing production up to 2033, Debswana strategists are taking a deeper look at DK7, it said. Debswana group manager, mining, Len Dimbungu recently told Business Week that the diamond company had moved DK7 into its sights. "It's smaller than the other deposits and we are doing work to see when to bring this into production and at what rate," he said, "It could possibly be about the same size as Damtshaa." When fully operational before its suspension in 2009, Damtshaa was a 500,000-carat per annum operation, being the smallest of Debswana's four operating mines. The DK7 deposit is 12 hectares in size, while the main Jwaneng deposit is spread over 54 hectares, said the report. Although Debswana is yet to fully investigate DK7, previous studies suggest it could also be an open cast mine like the diamond producer's other operations. Dimbungu said DK7 was only part of the plans to extend Jwaneng Mine's lifespan beyond the ongoing P24 billion Cut 8 project, it said. At present Debswana is mining to a depth of 330 metres at a level known as Cut 6, while ore from Cut 7 is due to be tapped into by 2014. Waste mining continues at Cut 8 with the diamond-bearing rock due to be reached and tapped into by 2016. Designs for Cut 9 are currently underway with board approval to be sought soon. "Under the Jwaneng Resource Extension Project, we are drilling up to 1,000 metres below the surface to understand the ore body, its quality, value and volume and by the end of 2014, I will have that information," said Dimbungu. "Using that information, I will be able to fine-tune Cut 9 and have it approved by the board. That would allow us to mine through to 2032 - 2033. Mining is about knowing what you are going to do ahead of time," the Debswana executive told Mmegi resource information for a decision on a possible Cut 10 would be required by 2022. "We are going to have to tell our geologists to prepare a resource extension project," Dimbungu said. "If we are going to go underground, we need to tell them that by 2018 we need information on this underground plan. We will look at the costs between open cast and underground to see which makes sense between the two." Cut 10 or an underground mine could possibly run between 2034 and 2054. "Debswana is going to be here for a long time," Dimbungu emphasised. "People may say diamonds are running out but they are still there. What runs out are the profit margins because as you go deeper, the costs rise. That's why you hear about the High Performance Organisation project to maximise the way we work and cut down on costs."
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