Diamond sector struggles as synthetics sink natural gems
RETHABILE MOHONO
MASERU – The diamond mining sector is grappling with a severe crisis as sales plummet, driven by the increasing popularity of synthetic, lab-grown diamonds.
According to the Financial Times, the prices of natural rough diamonds have dropped by 26% in recent years. This decline is further aggravated by weak demand for diamond jewelry in the United States and China, two of the industry’s largest markets.
However, the primary factor contributing to this market disruption appears to be the growing appeal of more affordable lab-grown diamonds. This fragmentation within the diamond industry is expected to persist. It is reported that after a brief pandemic-era boom in diamond jewellery, miners are battling to whittle down an oversupply of gems.
Anglo-American’s De Beers, along with Russia’s Alrosa, control two-thirds of the rough diamond supply. DeBeers this week said its rough sales dropped 23 percent in the first quarter.
It is not enough. While rough stone inventory has stabilised of late, polished diamond stocks remain high. At more than $20bn at the end of 2023, these were near five-year highs, up a third since the end of 2022, according to Bank of America.
Worse, as Laboratory Grown Diamonds have taken market share, their prices have declined too, to about 15 percent or less of their natural counterparts. Diamond miners spent years maintaining that romantic buyers would prefer the allure of rare, natural stones. It increasingly appears they were wrong.
The crisis is increasingly impacting Lesotho, a nation renowned for its high-quality diamond production. Diamonds, which rank second in mineral revenue after water, significantly contribute to the country’s economy.
The Liqhobong Mining Development Company is reportedly experiencing declining diamond sales, prompting the mine to convene with its 550 employees this week to address possible layoffs resulting from the poor sales recorded in May and July 2024.
Liqhobong is a multinational mining enterprise in Lesotho, jointly owned by Firestone Diamonds, which holds a 75 percent stake, and the Lesotho government, which owns 25 percent. To finance the construction of the mine, Firestone Diamonds secured $222.4 million, comprising $82.4 million from ABSA and $15 million from a private investor. After a closure exceeding one year due to challenges associated with COVID-19, the mine recommenced operations in both in August 2021.
In a letter sent dated August 15, 2024, and signed by Rob De Pretto, the Managing Director of Liqhobong, the Mining Development Company informed its employees about meetings scheduled for August 20 and 21 to address potential layoffs resulting from unfavourable stock market conditions. The letter indicated that consultative sessions with all staff would be conducted on-site during these dates.
“During these meetings, we will discuss: Possible ways and appropriate measures to avoid potential retrenchments; minimise the number of job losses; alleviate or minimise the adverse effects of potential retrenchments; selection criteria for retrenchment; voluntary retrenchment; retrenchment packages (and) any other incidental issues,” the letter stated.
It further mentioned that these meetings at Liqhobong Mining were necessary because of the poor diamond sales. In July 2024, the mine sold diamonds for $62.50 (M1, 124.57) per carat, but it needed to sell them for $89 (M1, 601.38) per carat to make enough money. He further explained that in May 2024, the mine sold diamonds for even less, at $61 (M1, 097.58) per carat.
Thus, the letter suggests that this reflects the current fragile market conditions, which have worsened quickly over the past few months and are far below the required average value of US$89 per carat that underpinned the business case to restart the mine in 2022.
The statement indicated that, in light of the prevailing market conditions and the extended unfavourable outlook, the Board of Directors of Firestone Diamonds Limited and the Company have determined that Liqhobong cannot sustain its current operations.
It further elaborated that the significantly reduced prices for Liqhobong’s diamonds, coupled with their already minimal costs, have resulted in the mine incurring financial losses.
“If we continue without adjustment, the company will quickly deplete its cash reserves and be forced to cease operations, with the closure of the mine and loss of all jobs at Liqhobong.
“Operating “as is” under the current conditions—maintaining our present throughput and relying on the current diamond prices—is simply not financially sustainable,” the letter stated.
However, it was also mentioned that, in response to these quickly deteriorating market and financial conditions, an urgent plan has been developed to help the company weather this market downturn.
“This plan is focused on a reduced level of production to limit cash losses through the market downturn, avoiding mine closure (or care and maintenance), and maintaining jobs where possible.
“The plan preserves diamond resources for a time when diamond prices are higher and extends the life of the mine. Firestone, Absa, ECIC, and Pacific Road Capital are all committed to avoiding placing the mine back on care and maintenance or closing the mine.
“The success of this plan is dependent on many factors, including the support of Absa Bank Limited, the Company’s senior lender, and the Export Credit Insurance Corporation of South Africa (ECIC),” De Pretto explained.
It said they have engaged both Absa and ECIC, and they have expressed their indicative support, subject to conducting their analyses of the plan and their internal approval processes.
“The success of this plan also requires its immediate implementation and the support of many other stakeholders, including employees, contractors, suppliers, and the government. In the absence of this support, there is a strong likelihood the mine will be forced to close,” De Pretto said.
Storm Mountain Diamonds (SMD), which operates the Kao Mine in the Botha Bothe District, issued a statement last week highlighting that diamond mines worldwide, including SMD, continue to face significant challenges due to ongoing unfavourable market conditions.
SMD employs more than 700 individuals and has contributed over M700 million to the Lesotho government through taxes and levies.
The letter stated that there are no current signs of market improvement, and diamond marketing specialists believe that a recovery is unlikely in the near future.
It also noted that their sales performance has been significantly impacted by the ongoing market crisis, with projected revenue for the financial year set at US $377.00 (M6,763.95) per carat, while the mine only realised US $193.00 (M3,462.61) per carat during the latest tender in July.
“These prices are not sustainable, given our current operational costs, as we need to achieve approximately US$ 300.00 (M5,383.56) per carat to break even,” the letter stated.
Meanwhile, SMD indicated that the poor revenue and ongoing operational costs are causing a liquidity crisis for SMD. With operational costs exceeding its revenue, SMD is running out of cash.
“It is clear that SMD cannot simply continue to operate as normal in these circumstances. The options that SMD has are to continue operations by optimising efficiencies and significantly curtailing costs, or to go on a care and maintenance plan to protect the diamond resource and start up again when it becomes economically viable to do so.”
The company further said the SMD Board of Directors (“the Board”) met during the week to assess the crisis and discuss the options. At the special board meeting, it was decided that SMD would be placed on care and maintenance, subject to the approval by the board of a care and maintenance plan.
During a national television appearance on Thursday, former mining minister Lebohang Thotanyane stated that diamond prices have declined similarly to the downturn experienced during the COVID-19 pandemic, currently ranging from 15% to 18%.
He also noted that the rise of synthetic technology, specifically laboratory-grown diamonds, is a significant factor contributing to this decrease in prices.
