Are diamonds losing their sparkle?

Sunday, 8th March 2009 10:37 - by GedW

World demand for diamonds has ‘fallen off a cliff’ and, consequently, the demand for the price-driven sparklers has fallen by quite a way, in fact by more than 50%. There is now an over-supply, causing a stockpile of unsold, uncut, unpolished gems that cannot find a market. It is going to be a very lean period for some of the smaller miners to survive unless they can rein in, if not halt, cash-burn altogether. Some operators are in fact selling stones at knock-down prices just to cover/barely exceed their overheads, but only because they can survive on tight margins. Botswana has one of the largest deposits where operators have suspended production until 2010. Things are just as dire elsewhere. Unless there is a marked turnaround in the demand for diamonds, it is going to get tougher to raise finance for under-funded ongoing projects. This is a double-edged sword. Do those miners on the cusp of commencing extraction activities continue their operations in the hope of a quick demand turnaround, or do they hold fire on operations and allow the oversupply to be absorbed and hope prices return to pre-recession levels? Some of the larger ‘cash rich’ operators can appreciate the obvious problems facing minnow miners, and may well decide to mop them up, taking control of their resource potential on the cheap. My guess is that we will see a burst of merger activity before too long.