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Riddle of the Sands

By Charles Wyndham.

Like any good thriller, various bits of information are coming together to help understand what has been happening; and, from this one can look ahead with a little more intelligence than mere guess work.

I was perplexed when De Beers announced at the half year that its stocks had grown by $400 million. 

This perplexity was increased dramatically when the company was able to put out the gargantuan sights in August and September.

At the time, the sales department of the DTC kept emphasising that this was a one-off, or to be more precise a twice-off.  

At the time of the sights I asked several sightholders if their boxes contained quantities of ‘different’ goods, such as Russian or Angolan. All to whom I spoke replied in the negative.

We know or thought that we knew that De Beers, apart from the sudden $400 million, De Beers stock had all but disappeared. Even, Paddy Kell, the financial director, explaining the less than lacklustre half year figures, put part of the blame on the very fact that they were no longer benefiting from the ability to sell down their stockpile which has all gone.

So the question was from where did all these additional millions come?

The news from Botswana government sources that there had been production problems at Orapa but that these had been more than compensated for by increases at Jwaneng, supports information that firstly De Beers is reaping the benefits from substantial increases in mine recovery efficiencies.

Put simply, they are getting more carats out of every ton processed.

Secondly, they are putting through more tons at the key mines of Jwaneng and Venetia. Also it may be that the tons being treated may be higher grade. That is in addition to the success that they have been having in recoveries from the Kimberley dumps. 

So more carats per ton and more tons per mine; but that still cannot explain the Tsunami like flood of rough that was unleashed on the market in August and September, and which the market is still finding difficult to digest.

The answer appears to be in an unprecedented improvement in the flow of goods from the mines through to sales. This was a process that used to take in the bad old days, in excess of 100 days.

De Beers invested heavily in a new computer system and after the inevitable glitzes the 100 days were reduced to around 75 days. This occurred over a period of time so the impact in the one off gain was spread.

What has happened this year is that the 75 days has been reduced to around 30 days, and the improvement has happened more by way of ‘at a stroke’.

In other words, sometime around the second quarter the impact of this reduction has suddenly given De Beers /DTC a one-off gain of an additional cycle of rough for sale, something in the order of another +/- $600 million.

Looking ahead it is obvious that it will be difficult enough to maintain these efficiency advantages, let alone there being any possibility of being able to replicate them.

Running mines at full tilt is like anything else, it can be done for a while but certainly not indefinitely.

Into this equation is the fact that the Botswana government has made it quite clear that it is unwilling to dramatically increase the production from Jwaneng and Orapa.

The government is highly sensitive to the fact that diamonds are the Botswana economy and they want to leave some for the future.

Production from Botswana is going to be relatively flat till the new plant at Orapa comes into play in a couple of years which is going to dramatically increase recoveries.

Government has apparently been lukewarm on the possibility of reworking the dumps at the mine which would be an option when this new plant is in place. De Beers is naturally keen to do so. If this happens it would greatly increase the  already planned increase in production.

This will be supplemented by production coming in from Canada. However, production from other mines will be declining and De Beers will certainly have less Russian goods to sell.

The riddle is unravelling and the news for the industry in the short term is good. The likelihood of more Tsunamis of rough in 2006 from De Beers are remote in the extreme.

The fundamental issue, however difficult it is to appreciate at this moment of  apparent over abundance, is that it is shortage that will yet again be the burning question.

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