Wednesday, September 23, 2015

Margin Squeeze

The margin squeeze in the diamond industry has become very transparent in 2015.

This recent article talking about Russian production clearly shows a squeeze is on.

Article -- Russia - Exports - Diamonds

Excerpt 1:

"The ministry reported that the average price of production increased 13 per cent to US$109.13 per carat."

That is the cost to produce a carat in Russia. A portion of this and the whole industry is the transition to underground mining at many operations. All underground mines are not alike and different problems need different solutions at each operation.

Excerpt 2:

"Recently, mining giant Alrosa issued its half-year report, announcing it has sold 18 million carats of rough diamonds for US$2.1 billion in the first half of 2015 - a 22 per cent drop compared to the same period last year (US$2.7 billion). Alrosa’s mines now generate 25 per cent of the world's diamond output."

A Russian diamond generates -- US$2.1 billion over 18 million carats or US$116 per carat


You now have a quarter of the industry producing carats at a very small margin of US$7 per carat.

What do you do when your margins are being squeezed.

Pull back production? Change your long term outlook and adjust production strategically?

How about:

You end up with this quote: --> Article

"According to Reuters, ALROSA’s CFO, Igor Kulichik, said the company was increasing its stockpile of goods rather than reducing production.

"Cutting production leads to a (relative) rise in costs, so we better grow the stock," Kulichik told a conference call, as reported by Reuters."

Sounds somewhat similar to the iron ore industry. Revenue is being crank up the production to reduce overall operating and fixed costs.

Recently it has been reported that Alrosa is considering cutting diamond prices in the second half of 2015. If they cut 6%, they are basically breaking even....according to the above information.

Reducing production might be a solution, temporarily closing down a low or negative margin mine might be a better solution...however, closing an operating mine in a Russian town might be a bit harder to stomach with the government overseeing you.

In times like this, profit margin is KING!

Chidliak has a huge margin built into it's project. A carat adjustment of $10 or $20 per carat does not squeeze the margin very much at all.

Profit Margin #1 -- Chidliak profit margin

Profit Margin #2 -  Chidliak Profit Margin 2

1 comment:

  1. When the margin of making a carat is dropped to US$7, we knew something is not right. Now that, in comparison to the US$109.13 average price is much less than expected. With only 6% of profit margin, no business can grow smoothly, forget dominating.