Industry News
Namakwa Diamonds Sees Opportunity in Current Market
19/03/2009
By Avi Krawitz
As the diamond industry continues to struggle, Namakwa Diamonds is seeing opportunities in the marketplace and is looking for assets to add to its portfolio.
“I believe it is a good time to look for two types of assets,” Namakwa’s chief executive officer (CEO), Nico Kruger (pictured), said in a recent interview with Rapaport News. “Firstly, we are looking for distressed resources from medium, small or micro cap companies that have lost enormous value. I also think there are once-off opportunities to buy physical diamonds from distressed sellers.”
Kruger noted that the South Africa-based company has “one of the strongest balance sheets among the listed diamantaires” to support its acquisition objectives. Boosted by the $170.87 million the company raised in a December 2007 listing on the London Stock Exchange (LSE), Namakwa started its fiscal year in September with $52 million of cash on hand and no debt. The company's most recent trading statement reported that at the end of November, its cash was down to $26 million and that it had a net working capital of $91.4 million.
Since the crisis hit around September, however, it hasn’t been an easy time for listed diamond companies, which have lost around an average 80 percent of their market value in the economic downturn. Namakwa shares have fallen by approximately 90 percent. While the declines would have been somewhat in line with the general stock market volatility, most have expressed more concerned for the dramatic effect the recession has had on rough diamond demand. The lull has forced most mining companies to suspend operations, resulting in a larger impact on the mid-to-small tier companies. Scores of exploration and development projects have also been put on hold.
“The market is not flooded with assets for sale, but I think that people have seen the paradigm shift; they understand that their asset is not worth $100 million anymore, but maybe $2 million, $5 million, or $10 million,” Kruger explained. “People understand that today you’re not going to raise cash in a hurry and that you need some consolidation in the market.”
“We are always, and now more than ever, looking to upgrade our portfolio. There must be some good assets out there for sale,” he added.
RBC analyst Des Kilalea wrote in a January note about Namakwa that while the company will likely report a loss in fiscal year that ends August 31, 2009, it should close the year with cash on hand, a positive that “puts the company in a good position to be part of industry rationalization.”
Due to the closed period before the company reports its fiscal half-year earnings results in April, Kruger could not comment on whether the company was in negotiations to buy specific assets. He explained, however, that Namakwa was looking to buy assets that add “in leaps and bounds” to its portfolio.
With five producing alluvial mines in South Africa in its mining portfolio, along with further development projects in that country, the Democratic Republic of the Congo (DRC), Namibia and Angola, he added that the company would focus its attention on the turf it knows best: Sub-Saharan Africa.
Portfolio Flexibility
Expanding its portfolio is not a new thing for Namakwa. The 30-year-old company started out as a family business dealing in rough, buying from third parties, assorting and selling to the wholesale market or cutting and polishing the stones to sell to the polished wholesale market. It has since evolved to partner with jewelry companies in the retail space and more recently, by entering the mining sphere by acquiring alluvial operations in South Africa.
It’s this diversification and exposure throughout the diamond pipeline that Kruger believes gives Namakwa the perspective and flexibility it needs to manage the current economic crisis. This was evident when the company shifted its focus in response to the market downturn to its polished business. The polished market, the company explained, has been less affected by the crisis, so Namakwa decided to hold back rough production to cut and polish itself, rather than sell as rough to third parties. “Selling a higher proportion of its inventory as polished diamonds enables the company to realize higher prices and margins,” Namakwa said in a January report to the LSE.
The company also scaled down its rough production as part of its crisis management, placing some of its alluvial mining sites on care and maintenance, and significantly reduced production at others. It also delayed the launch of its project in the Democratic Republic of the Congo (DRC), which is expected to be ready to start mining in the second quarter 2009, “until there is more certainty about diamond prices.”
Kruger stressed that the flexibility the company has exercised in order to refocus as the market develops through its diverse business model could only be achieved by having a complete understanding of the industry – something he believes is sorely lacking today, particularly among producers. “If you understand what is happening at the retail level with fancy yellow goods or white goods or general run-of-the-mill goods, you can understand the impact that credit has had on your polished dealers in the middle [of the chain] on your rough wholesalers and on your producers. You’re able to understand the whole picture and can then see the opportunities,” he explained.
Back to Basic Industry Principles
Kruger recognized that the diamond industry may have found some floor in terms of its declines, but admits there is no way of predicting whether it is temporary and will fall to a lower level or not. “It all depends on credit; the system is built on credit,” he explained. “These are unheard of times that none of us in the diamond industry have seen before. For the first time, we’re seeing the disjointedness between memo and cash deals reaching 40 to 45 percent. The client you dealt with before is not the same client of today,” he claimed.
Kruger observed that the credit crisis has put an end to “overspeculating” on rough diamond prices and is forcing the industry back to “old diamantaire principles” of trust and loyalty.
In the bull market of the past few years, Kruger explained, “You had uneducated people selling products in all markets to people with money and access to unlimited debt. It was an easy sell, debt rose and unfortunately, the same thing happened in the diamond industry.”
The result when the market crashes, as it has, is that you get no loyalty from your customer because you weren’t loyal to him, he explained. “You were selling to everyone at the highest price and letting him fight with 15 to 20 other guys that were buying.”
Relationship Trading
Namakwa, Kruger continued, will always rely on relationship selling, building on its “30-year-old diamantaire network of partnerships, which has evolved over time into a current diamantaire network,” he said. “In other words, it’s not just the old rough wholesalers or rough dealers; it’s moved into polishing relationships with polished wholesalers and dealers and further into the retail space.” In 2008, Namakwa penned deals to partner with Swiss Gold to manufacture jewelry using diamonds and gold from the two companies respectively, which a joint-venture company sells at the wholesale and retail level. It also has an agreement with Harry Winston, supplying the luxury retailer with polished stones for sale through Harry Winston stores, with the two companies sharing the profits.
For the Krugers – including Nico, brother Heno and father Thomas, who founded the business and remains its largest shareholder with an approximate stake of 16 percent – following that partnership strategy is the key to managing this crisis. Such a strategy helps the company maintain a full understanding of the diamond product and with its foot in every diamond door along the supply chain, Kruger believes Namakwa is setting itself up to emerge stronger than before. “We’ve got to assess what people want to see once we’re through this cycle,” Kruger said. “They want to see that you’ve got cash, that you’ve got better resources and that you are able to take your business forward.”
“Because, whether this [downturn] takes two or three years, you can’t then suddenly pull your head out of the sand and say 'Let’s start again.' You’ve got to be planning now,” he stressed.
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