Namibia’s leading diamond producer, Namdeb revealed recently that its output for 2009 was expected to be less than half that of last year.
The company said it was also experiencing lower quality ore at its land operations and would not raise production until its brownfield expansion projects materialised.
The diamond miner is expected to record an output of 330000 carats from its land operations and about 600000 carats from its marine operations compared with a total output of 2.1 million carats the previous year.
Its 2010 production forecast was also put at 400000 carats and 650000 carats from its land and marine operations, respectively.
Namdeb was forced to embark on the so-called production holiday for three months tin 2009 to cut on costs.
Rough & Polished’s African Bureau Editor Veronica Novoselova had an interview with Namibia’s Diamond Commissioner, Kennedy Hamutenya who spoke widely on the operations of Namdeb, in which the Namibian government has an equal shareholding with De Beers.
Read the full text of the interview below:
What was Namdeb’s financial and operational highlight in 2009?
The year 2009 was a difficult year for Namdeb because they had to cut production by more than 50 percent. They will at most reach 900 000 carats, and they had to cut down their production capacity and work force by half as well. At the moment, Namdeb’s land operations are making marginal profits but because of some difficulties being faced on its sea operations, they will only manage to breakeven. Their operations were efficiently run; there was a lot of cost cutting. It should be pointed out that Namdeb had already planned to implement some cost cutting measures before the advent of the global economic downturn as land resources were depleting. These are the times when a company is challenged to come up with creative initiatives to be more efficient and Namdeb has been doing that so it can stay alive.
What kind of measures are being taken to support demand for rough diamonds?
DeBeers obviously has programmes in place to create demand; they spent more money, trying to promote diamonds, especially the new brand of the diamond jewellery, ahead of thanksgiving, Christmas, New Year and Valentine’s Day. They are cautiously optimistic that this will improve demand for jewelleries. We are counting on those promotional activities to create demand. I think depending on what happens over Christmas and new year they might be more demand, if we have a lot of polished into the market obviously they will be good for rough as well, because we need the polished to move so that a lot of the rough that has been bought now can move, because people have been stocking up for their factories. I can see prices increasing between 7 and 10 percent next year if things remain positive.
What is the reason behind a recent higher demand for rough diamonds, despite the almost flat polished market?
I think it is mostly speculation in the market and also people needed to stock diamonds for their factories before September and October to meet demand for diamonds end of the year and the New Year. So, clearly, there has been a shortage of diamonds in the market. Before people were not buying because they did not have money, there was also a lot of uncertainty. But now people are beginning to have a feeling that the economy is going to recover and they are also getting the feeling that prices are going to increase, so they would rather buy the rough diamonds now. So, I think that is the reason a lot of people are buying rough diamonds. Some of them are buying because they feel that there is high demand for rough at the moment and u can make a quick turnover, selling diamonds getting margins from 10-15 percent. They are cashing in on this and this has been happening all over the world.
Will this trend be long?
I think once reality sets in the polished and rough market will start to try and adjust themselves. It will eventually stop because people will realise that there ‘is no way we can keep buying rough while the polish is not moving’, so the pipeline will have to calibrate itself so that there is a congruence between the movement of polish and rough and I think this will start to fix itself going into the second quarter of the year, hopefully, if the recovery is sustained, maybe then we will be on our way back to normal recovery, although people are expecting full recovery between 2011 and 2012. The recovery will be gradual because it is driven by global economic dynamics, it is not an industry specific problem, and so as long as it depends on other elements in the global economy such as the banking industry, these have to come right. There is no much money out there available for people to buy diamonds, so it will be a slow recovery.
How do you evaluate the current prices for rough diamonds, are they fair?
It is difficult to tell whether there will be increases in diamond prices, or if we will get back to the levels where we used to be. Rapaport is saying diamonds should be a commodity and the law of supply and demand should take over and on the other hand De Beers believes that diamonds should not be a commodity and it is a special product, maybe it is between the two. The most important thing to ask is can mining companies continue to mine and make a profit? So, you will find out that marginal mines (those that are too expensive to run) will go out of business and the low cost mines will continue to be in business.
Will it be correct to say that the crisis that hit the diamond industry is over?
No, not yet, the crisis is not yet over, but we are on our way there.
What is the difference between the diamond market in 2008 and 2009?
Obviously the first half of 2008 was business as usual, but people started to realise that ‘we are in trouble’ when they felt the full impact of the global financial crisis in November 2008. The year 2009 has been a survival year, people realised that they have to stay in the game because if you are in and the crisis is over, you are in good position, but if you are out, you are out. Of course 2010 will be the beginning of the recovery, which some people think has already started.
Is the sightholder scheme effective in a crisis situation?
Not really, a number of sightholders did not buy a lot of goods they were offered, they said the goods were overpriced, they left the goods on the table and others did not buy anything at all. In Namibia between November 2008 and March 2009, we did not sell even a single diamond. So, the whole sightholder system did not work, hence we had to sell diamonds to India, because we needed money to keep Namdeb alive. Namdeb had faced a serious cash flow crisis so we managed to sell the rough to the Indians on a good price. So the sightholder scheme was actually in hibernation. There are, however, some sightholders that continued to buy diamonds even when they might have lost money just to stay in good books with De Beers’ DTC and they were others that said ‘we are sorry we cannot sustain this kind of life and we are not going to buy’. I think De Beers understood that. The whole system was tested to the core, it was shaken, so I am not sure what the future holds for the sightholder system, maybe they will come up with new models for buying diamonds.
What is more expensive to run a Kimberlite or alluvial diamond mine and what did Namdeb to remain competitive?
Obviously, kimberlites are easy to mine, they are concentrated in one area and the cost is not so high compared to alluvial mining like we are doing. We are talking of the biggest earth moving operations, it is a very huge cost, so we have to improve the way we do our business, we have to come up with new creative ideas and how to mine efficiently and cost effectively, maybe by breaking up mines into business units. So, they are new ways of thinking that are coming into play as to how you can stay alive in this very difficult environment. Some mines where the rough is not so nice and maybe very industrial and expensive to mine will be shelved unlike those that have nice quality stones.
Veronica Novoselova, Rough&Polished African Bureau Editor in Namibia