342-carat diamond recovered from Lucara's Karowe mine last month. Photo: Lucara Diamond Corp

342-carat diamond recovered from Lucara's Karowe mine last month. Photo: Lucara Diamond Corp

Prices Favour Lucara

Issue 125, May 2015

When De Beers' diamond buyers bought stones from the company in the 1970s, they were invited to its offices in London's Charterhouse Street, given a box of diamonds, informed of its price and asked if they would accept it or not.

Those who always agreed were favoured with lucrative parcels and those who did not were presented with over-priced stones, but all, on their way out, shuffled past Monty Charles, Sir Philip Oppenheimer's grey-haired lieutenant, who oversaw allocations and knowingly liked to ask if buyers were pleased with their boxes.

De Beers' diamond monopoly has long since passed, broken by Russian production in the '90s, but its antiquated sales process largely remains: so-called “sights” are now held in Botswana, where sightholders, De Beers' circle of authorised buyers, are offered boxes on a pay-or-reject basis.

Those rejections have risen rapidly in the last 6 months, with $300m of goods reportedly left on the table at its March sight. The rejections are benefitting newer producers running assets once owned by De Beers, including Petra, Gem Diamonds and Lucara, which sell through conventional tenders to the highest bidder.

“There's been so many rejections now that people just can't get the volumes they want,” says Lucara's chief executive, William Lamb. “The number of De Beers sightholders we see coming to our tenders is probably triple what it was, so we've seen a steady improvement in pricing, specifically because we're not trying to dictate to the market what our diamonds are worth.”

Lamb says prices were weak in December, with declines of 7 to 8 per cent, but have rebounded strongly, suggesting strong quarterly sales, with prices up as much as 20 per cent in some categories at its February tender.

Tight Supply

De Beers has responded to “current trading conditions” by lowering output to 30m-carats this year, a tightening of 10 per cent. The move, mirrored by Russia's Alrosa, is in stark contrast to miners in coal and iron ore, which have responded to falling prices by increasing volume to defend company cash flow, only damaging prices further.

"We would rather keep our goods in the ground and wait for the market to recover," a director for De Beers' Botswana operations has said.

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“The number of De Beers sightholders we see coming to our tenders is probably triple what it was.”

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