Stuart Brown, the ex-joint managing director of De Beers, and current CEO of Canadian miner Mountain Province Diamonds, made an amazing statement in a Financial Times article, stating the very obvious: “We need India to open up. Until the manufacturing opens up there, there will be no demand for rough diamonds.”
It seems as if miners have suddenly realized that they need India far more than India needs them. Mines are deeply indebted. Dominion Mining, which also owns parts of Canada’s Diavik and Ekati mines, has seen its Fitch Rating reduced to Triple C, which is a junk bond status. South Africa’s Petra Diamonds has scaled down operations in South Africa for a mandatory lockdown aimed at containing the spread of the coronavirus pandemic. It is deeply indebted. We could expand this list – but that’s not the purpose of this Memo. Let it suffice to note that corona has caused some mines to be put on care and maintenance. Many are overly leveraged. A few producers may even face bankruptcy or closure unless India opens up quickly.
And if it doesn’t? Then producers may literally choke on their diamonds. But talking about choking, looking at the total diamond pipeline, still the most uncomfortable place to be is in the midstream. India alone has somewhere between $1.5-2 billion worth of rough diamond inventories. Add to this some $5 billion polished and you are getting the picture. And to say that bank debt can be settled out of future earnings is to believe in fairy tales – unless of course, India uses the corona moment to seize the initiative and become the game changer everyone has been waiting for.
Stability in rough prices is no less crucial.
The government of India can assist the industry in a tremendous manner if, after the corona lockdown has been rescinded, it simply puts a three-month moratorium on rough diamond imports. Whether the moratorium would be for two, three or four months is something it could discuss with the industry. It certainly depends on how long it takes for the diamond market not just to stabilize, but also to pick up.
The Indian banks have literally “given up” on the diamond sector. They shy away from diamond financing with the same resolve as we run away from the corona virus! If sightholders remain addicted, with a monthly rush to De Beers, Alrosa and other producers, falling over each other to get rough, they will ruin any prospects for India to clear up its inventories.
Unfortunately for the miners, there is no alternative to India.
Photo © De Beers, DR.
