Between the Lines

Mining: Positive Prospects for Petra

Petra Diamonds continued to be bolstered by its Cullinan mine in South Africa.  The company reported that its total sales rose 43 percent to $48.4 million in the six months that ended on December 31, 2009, a time when most mining companies experienced sharp sales declines. The rise came as a result of Petra increasing its production at Cullinan. It also raised its share in the mine from 37 percent to 74 percent during the period, which added $6 million in revenues for the period. Average prices at the mine were down 5 percent from their levels in the same six months of 2008. Petra posted a net profit of $37.9 million compared with a net loss of $88 million a year earlier. 

Revenues are expected to be further boosted in the current second fiscal half as the company is set to sell its exceptional 507-caratt rough  stone from Cullinan, which RBC Capital Markets analyst Des Kilalea expects will fetch between $15 million and $20 million. In addition, Kilalea noted that while prices have recovered strongly from April 2009 forward, the real impact of this recovery will become evident during Petra’s second fiscal half. He maintained his “Outperform, Above Average Risk” recommendation for the company.

Manufacturing/Wholesale: Shows Improvement

Organizers of the Inhorgenta Europe show in Munich, Germany, reported 15 percent growth in visitor traffic this year over last year, with 30,000 industry professionals from 84 countries attending the event. Approximately one-third of the visitors came from abroad, an increase of about 2.5 percent compared with 2009. Reports from traders at the show indicated that diamond exhibitors did better business, as well. There was strong demand for 0.55- to 0.90-ct. sizes in the D-F, IF-VVS1 and G-H, VS categories. German retailers are also starting to look at lower color diamonds in I-K, mainly in the larger sizes above 3.00 cts. While there appeared to be a sense at the show that polished prices will continue to increase, many doubted that the trend reflected demand in the market, which they still consider low.

The IIJS Signature show in Goa, India focused on the domestic market, which continues to grow and compensate for the slump in the export market for Indian manufacturers. The invitation-only event hosted 68 exhibitors and an estimated 350 visitors, including seven foreign delegations. Small exhibitors appreciated the opportunity to spend more time with buyers, in contrast to the Mumbai show, which tends to be extremely busy. While organizers were contemplating cancelling the event, or a change of venue, prior to the show, given last year’s weak turnout, they were satisfied with last week’s event and intend to continue to market the Goa show as a niche event for Indian jewelers.

Retail: Encouraging Results, But Zale Still Playing Catch-Up

Zale Corporation reported that its revenues fell 14 percent to $582 million in the second fiscal quarter that ended on January 31, 2010. The jewelry retailer moved to a net profit of $6.7 million from a net loss of $31.8 million a year earlier.  The move out of the red came as Zale lowered its cost of sales by 23 percent and its selling, general and administration expenses by 16 percent.

The company’s inventory at the end of the period stood at $738 million, down $110 million from January 31, 2009. Zale lowered its outstanding debt by 6 percent to $368 million, while its available cash declined 52 percent to $32.4 million.

While analysts remain concerned that the company is lagging behind its competitors, the results were encouraging and beat expectations. The news lifted Zale shares by 8.6 percent in the day’s trade, following the release of these results. The company noted that “direct competitors have demonstrated that the market for mid-tier jewelers has stabilized.” The question that remains is whether Zale can catch up.

Global Markets

United States: The market in New York is stable with reports of good demand for 0.50- to 0.80-ct., better quality F, VVS stones. The demand for 1.00- to 1.50-ct., F, VS2, Triple EX goods has also improved. Retailers report that foot traffic to stores has picked up significantly in the past week, with good demand for engagement rings with 1.00- to 2.00-ct., G-H, SI1 center stones. Wedding bands are also moving, particularly those that are white gold with diamonds, channel set bands and micro pave.

Belgium: Activity in Antwerp has improved and traders are buying goods and looking for stones. It is taking some time for buyers to adjust to the new prices, but, on the whole, they are accepting them. There is a sense that buying is being fueled more by demand, and less by speculation, than in previous weeks. There is strong activity in 1.00-ct. stones and it is becoming difficult to find 1.00-ct., G-H, VS2-SI1. Similarly, there are reports of shortages in 2.00-ct., G-H, VS items. Others reported shortages in the oversize items, as well as an increase in demand for VS and SI goods. Traders are preparing for the Hong Kong show, which some expect to set some benchmark for the remainder of the year.

Israel: The market quieted this week as traders were focused on preparing for the Hong Kong show. Many are holding onto goods based on the expectation that they will be able to fetch better prices for them at the show. There is concern regarding high rough prices, however, as polished has not increased to the same extent this year. There is a sense, however, that the recent polished increases are reflective of the market. There is good demand for 1.00-ct., 1.50-ct. and 3.00-ct. stones. 

India: There was strong interest in polished this week, with many international buyers reported in the market, although trading was held back by price differentials. Polished traders grew cautious regarding prices and buyers feel that prices are too high, with some expressing concern over the possibility of a correction that may occur later in the year. However, there remains some speculation in the polished market regarding increases in the very near term. There is strong demand for 1.00-ct. stones in all colors and clarities and good demand for 2.00-ct., J+, VS+, although there has been a slight shift toward SI goods. There is also good activity in melees, J+, lower pique to SI+ goods. Increases in rough have deterred small- to medium-sized cutters from buying and while still strong, the rough market has quieted slightly.

China: Reports from diamond wholesalers and retailers indicated a strong New Year Golden Week, which boosted the mood in Shanghai this week. Gold and silver jewelry sales reportedly rose 19 percent through the weeklong holiday, while overall retail increased 17.2 percent to $49.9 billion. Retailers reported an increase in demand for 1.00-ct., G-H, SI1 stones, as well as for 3.00-ct. sizes, and that consumers are paying more attention to color and clarity. Demand is greatest for 0.30- to 1.10-carat round stones in D-J, VVS-SI, GIA-certified and preferably EX cut. Demand is also good for round and some fancy shapes in 1.00-ct. I-K, SI-I goods to be set as jewelry pieces and sold as promotional items.

Hong Kong: The market is slightly off balance with regard to prices, as buyers are resisting the new prices. On the whole, the market has improved since the Chinese New Year holiday, but Chinese buyers have still not returned in full capacity from their vacations. There is a demand for goods, but price differentials remain the biggest stumbling block to closing transactions. A great deal hinges on supply and demand at the forthcoming Hong Kong International Jewellery Show, which begins March 5, as local traders are waiting to see how price dynamics develop there.

Quote of the Week

“Don't bring your need to the marketplace; bring your skill. If you don't feel well, tell your doctor, but not the marketplace. If you need money, go to the bank, but not the marketplace.”