There are several main factors that determine profitability in the global diamond industry. On the revenue side, the vital factors are the following:
The industry players have the following turn over as specified below:
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The World Diamond Council (2007) explains that the cost structure of a diamond business consists of labor and security costs, the annual cost of diamond production and processing, and design and construction expenses. Diamond producers incur significant capital expenditures in the design and construction stages of diamond production. There are also huge expenses during the operations of the mines. The capital costs at the design and construction stage are normally split equally between direct and indirect costs. Under direct costs, the major expense goes to sampling the ore to assess diamond grade and size.
Indirect costs consist of commissioning the diamond processing plants and other infrastructure requirements like wastewater, waste removal facilities and the overall management of the construction site (this includes administrative and security expenses which safeguards a well maintained operations). Indirect costs normally eat up about 20 percent of the total costs. Capital expenses which are incurred at the operating stage of a diamond mine consist of mine expansion, expenses linked to any errors or under estimation made during the design and construction of the mine, and facilities and equipment upgrades. Besides the capital expense requirement to initiate and sustain a diamond production, crucial operating costs are also incurred in relations to ensuring sustained diamond mine operations.
In an average South African open-pit mine, production constitutes the biggest unitary cost component. It is about 40 percent of the total operating costs. Staff payments and salaries of contractors as well as energy expenditures, purchase of equipment and general maintenance are samples of the costs that render production expenses. Key cost drivers of an average open-pit mine operation consider the depth of the pit, the amount of overburden to be eradicated, the location and climate; the cost of labor, electricity and energy, and the political and economic contexts in the local territory or host country.
Diamond mining can be costlier in regions with long distance locations or harsh conditions since it will entail a greater amount to develop basic infrastructure such as roads or electricity generators. The cost of labor also varies significantly, as do tax levels and beneficiation laws that require hiring a quota of local residents. In terms of average operating costs per carat, De Beers and Rio Tinto top the major diamond players but these indicators are only good for the operating efficiency. This is not a good indicator of the overall cost base, which is also greatly affected by taxes, government revenue-sharing agreements and beneficiation investments.
De Beers saw an increase in financing costs and margin pressure to the global diamond value chain. (Lee, et. al., n.d.) Aside from the increasing cost structures, there was also a lack of liquidity of the pipeline demand. It is able to adjust its price cost margins since it owns more than 40% of the rough diamond supplies. Hence, it can adjust its diamond prices to cover up for these increased costs. The actual price cost margins of De Beers is hard to determine since the company only stipulates their final prices to their manufacturers and buyers. Since their diamond prices (wholesale, rough diamond sales, among others) are not public data, the most accurate information cannot be indicated in this study. However, it was reported that De Beers' prices for diamonds over 10.8 carats are set. However, it is often negotiated. Also, the diamond prices under 10.8 carats are not negotiable (World Diamond Council, 2007).
Companies are given three weeks before their "sight holders" dealers submit their own lists of requests. During the "sight," they are offered a diamond allotment or package as earlier described. If a dealer chooses a package, he has seven days to finalize the sale in U.S. dollars. The cost of each box is estimated between $1 million to $30 million. ALROSA has a distinct advantage in this aspect because it has a lower ruble cost structure and has a ready state financial backing. (Helmer, 2009) The Russian company's EBITDA margin averages at 30 percent in 2008. According to Fitch analyst Sergei Grishunin, ALROSA's EBITDA exceeds those of the diamond industry leader De Beers, which had an EBITDA margin of 17 percent in both 2008 and 2007. In 20120, ALROSA increased its EBITDA margins to 31 percent while De Beers also increased to 24 percent (Rudnicka, 2010).
Rio Tinto and De Beers incur lower EBITDA margins as they now want to sell their diamond businesses. This is because the diamond business operations became "major cash drains" for the two diversified companies. While its EBITDA margins and cash flows from operations seem high, it is not solely for its diamond business. The company withstood higher prices, stronger currencies and input cost pressures and leveled out with a 10 percent EBITDA margins in 2011 (Rio Tinto Annual Report, 2011).
Likewise, the striking 51% EBITDA margins of BHP Billiton for 2011 was due to the excellent quality of its diversified portfolio rather than the performance of its diamond business. (BHP Billiton Website, 2012) This is also attributed to the company's highly profitable Ekati Mine in Canada which it owns by 80 percent. (Rudnicka, 2010) Aber's EBITDA margins equaled to 8.3 percent in 2008. Under Harry Winston Diamond Corporation, it managed a 19.8 percent in 2011 ("Harry Winston's Diamond Corporation," 2011). Meanwhile, smaller diamond industry players like Petra Diamonds has a 43 percent margin (Rudnicka, 2010).
Diamond production and manufacturing are capital-intensive segments of the value chain that require significant funding, particularly for the smaller players. At the production and retailing segments of the value chain, diamond industry players can usually secure financing support without any difficulty. They can secure loans, issue equity or even source government sources. Diamond banks give two main types of working capital financing through loans and accounts receivable. Two leading banks which extend their financial resources to diamond producers are: the ABN AMRO, a Dutch bank focusing on big corporations, and ADB (Antwerp Diamong Bank) of Belgium. These banks specialize in helping middle size companies. Among all players, operating margins remain in the range of 25 to 50 percent. (World Diamond Council, 2007) The price-cost margins of these industry players are influenced by the price fluctuations in the market.
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Generally, the diamond market has been less affected by the cyclical price fluctuations normal to other commodities. This is due to both its retail product nature and the diamond market domination of De Beers, which strategically adjusts diamond supplies in times of over production and/or recession. This is intended in order to preserve the industry's price stability. Since the 1940's, prices of rough diamond have shown a general upward trend, with gem and near-gem diamonds totally reflecting greater price increases (Lonrho Mining Website, 2011).
The industry's forecasted production shortfall against the demand has resulted in challenging trading conditions in the rough diamond market. This cause record price increases. From 2003 to 2005, for instance, uncut diamond prices have doubled. The Diamond Trading Company or DTC, the sales agency of De Beers, raised its prices to generally influence the diamond pricing.
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