The economic downturn and credit crunch has crushed demand for diamonds, hitting prices so hard that miner Rockwell Diamonds reports it has been unable to turn a profit on the stones it has produced through its SA operations, despite an improved operating performance.

The Canada-based company, which is listed on the JSE, operates three diamond mines in South Africa: Holpan, Klipdam and Saxendrift. A fourth, Wouterspan, is on care and maintenance.

In the face of the collapse of the diamond market, Rockwell reported a loss of C$6.6-million for the six months to end-August, more than double its C$3.1-million loss in the same period last year.

Widening losses have led the company to embark on a cost-cutting drive and CEO John Bristow says it has implemented improvements to operations and cost structures in all parts of its business.

He says diamond prices are rising and there has been a positive change in market sentiment.

Cost-saving measures necessary

There was a 54 percent increase on average in diamond prices in the second quarter of the review period. Rockwell received US855/carat, up from 555/carat in the preceding quarter. Monthly averages also showed a steady improvement, from 531/carat in March to 1090/carat in late July.

Meanwhile, Rockwell has had to take decisive action and is hoping to secure commitments to raise C$7-million to C$10-million to bolster its balance sheet, pay off short term debt and undertake production improvements and cost-saving measures necessary for its "growth and expansion plans", says Bristow.

However, he cautions: "The funds raised are expected to be achieved through a combination of a rights offer and private placement, but there can be no certainty of its success at this time."

He says that if the company receives the funding, it intends to modernise its Wouterspan processing plant with a view to recommissioning this operation. But that hinges on further improvements in diamond prices.

Rockwell says details of the rights offer will be made public next month.

"Exceptional stones" produced

Sales of rough diamonds brought in C$9.7-million for the six months to the end of August, significantly down from C$17-million a year earlier.

This was despite the company reporting several "exceptional stones" produced, including a 40-carat clean white stone and a 122-carat rounded octahedral stone of light yellow Cape colour with a number of inclusions. Two other stones of 120 carats and 105 carats were found.

Bristow attributes the lower revenue to sales prices in the first quarter, which were below the cost of production.

Though prices in the second quarter rose, covering production costs, they were still insufficient to fully pay for fixed overheads and leases.

By August sales were covering operating expenses but the company says overall inflows were not enough to cover the full costs of the lease payments on a limited amount of earth-moving equipment. Production and cost improvements appear to have occurred in a number of areas.

Share price took a knock

Rockwell says it exceeded its target of 2500 carats/month from its three operating mines during June to September. Mining costs in the six months fell to C$9.6-million, down from C$12.3-million a year earlier, while exploration expenses fell to less than C$60 000, from more than C$270 000 in the same period last year because of lower engineering activity and property assessment fees in SA.

Rockwell's share price, as you would expect, has been rocked in the past 12 months. It has been as high as R2.70 and as low as 23c. It is currently trading around 65c.

Best then to wait until there is evidence that consumers will be willing to splash out on luxury items such as diamonds before betting the farm.

Financial Mail

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