As Diamond Sales and Prices Fall, Alrosa Sees Signs of Recovery, Increases Production

Mining and Exploration
17/10/2019 17:31

Russian diamond mining giant Alrosa increased its Q3 diamond production by 15% year-over-year while the volume and value of carats sold declined, leading to the miner holding 40% more diamonds in stock than at this time last year. However, they write, globally, the second half of Q3 2019 saw an upward trend in rough diamond sales and a turning point in destocking in the midstream, creating a basis for the market recovery in the future.

Alrosa's Q3 diamond production grew by 24% compared to Q2 2019 and is up 15% year-over-year to 12.1 million carats due to the launch of production at new deposits and expansion of the existing ones (for more details see page 5 of the IFRS report). As a consequence, production for the first nine months of 2019, reaching 29.7 million carats, a 12% increase over the year prior. Production in Q3 grew by 14% compared to Q2 2018. The annual growth is attributed to the launch of production at the V.Munskoye deposit in Q4 2018, as well as increased output at the Nyurba Division's Botuobinskaya pipe due to an increase in higher-grade ore processing and the roll-out of the operational efficiency improvement program.

Alrosa's Q3 rough diamond sales declined by 1.9 million carats compared to Q2, achieving 6.4m cts in total sales (down 23% q-o-q), with sales of gem-quality diamonds falling by 1.7 million carats q-o-q to 4.3m cts (down 28% q-o-q) against the backdrop of reduction in stocking by cutters and retailers (for more details see page 3 of the full IFRS report). Their Q3 sales in value terms declined by 37% from Q2 levels due to an 8% decline in volume and a lower average realised price (down 32% y-o-y). They attribute the price decline to growing sales of small-size diamonds and a price index reduction, while explaining the overall sales decline to softer demand in the diamond jewelry markets after the record-high sales in 2018. They also note somewhat weaker demand from end consumers in China and the US amid the ongoing trade tensions. Sales during the first nine months of the year fell by 13% y-o-y to 25.3 m cts, mainly driven by lower sales of gem-quality diamonds (down 14% y-o-y).

For the first nine months of the year, Alrosa's overall diamond sales have declined by 3.8 million cts (down 13% y-o-y) as a result of lower demand. Their total sales amounted to $2.4 billion, a 34% y-o-y decline. Looking just at gem-quality sales, in value terms sales amounted to $2.3 billion, down 34% y-o-y amid a 14% decline in sales and a 23% drop in the average realised price. Looking just at Q3 2019, however, the average realised prices for gem-quality diamonds rose 5% q-o-q to $135/ct due to a lower share of small-size diamonds. Meanwhile, the diamond price index fell by 3% q-o-q and is down 7.5% year-to-date.

Polished diamond sales for Q3 amounted to $10 million (down 13% q-o-q and 60% y-o-y) while 9M sales acheived $37 million (down 50% y-o-y). The miner writes that diamond jewelry demand is being affected by increased macroeconomic uncertainty weighing negativity on consumer confidence, leading to higher inventory levels. They write, "Elevated polished diamond inventories piled up in 2018 on positive expectations for 2019 diamond jewelry demand, which turned negative instead, were an overhang negatively impacting polished prices. Deflation in polished diamond prices eroded midstream margins and, as a result, made industry financing more difficult. Moreover," they add, "the jewelry sector consolidation and a nexpanding share of online jewelry sales result in an ongoing non-recurrent reduction in polished diamond stocks across the retail sector as more efficient stock management practices are introduced, which is in turn reflected in the amount of diamonds purchased by cutting and polishing companies."

Image source: Alrosa Instagram @alrosadiamonds