THE diamond mining sector is in deep trouble. Kao Mine and Liqhobong Mine, two of Lesotho’s four biggest mines, face a serious cash crunch due to low diamond prices. The crisis is so serious that the mines could retrench or shut down to avoid further losses. Kao employs 800 while Liqhobong has 600.
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The companies blame the low prices on the rise of manufactured diamonds, the weak Chinese market and overstocking by diamond cutters, polishers and wholesalers.
The crisis could have a huge impact on the economy and the government‘s revenues in taxes, levies and royalties.
Diamond mines contribute between six and 10 percent to the Gross Domestic Product (GDP) and employ some 3 000 people.
In 2022 diamond mines paid M512 million in royalties, M7.7 million in mining lease fees and M36 million in Value Added Tax.
They also injected M2.9 billion into the economy by buying goods and services from local companies. Another M414 million came through salaries on which the companies paid M98 million in income tax.
Retrenchments in mining could empty hundreds on to the streets, worsening the unemployment rate. News of the crisis in the diamond mining sector comes as the government is battling to contain a crisis in the troubled textile sector that has shed nearly 20 000 jobs in the past three years.
At the same time, the economy is yet to regain the steam it lost during the Covid-19 pandemic.
Storm Mountain Diamonds, the owners of Kao Mine, told employees in a circular letter that it is facing a “liquidity crisis” caused by “poor revenue” and “ongoing operational costs”.
Storm says it is “running out of cash” because operational costs continue to exceed revenue due to low diamond prices.
“Our sales results have been severely affected by the market crisis.”
The statement has triggered panic among employees at Kao, Lesotho’s second-biggest diamond mine.
The company says the planned revenue for the financial year was “US$377 per carat but it only achieved US$193 per carat at the most recent sale in July”.
Those prices, the company notes, are unsustainable as it needs about US$300 per carat to break even at the current cost structure.
Storm paints a depressing picture of a crisis unlikely to abate anytime soon.
“If anything, the crisis is deepening,” the company says.
It says while there are no indications on when the prices will rebound diamond marketing experts are not optimistic that it would be any time soon.
Liqhobong Mining Development Company (LMDC), the owners of Liqhobong Mine, also issued a similarly sombre circular saying the low prices and the current costs have pushed the company into unsustainable losses.
The LMDC says if it continues with the current cost level it will “quickly deplete its cash reserves and be forced to cease operations, with the closure of the mine and loss of all jobs at Liqhobong”.
It says the average value of US$62.50 per carat achieved in the July sale was below forecasts. This, the company notes, is far below the average value of US$89 per carat which was the basis for the mine to reopen in 2022 after it was put under care and maintenance during the peak of the Covid-19 pandemic.
The subdued July numbers followed an even worse average per price per carat in the May sale.
Describing it as the “most challenging times ever for the diamond industry”, the LMDC says those prices reflect the current fragile market conditions which have quickly worsened over the past few months.
“There is a consensus that the diamond market downturn and subsequent recovery may be protracted, and improvement is expected only once the midstream sector has been sufficiently destocked, which will take time,” the LMDC warned.
Storm says a special board meeting last week decided to put Kao Mine under care and maintenance to conserve cash and diamond resources while waiting for an upturn in prices.
It says the same board however agreed to reconsider the decision to put the mine under care and maintenance if it gets a loan from its funding shareholder and the government agrees to either reduce or postpone its royalties.
The company is still waiting for responses to its application for the loan and royalty relief. Storm is also considering a cost-cutting plan that includes retrenching if it continues operating after getting the loan and the royalty relief.
It however says the “number of jobs affected would be fewer” and promises to be fair if the retrenchments become inevitable.
The LMDC’s cost-cutting plan at Liqhobong, Lesotho’s fourth biggest, is focused on reducing production to limit cash losses during the market downturn, avoiding mine closure and saving jobs.
The company has already discussed the plan with funders who it said have “expressed their indicative support” subject to their analysis and internal approval procedures.
It cautions that apart from funding, the plan also requires the support of employees, contractors, suppliers and the government.
“In the absence of this support, there is a strong likelihood the mine will be forced to close.”
Part of the plan is to cut production by operating the plant at 500 tonnes per hour in a single 12-hour shift from September 1.
“This will help preserve the line of the mine, maintain cash resources, and match production to the prevailing market conditions,” the company says, adding that it will improve production if the market improves.
The LMDC management started discussing retrenchments with employees on Tuesday, promising that the “objective is to explore possible alternatives and minimise job losses wherever possible”.
The company says the meetings would discuss ways to avoid potential retrenchments, minimise job losses and reduce the effect of potential retrenchments.
They also discussed voluntary retrenchment, packages and criteria to be used.
It is unclear if Letšeng Diamonds, the country’s largest diamond mine, faces similar challenges and is considering the same measures as Storm and the LMDC.
It is however unlikely that it will come out of this phase without some bruises.
The situation at Mothae Diamond Mine recently bought by Minister Lebona Lephema’s Lephema Executive, is unknown.
However, the low diamond prices and the mine’s low carat yield could explain why Australia’s Lucapa Diamond Company sold its 70 percent stake to Lephema Executive.
Lephema Executive paid a nominal A$10 000 (M121 000) for a stake that Lucapa bought for M134 million from the government in 2017.
Staff Reporter
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