Unique advantages of the integrated model - analysing market dynamics

A key driver of the Trading & Beneficiation Division is to capture margin in volatile markets for rough and polished diamonds. Understanding market sentiment in the wholesale and retail industry is an essential component for the business, and the division has close relationships with a number of retailers and jewellery designers for a wide range of different diamond products and metals. Each month the team assesses current client demand and reported market demand against the “Namakwa Diamond Investment Triangle”, which has proven to be a useful measure throughout the crisis of 2008/2009 and the volatile recovery in the industry during 2010.

As a result of the Trading & Beneficiation Division's direct access to the downstream business on a daily basis, the Company was able to adjust rapidly its mining strategy during the global economic crisis of 2008 and was one of the front runners in reducing its mining staff and/or suspending mining operations, aware that early indications of a drop in demand might be followed by a complete restructuring of the diamond industry. Due to the availability of information on the complete pipeline, the Company could respond and switch focus between rough dealing and polished dealing and also decrease mining activities.

During the recession of 2008/2009, in response to the difficulty in selling rough diamonds to cutters who no longer had access to liquidity, the Company switched its focus to the polishing business. Then, during the second half of 2009, when rough prices started to rise as a result of a recovery in global macro-economics and the industry shortfall in rough production, creating a disconnect with the price of polished diamonds, the Trading & Beneficiation Division was able to switch back into the rough trading markets, utilising product from the Mining Division, which was re-opened because of the insight of the downstream operations. In this way, the Trading & Beneficiation Division was able to generate cash-flow for the Company's continued acceleration of the Mining Division and acquisition and consolidation strategy as the diamond mining industry fragmented.

The “Namakwa Diamond Investment Triangle” provides a simple measure against which the Trading & Beneficiation Division is able to quickly analyse trends in the downstream market to assist with the strategic sales of parcels of product. The triangle explains the type of diamond purchases a potential buyer can make, dividing the market into three sections: Branded Purchases, Emotional Purchases and Investment Purchases. The triangle describes the impact that macro-economic sentiment has on the different segments in the diamond industry and the factors that drive demand in these respective segments. It also explains where the diamond product of the resource areas within the Namakwa Diamonds Mining Division fits into the downstream market.

Branded Purchases are divided into two distinctive segments, namely high-cost branded jewellery and low-quality branded purchases:

High-Cost Branded Jewellery - a market driven by large jewellery and watch brand names that provides consumers with a branded image and a lifestyle for others to aspire to. Diamonds will form a major part of the product and its value, and the brand is supported by significant advertising spend and campaigns to ensure consumer reach.

Often, large quantities of small diamonds (mellee) are incorporated into the designs of the watches and jewellery. Considered by Namakwa Diamonds to be a fickle industry with fashion demands changing regularly, but the underlying diamond product remains a stable key element to the brand, with greater diamond content driving higher values.

During 2010, the team saw an increased demand for such product, correlating with increased advertising spend from the major fashion houses.

Low-Quality Branded Purchases - the lower end of the market driven by inferior quality and smaller goods.
This is a market typically driven by US consumer credit, with large US retailers being the main buyers and an ever-increasing retail demand from the Indian market. This section was severely impacted by the economic downturn in 2008/2009 but has since re-emerged to regain most of its losses in 2010.

Emotional purchases account for commercial goods and high-end product:

Commercial Goods - polished diamonds ranging from 0.5 to 3cts.
This is a market driven by emotions; the typical engagement ring or special event celebration. This segment was the primary driver of the downstream industry and the quickest to return to pre-crash pricing levels, with little impact caused by the economic downturn and a strong and healthy consumption profile. Key to building a sustainable business, this fragment of the market is currently supported by healthy demand from Asia, as it becomes increasingly common in the region to follow the Western tradition of giving diamond jewellery for engagements and special occasions.

Whilst a branded product can influence emotional purchases, and the higher-end jewellery retailers capture a significant share of this market, the underlying type and quality of the diamond and the design of the jewellery piece are the principal drivers. In this market, the diamonds themselves become the brand, rather than simply acting as a product within or to support the brand.

High-End Goods - driven by discretionary spending, this market was impacted hardest by the global slowdown and the lack of liquidity in the credit markets. The aftershock is still evident, with prices struggling to recover within this category. The product is defined by high colour and high purity, and is larger in size, usually 5 to 20 carats with D E F colours and flawless or near-flawless purities.

The Trading & Beneficiation Division places a significant proportion of the Mining Division's South African (North West Province) product, as well as its own manufactured product from third party rough diamond purchases, into the markets for commercial and high-end goods. Also, based on the initial metallurgical test work of Storm Mountain Diamonds on the Kao kimberlite pipe in Lesotho, and the consistency

In quality emerging, Namakwa Diamonds expects the Kao product to be well suited to the commercial goods environment.

Investment purchases are considered by Namakwa Diamonds to represent the top 2% of sales in the downstream diamond market. This is typically the market in which the Trading & Beneficiation Division will characterise a 77.77ct Vivid Yellow or the rare Vivid Orange recently discovered on the Mining Division's resource in the North West Province of South Africa. Relatively immune to macroeconomic drivers, as portrayed by recent record sales by Christie's and Rio Tinto of blue and pink diamonds in 2010, Namakwa Diamonds believes that this sector offers the opportunity for an alternative store of wealth.