Following the sharp decrease in rough diamond prices, another financial research firm has downgraded Harry Winston Diamonds as well as Petra, while Gem Diamonds maintains its rating.

 

In an analysis titled Diamond Update No. 3, BMO Capital Markets’ Global Mining Research has downgraded Harry Winston to Market Perform and Petra to Market Perform, speculative investment, because of current market conditions.

 

BMO Research continues to rate Gem Diamonds Market Perform.

 

Noting evaporating demand for new rough diamonds due to pipeline inventory destocking, “Diamond stock prices began their decline in advance of the collapse in rough diamond prices and have suffered significantly.”

 

The financial services firm said that rough diamond prices are down 30 percent from August highs.

 

BMO added that it “forecasts a gradual recovery in diamond prices starting midyear, as destocking is completed amidst shortages created by the cuts in sales and production from De Beers and Alrosa.”

 

But while expressing confidence in Gem Diamonds, saying that it is “best placed to weather the financial crisis,” it forecasts that Harry Winston and Petra “offer the best opportunities in a recovering market.”

 

A surprising comment mentions “some speculation that the writing is on the wall for De Beers, as Anglo American and the Oppenheimer trustees are losing patience with current management,” however it does not go into any further details.

 

Based on historical analysis of rough diamond prices and U.S. CPI forecasts, the firm is forecasting a gradual recovery in rough diamond prices staring in mid 2009, returning to the upward trend of the past decade by early 2010.

 

BMO Research Rough Diamond Index 2000=100 Source: BMO Capital Markets

 

BMO Research said the structural dynamics that underscored sustained price increases from 2000 to mid-2007 remain unchanged despite the financial crisis. It specifically notes that no new deposits of significance have been found since the discoveries of Ekati and Diavik in Canada, and that many of the existing major mines, such as Jwaneng, Orapa and Diavik, are reaching the end of their open-pit mine lives and are transitioning to lower output underground operations.

 

BMO warns that recovery packages planned by many governments around the world may lead to strong inflation, resulting in a strong risk that diamond prices could again become overheated.

 

If, however, “interest rates are increased dramatically to keep inflation in check (…) the debt burden of the diamantaires could prove too much and the whole industry could begin to face liquidity pressures.”

 

Finally, BMO warns that “stockpiles built up during the period of low rough purchases by diamantaires may suppress the front end of the forecast recovery. Equally, production cuts may be more protracted than forecast due to difficulties restarting mines. This may result in a shortage of material further out in the forecast.”