The Diamond Market Keep exploring! James Allan Botswana July 2006 1
Contents Diamonds still a girls best friend Last years conclusion The market in the early 2000s Cutting Centre Debt What is driving the market? Supply and Demand Conclusion
Conclusion(2005) Current market growth is likely to be sustainable Cutting centre debt.ok for now Can growth in China and India offset a slowdown in the US? Market deficit to be offset by price increases Consumer confidence remains key to growth
The Diamond Pipeline Consumer Research, Advertising, Promotions & Publicity Prospecting Mining CSO Cutting centres Polished Market Jewellery Manufacture Retail Consumers Trade Liaison and Market Surveys
Diamond Pipeline ($m) 80000 70000 60000 50000 40000 2004 2005 30000 20000 10000 0 Exploration Mine Costs Mine Production Polished Wholesale Market Value
The Opportunity Gap - Key Marketing Insight in 2000 Diamond jewellery outperformed by other luxury goods - and GDP 500 400 300 CAGR 1980 = 100 Luxury goods GDP* Diamonds (Polished Wholesale Prices) 200 100 1980 82 84 86 88 1990 92 94 96 98 2000
Driving Growth World Retail Sales (USD) 4.0% +3.6 3.0 2.0 1.0 0.0-1.0 10% -0.2 94-98 99-03 5.9% 8.5% 6.3% 2.6% 0% 0% 2002 2003 2004 2005 Source: DTC
Retail Sales of Diamond Jewellery 2005 ($68bn) (+6.3%) 16 % 6% 6% 6% 51% USA Japan Europe Asia-Pacific Asia-Arabia Others 15 %
Polished Prices Index
De Beers -diamond stocks to 2004 (Estimated from 2001) $000 s 6000 5000 4000 3000 2000 1000 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 0
Cutting Centre Debt 1980-2005
US Fed Funds Rate 2000-2006
Cost of debt to Rough Turnover Ratio 1980-2005
Indian debt as % of total cutting centre debt 1992-2005
Has the SoC Strategy been solely responsible for the market growth? Increased ad-spend has no doubt played a role But what are the underlying fundamentals Remember economists don t understand the fundamental drivers of an economy as they do not understand sex.
The Baby Boom US Births by era Million 80 70 60 77 72 50 40 45 30 34 20 28 10 0 Parent of of Babyboomers Baby-boomers Born before 1931 preview Boom Preview Boom 1931 1945 Baby Boomers Baby-boomers 1946-1964 Gen-X 1965-78 Echo Boom 1979-1997
US Consumers Increases/Decreases by Age (1995-2010) Percent 70 Projected % Change in Consumers by Age 60 50 40 30 20 10 0-10 Under Under 25 25 25 25-34 34 35 35-44 44 45 45-54 54 55 55-64 64 65 65-74 74 Over Over 75 75 Age
Jewellery Expenditures by Age $ Per Capita $ Boomers - today to 2010 200 180 160 140 120 100 80 60 40 20 0 Under 25 25-34 35-44 45-54 55-64 65 & over Age James Age Allan & Associates
Jewellery Expenditures by income $ 250 Per Capita Boomers - today to 2010 200 150 100 50 0 <$ 15K $ 15-30K $ 30-40K $ 40-50K $ 50-70K >$ 70K Income Age
US Diamond Jewellery Expenditure by Age (000 s) Adult Womens Market $ 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Boomers - today to 2010 Under 25 25-34 35-44 45-54 55-64 65 & over Age Age
The Jewellery Boom Baby Boomers entering high income bracket Inheriting more High disposable income Jewellery spend to rise sharply
The Jewellery Boom BOOMERS TO GIVE US JEWELLERY SALES DRAMATIC GROWTH
USA 3 STONE JEWELLERY
3 Stone Ring Sales +11% 2005
Right Hand Ring advertising +15% in 2005
US Jewellery: Share by Occasion
US Jewellery Sales Growth of 7% in 2005 Still underperforming luxury goods (+12.6%) Slower growth predicted in 2006 Major drivers: married women, high income households and heavy owners Right hand ring and 3 stone ring showing superior growth Consumer confidence is still high (particularly in high income households)
Market Growth India
CHINA DIAMOND WEDDING RING
China Diamond Wedding Ring Acquisition in China Now Exceeds that of More Mature Markets Acquisition of DCJ amongst recently married women 80% 66% 36% 44% 45% 50% 51% 56% 57% 56% Chengdu DCJ '03 Thai DCJ '04 Guangzhou DCJ '03 Japan DER '03 Korea DCJ '02 HK DAS '02 Taiwan DCJ '04 Dalian DCJ '03 Shanghai DCJ '03 Beijing DCJ '03 Source: DAS/DCJ
Chasing the Petro Dollar
Diamond Production in 2005 (JA estimates) Other South Africa Canada $800m $1560m $1400m Australia $600m Total $1200m $10.7bn $2810m Botswana Angola Russia $1700m $620m Namibia
Mine Supply 1998-2010 ( 000cts) (000) carats 150,000 145,000 140,000 135,000 130,000 125,000 120,000 115,000 110,000 105,000 100,000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Mine Supply 1998-2010($/ct) 95 90 85 80 75 70 65 60 55 50 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $/ct 2008 2009 2010
Mine Supply 1998-2010 ($m) 12,000 11,000 10,000 9,000 8,000 7,000 6,000 1998 2000 2002 2004 2006 2008 2010
Mine Supply 2010 Production 2010 ($11.5bn) South Africa 19% 10% 14% Botswana Namibia Russia 2% 10% 15% 5% 24% Angola Australia Canada Other
Challenge Growing/meeting demand $500-600m per annum? Maintaining Growth 10% 0% 2002 2003 2004
Supply/demand deficit Demand growth to 2005-2010 - $4-5bn? Supply growth to 2005-2010 - $1.5bn? Canada $950m (Snap Lake, Victor, Diavik, Jericho) Botswana $250m (Jwaneng, Orapa and AK6!) South Africa $150m (Venetia) Angola and other >$200m? Deficit 20-30% of current supply>prices
Market Deficit to 2010 3.5 $bn 3 2.5 2 1.5 1 0.5 S A B o t s w a n a 0 3% 4% 5% 6% 7% Market Growth (Annual)
Market deficit SA>Diamond Amendment Bill >$400m Quest for carats De Beers drilling 55 kimberlites in Angola in 2006 Shorten mine development pipeline to <10 years DRC Botswana
Synthetics- A threat to the industry Combat the synthetic threat on several fronts Detection Disclosure Differentiation
Global Overview Rough diamond prices up 35% since 2002 De Beers prices up, 2% in Feb 2006>poorly timed Carat production decline of 2.5% per annum to 2010 Argyle production to halve by 2010 But growth in value of 1.5% per annum to 2010 Demand growth 5-6% per annum? Upward pressure on rough prices Less carats to cut and polish! Indian cutting centre will be under pressure to take bigger stones
Rough Diamond Price Increases Since 2002 SourceJA Presentation to World Diamond Conference Perth 2005 80 70 60 $1500/ct <$20/ct Percent 50 40 30 $75/ct 20 10 0 Middle Orange River Market Average Indian Goods
Conclusion Strong appetite coupled with greed leads to indigestion current slow down Cutting centre debt becoming a problem US. China, India, Middle East growth is strong Market deficit to be offset by price increases Consumer confidence remains key to growth
Questions? Corporate finance and advisory james@jamesallan.co.za 27 11 3255457 (office) 27 82 565 4507 (mobile) 45