Diamonds are Nam’s best friend

The deployment of the N$7-billion Benguela Gem of De Beers Marine Namibia (Debmarine Namibia) in March has helped catapult diamond sales and royalties to record levels.

According to a report released by Cirrus Capital on Monday, diamond royalties for the fiscal year to date have been the best on record, with N$817.8 million paid from April to the end of July. More than half of this - N$408.9 million – was collected in July, making it the single largest month on record.

Cirrus quotes data of the ministry of mines and energy, saying 571 421 carats of diamonds were sold in July. This is the most in one month since August 2011 when 834 653 carats were sold.

“A third of the way into its fiscal year, government has already collected 57.0% of its expected diamond revenues,” Cirrus says.

The analysts attributes the strong royalty performance thus far largely to increased sales, but also from higher carat prices and the weaker rand.

“Given the collections ahead of budget, we believe that forecasts for this year will be revised materially upwards,” Cirrus says in the report, which was released ahead of finance minister Iipumbu Shiimi’s mid-year budget revision yesterday.

NAMDIA

Additionally, Namib Desert Diamond (Namdia) this week declared a dividend of N$150 million to government for its 2021/22 financial year, the highest figure to date. In its previous book-year, the state-owned enterprise (SOE) dividend pay-out was N$40 million.

Cirrus says Namdia’s dividend performance was due to a “massive increase in trading revenues as the diamond market and domestic output recovered”. The SOE’s sales revenue for the year under review increased by 78.7% to US$128 million.

Diamond production continues to post a recovery in 2022 so far, as production for the first five months increased 42.3% to 827 631 carats.

“This is the strongest first five months since 2018 when 918 078 carats were produced. That year, total diamond output reached 2.1 million carats – the highest since 2008 (2.2 million),” Cirrus says.

The improved output is driven by Namdeb’s increased planned production levels, which are being surpassed due to the newly-commissioned Benguela Gem which began contributing to production in the second quarter of this year, the analysts add.

OTHER COMMODITIES

Gold output for the first six months of this year increased 45.7% year-on-year (y/y) to 3 200 kg.

“This is largely due to an exceptionally (and surprisingly) strong January 2022 with reported output of 858 kg,” Cirrus says.

However, output has since tailed off as the year has progressed, the analysts note.

“Production at Navachab has been largely stagnant recently, with a slow decline over the past few years. B2Gold has faced delays in bringing the Wolfshag underground mine into production, which has seen its output deteriorate from early this year. However, we expect the completion thereof and the higher grades will see much better gold output in 2022.”

Zinc concentrate production levels were up marginally, by 1.7% y/y at 38 059 tonnes in the first half of the year.

“Skorpion Zinc remains under care and maintenance, while the bankruptcy protection filing for Rosh Pinah Zinc Corp’s Canadian parent, Trevali, has put the RP2.0 project on hold indefinitely,” Cirrus says.

Royalties from other mineral commodities (notably precious and base metals) have increased for the first three months of 2022/23 relative to the prior year, according to the analysts.

“However, the absolute values here are much smaller than those received from diamonds. We estimate approximately N$42.2 million in gold royalties for the first three months of FY 2022/23 (only available data), up 52.9% y/y. Similarly, we estimate about N$9.1 million in zinc royalties for three months of FY 2022/23.”

URANIUM

Uranium production and export figures for 2022 have not been provided by the mines and energy ministry, thus Cirrus does not have an indication on these royalty payments and the impact on the fiscus.

“However, the Namibia Statistics Agency’s Uranium Index suggests that yellow cake output for the first five months of this fiscal year is up around 11.2% y/y. The increased output should also lead to higher royalty payments, particularly with the weaker rand. This should also contribute to better mineral royalties for the state,” the analysts say.

Improved mining output in 2022 and 2023 will be the primary driver of Namibia’s economic growth recovery, according to Cirrus.

“The improved production across some commodities will not only drive economic growth, but will also improve revenues for the state. We thus expect non-tax revenues, largely from diamond royalties, to show a strong performance for FY 2022/23 and help offset the weaker tax revenue (particularly from the Southern African Customs Union or Sacu).”

GROWTH STATS

According to the latest figures by the Namibia Statistics Agency (NSA), mining and quarrying grew by 21.3% and 29.4% y/y in the first two quarters of the year respectively – the best performance since the first two quarters in 2018. In the corresponding period in 2021, growth was -20.7% and -1.8% respectively in real terms.

In nominal terms, mining and quarrying contributed nearly N$3.9 billion and N$4.8 billion to the gross domestic product (GDP) in the first two quarters of 2022 respectively. As such, its contribution share to GDP was 8.3% and 9.9% respectively.

In the same quarters last year, the sector pumped nearly N$2.5 billion and N$3.3 billion respectively into the economy. GDP contribution was 5.8% and 7.7% respectively.

In the Bank of Namibia’s (BoN) latest economic outlook, released in August, the central bank expects mining and quarrying to grow by 13.6% this year, followed by 10.9% in 2023 and 3.9% the year after.