Fiscal boost as diamond prices mend

After a year of turbulence, international rough diamond prices have started to rise in what could be a boost to Botswana's revenues and foreign exchange inflows.In a market update released yesterday, Gem Diamonds Limited, says that rough diamond prices are beginning to firm after a suppressed third quarter in which sales nosedived due to weak economic environment and tight liquidity in the market. London Stock Exchange (LSE) listed Gem Diamonds are the promoters of the Ghaghoo Diamond mine, which is currently under construction in the Central Kalahari  Game Reserve (CKGR).
The company reported a 38 percent drop in sales at its high-value Let_eng mine in Lesotho during the three months that ended on September 30, 2012. But it says that in October, prices began to rise as the US holiday sales period approaches. Gem indices suggest a seven percent increase in prices for the year.
"Rough and polished market indices are beginning to reflect a more encouraging overall trend, but the rough trade is expected to be quieter in November as the Indian market celebrates Diwali. A more positive expectation for the holiday season retail sales in the major US market should provide some stimulus to prices in the short term. However the supply strategy of the major producers in an illiquid and fully supplied market, as well as the aftermath of Hurricane Sandy in the US may have an impact," said the company.
 Following the reduction in rough prices in September 2011, the rough diamond market moved positively through to May 2012. However, lower margins and continued illiquidity in the diamond market coupled with the poor macroeconomic climate resulted in significant pressure being exerted on rough prices, which began weakening in June 2012. This pressure continued through to September 2012 after which a market correction process started.
For Botswana, which gets over 70 percent of its foreign exchange   revenue from diamond sales, the 2012 turbulence has hit hard on government coffers with reduced income expected for the 2013-2013 fiscal year. In the State of the Nation Address delivered last week, President Ian Khama said that during 2012, diamond carat sales and revenue are forecast to reduce by 13 percent and 19 percent respectively. He said this will translate into a slower economic growth rate for Botswana.
"The economy is seen growing by 3.5 percent this year before rising by five percent in 2013. Output from the mining sector will be heavily curtailed by the weak diamond market which is currently suppressed due to the global economic slowdown," Khama said.
Botswana's economy grew by eight percent last year according to figures from Statistics Botswana. Meanwhile Gem Diamonds say that construction of the Ghaghoo mine is progressing though at a slower rate due to challenges encountered in advancing through an area of unconsolidated sand.
"Development of the sand tunnel re-commenced in September 2012 following the final inspection review by the Department of Mines to the tunnel integrity and modifications to the open face tunnel shield which were implemented during the period. The sand tunnel, however, continues to progress slowly as it descends through an area of hard material.
Plant and camp infrastructure development continues to progress according to plan," Gem CEO Clifford Elphick said in a statement.