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An uptick in global prices could turn Firestone Diamonds into a significant cash cow

Diamond demand looks set to grow and Firestone is well positioned to capitalise
An uptick in global prices could turn Firestone Diamonds into a significant cash cow
Special stone from Liqhobong

It’ll take just a small uptick in diamond prices for the margins of Firestone Diamonds PLC (LON:FDI) to balloon out and provide the company with some very substantial cash flow.

As it stands, Firestone is modelling production from its Liqhobong project in Lesotho as likely to realise US$75 per carat, which is supported by current diamond market conditions.

But if the price were to increase by just, say, US$10 per carat on average, then the difference would be marked.

“The cash left and the end of the life of the mine,” says Firestone’s chief executive Paul Bosma, “would be double.”

So the question then becomes, how likely is such an uptick in the diamond market?

Weaker demand?

It’s a tricky one to generalise since diamonds are generally sold at the tender and each individual parcel commands a unique price. But there are some clear trends that can be discerned, not least by reading the market commentary of bigger players like De Beers and Alrosa.

De Beers’ most recent sight wasn’t exactly encouraging, as the company that once completely controlled the price itself, was able to book just US$490mln in revenue, the lowest for several years. De Beers blamed weak demand for lower value stones as fears of global trade war dented demand in China and a depreciation of the value of the rupee in India kept buyers at home there.

So it’s not just Firestone that’s finding it challenging. The big boys are too.

Future price gains?

But if the immediate outlook offers scant comfort, the next couple of years present a very different picture. For one thing, the current oversupply in smaller stones is likely to be significantly curtailed as production from Rio Tinto’s Argyll mine draws to an end. Argyll is slated to come offline within the next two years, and its absence will make it harder for buyers to find the small stones known as the minus three grainers.

But guess who has plenty of those in its mine? That’s right, Firestone Diamonds.

So that’s one ray of sunshine on the horizon.

Another is that the global trade war looks to be drawing to a close. While nothing’s yet been signed, both President Trump and the Chinese President Xi Jinping have been making positive noises about reaching an accommodation. Both sides may be chivvied along by the recent inversion of US government bond yields, as it’s becoming increasingly clear that both the US and China have everything to gain by reaching an accommodation.

“In the foreseeable future there will definitely be a decline in supply,” says Bosma.

And he contrasts that with the likely increase in demand. According to Bosma, the world market for luxury goods items amounts to approximately €1.2tn, of which 7% or €84bn is accounted for by diamond jewellery demand.

So these are huge sums, and likely to rise, given the unequal geographical spread of current demand. Around 50% of demand comes from the US, with only 16% from China and 6% from India. And as prosperity in both China and India continues to rise, so demand for diamonds will too.

And Bosma follows that up with another intriguing thought.

Wedding market

Around a third of the global population are now millennials, he says. And these millennials are all starting to get married.

The fundamentals, therefore, have a great deal to offer a Firestone optimist.

While it’s true that Liqhobong hasn’t quite lived up to initial expectations in terms of dollars per carat realised or the frequency of its large stones, the company’s production is running well and the plant is exceeding nameplate capacity.

With supportive shareholders RCF and Pacific Road holding sizeable chunks of stock, the future looks fairly secure, particularly if the diamond price starts to improve.

Added to that, there’s always the possibility of a round of consolidation amongst the Lesotho diamond operators, given that there are as many companies there as there are mines.

Firestone’s weak share price might tend to make it a target, were it not for those big supportive shareholder blocks. So it’s possible instead that some sort of more creative deal might get done. Watch this space.


 

 

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