Industry News
Namakwa Diamonds - still has cash in tough times
16/01/2009
Following Tiffany's 35% US same-store Xmas sales decline, it is not surprising Namakwa should caution that rough and polished diamond prices remain under pressure and that it will slow the build-up to full production on its South African alluvial properties.
In the quarter to end-November, production from the North West mines increased to 12,207ct (11,878c in Q408) with unit costs falling to $4.25/t or $748/ct ($5.04/t). Realised rough prices must have been in the region of $485/ct ($652/ct in FY08) given management's comment that prices fell 20%-30%. While the company was expected to see high costs in relation to revenue during the production build-up, the scale of the fall in diamond prices explains why Namakwa is reviewing its ramp-up schedule in the North West.
In trading and beneficiation, Namakwa reported a gross margin of 4.8% in the quarter from the 11,102ct sold (Q408 18,474ct). This compares with a margin of 11% in FY08 (against a 5% budget) so weakness in rough and polished diamond prices has impacted the business. However, the fact that there is a margin does underline that the company is more resilient than a pure producer as it can move more rough into polished given a relatively better performance in polished.
Cash-on-hand at the end of November was $26.7m (£0.16/share) compared with $55m at the end of the August. The reduction reflected capex ($9.7m), acquisition of alluvial properties ($4.2m), third-party diamond purchases ($7.7m) and cash consumed in operations.
At the end of November the company had a rough and polished diamond inventory of $55m compared with $48,2m at end-August. Management says the increase reflects Namakwa taking opportunities to buy up rough at good prices.
Namakwa has furthered its value-add strategy by entering a JV with Swiss Gold to manufacture jewelery in Dubai.
Investment Conclusion
The diamond sector faces a tough year and conserving cash must be the priority. Namakwa will report a loss in FY09 but with capex pruning and beneficiation margins, it should close FY09 with cash on hand. This is positive and puts the company in a good position to be part of industry rationalisation. RBC Capital Markets' recommendation and target price are unchanged.
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