Firestone Diamonds’ Kenny remains confident despite disappointing diamond sales

The diamond market has been dealt a blow by the recent economic turmoil. However now’s not the time to hit the panic button, according to Firestone Diamonds (LON:FDI) chairman Phillip Kenny.

Firestone is currently ramping up production at its two operations, the Liqhobong mine in Lesotho and the BK11 mine in Botswana. This expansion is understood to be going well, particularly at Liqhobong. 

Despite this operational progress, which saw a 69 per cent increase in saleable output, Firestone was disappointed by the results of its latest diamond sale last week.

In a quarterly sales update, Firestone revealed that just 3,395 carats, of a 24,109 carat tender, was sold at an auction in Gaborone, Botswana. A 15-20 per cent drop in rough diamond prices got the blame because the majority of smaller diamonds did not meet their reserve prices.

The news prompted an 18 per cent sell off in the group’s shares, which are now at their lowest point since the spring of 2009, when the diamond market was still emerging from its last crisis.

In an interview with Proactive Investors, Kenny stressed that the disappointing outcome of the August auction was merely a case of bad timing, rather than a return to the dark days of the 2008 financial crisis, in which the diamond market ground to a complete halt.

"August is a quiet time in the diamond market in any case, the 'trade' only really comes back to business at the end of August.

“On top of that we had global instability in the financial markets. So when the buyers came back to work at the end of August they were questioning where the market was going next.

He added: “Basically (it is our view that) the diamond buyers were exercising caution. 

“There was no real fear or panic, just caution. Some buyers simply decided to sit on the sidelines and not buy anything for a couple of weeks to see what happens in the global markets.”

"We are required to report our sales to the market. And unfortunately I think some people’s reaction was 'oh my god it's 2008 all over again', but it isn't," he said. "There is no panic like there was then. 

“In 2008 there was a complete withdrawal of credit from the diamond industry which basically meant that trade came to a halt. We are not seeing that at all (this time around)."

In total 3,395 carats were sold for US$863,037. Of these sales 1,846 carats came from Liqhobong with an average price of US$231 per carat, while 1,549 carats were from BK11 and were priced at US$282 a carat.

"While we sold some diamonds for proper market prices, we also had some offers that didn't reflect the market valuations,” Kenny explained. "The bids were well below market price. 

“We didn't need to sell, so we chose not to."

“We were prepared for this situation before the tender, and looking at our cash position we knew that we could comfortably carry unsold diamonds over to the next auction. We are confident that the volatility will dissipate in the coming months."

Looking ahead, the Firestone chairman remains confident in the fundamentals of the diamond market. And in fact he believes the unsold stones could eventually fetch a far higher price at a later auction.

”The amount that Firestone produces is very small in relation to the overall diamond market, so the impact of us not selling for a number of months would be negligible.

“Selling bigger parcels would actually better for us because with bigger parcels we can attract bigger buyers.

"These bigger buyers pay better prices. That’s generally because the smaller buyers are middlemen who need to simply make a margin and sell on the diamonds. So for Firestone selling more diamonds in fewer parcels has its advantages.

"We can comfortably wait until such time that the market improves, based on our current cash position we do not have to sell these diamonds now.

We can sell them later this year or earlier next year. "We don't have any pressure. We just completed a £13.5 million funding in July, so our cash position is secure and we have a lot of flexibility.”

Beyond the immediate economics of the quarter to quarter trade, which is liable to hit the odd speed bump, Kenny highlighted that the diamond market still has a sparkling future ahead of it.

“There are huge numbers of emerging middle class consumers in China and India, and what is becoming very clear over the past five years is that diamonds are among the things these middle classes have an appetite for.

“What we are seeing is robust double digit (percentage) growth in diamond sales year-on-year out of these countries. 

Kenny points out that while the United States remains the world's largest diamond market, accounting for about fifty per cent of retail diamond sales, it will soon be surpassed by Asia, where China and India are leading the charge.

On De Beers estimates this will happen by 2016, Kenny explained. 

“If China and India keep on growing there is no doubt that they'll be the engine room of future demand. 

“Coupled with this, analysts agree that supply in the coming years will be flat at best, as many of the world's big mines are getting old and they're reaching their production limits.

“Coupled together we'll see rising demand and limited supply in the years ahead.” 

Firestone’s current valuation fails to take into account the growth potential of a diamond market propelled by the conspicuous consumption of the newly minted Chinese and Indian middle classes, analysts say.

Evolution Securities mining analyst Charles Kernot remains a ‘buyer’ of Firestone despite the recent setback and reckons it is worth 40 pence a share, roughly double its current price.

He said: “This is based on our view of the longer term fundamentals of the diamond sector and our belief that the group has significant long term potential in its Liqhobong asset.” 

In the meantime investors will eagerly await the outcome of Firestone’s next auction, expected by the year’s end, whilst keeping their eyes peeled for signs of a turnaround in overall diamond prices.