diamonds

Rough diamond prices were down by over 5% in aggregate in 2019, with some categories down by double digits, according to the Zimnisky Global Rough Diamond Price Index – adding to the trend of flat-to-down diamond prices for most of last decade, which has pressured the profitability of diamond miners.

Moreover, on the back of Russian diamond producer ALROSA’s announcement on a downward revision of its 2020 production guidance, global natural diamond production is again forecasted to fall in 2020.

This article first appeared in Mining Review Africa Issue 1, 2020

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ALROSA serves as an important supply proxy for the diamond industry, accounting for an estimated 25% of global production volume in carats and almost 30% of total value produced in dollars.

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For context, De Beers is estimated to account for 23% of volume supplied and 34% of value, respectively.

In late-2019, Russia’s ALROSA cut its full-year 2020 production guidance to 34.3 million carats from the previous 38.7 million carats, however the company specified that the figure is subject to change and will ultimately be the decision of the supervisory board rather than management.

This figure would put ALROSA’s production in line with that of De Beers, which has previously been forecasted at just over 34 million carats in 2020.

In recent years, ALROSA has been the world’s largest diamond producer by volume, with output of approximately 38, 37, 40 and 37 million carats between 2019 and 2016.

For comparison, De Beers has produced about 31, 36, 34 and 27 million carats over the same time period.

Regarding its 2020 production projection, on an analyst call in November, ALROSA said that the production cut was not “for the sake of reducing production” but a result of “identifying facilities where a reduction in production will result in an increase in free cash flow for the company.”

Adding that at many of company’s deposits and facilities “the share of the fixed costs is quite high” and that cuts would likely be at alluvial operations.

Incorporating the lower 2020 figure for ALROSA’s assets, global natural rough diamond production is now forecasted at 139 million carats, which would be down from 141 million carats in 2019, 149 million carats in 2018 and 152 million carats in 2017, according to Paul Zimnisky estimates and forecasts.

Importantly, ALROSA also said that 2020 sales guidance would be between 37 and 38 million carats and “maybe 39 million carats in a very optimistic case,” implying that the company expects to draw about 3 to 5 million carats from inventory next year.

For context, ALROSA’s total inventory count was estimated at around 23 million carats at year-end-2019, of which approximately 10 to 11 million carats are estimated to be “excess” inventory – an estimated 6 million carats of which was accumulated in 2019 specifically.

This means that based on ALROSA’s 2020 sales projections, the expectation is to draw between 50% and 85% from the inventory that the company built in 2019.

About the author

Paul Zimnisky is an independent diamond industry analyst and consultant based in the New York City metro area and is the author of the monthly industry report – State of the Diamond Market. Zimnisky is a graduate of the University of Maryland’s Robert H. Smith School of Business with a B.S. in finance and is a Chartered Financial Analyst Charterholder, and has held roles as a metals and mining analyst, arbitrage trader, exchange-traded fund developer, and consultant.

His work has been used globally by institutional investors, management consulting firms, private and public corporations, governments, intergovernmental organisations and universities.