good article
Diamonds: An Investor's Best Friend?
By Jackie Steinitz
11 Apr 2006 at 08:40 AM EDT
LONDON (ResouceInvestor.com) -- Share prices of the larger diamond juniors (those with a market capitalisation greater than $50 million) have risen by 34% over the last year.
Leaders of the pack include African Diamonds [AIM:AFD], up 161% following promising results from the AK6 discovery in Botswana in its joint venture with De Beers, and Blina Diamonds [ASX:BDI], which has reported high alluvial grades from its exploration projects in the West Kimberley Field in Australia. Dianor [TSXv:DOR] jumped 300% in the two months to February following an exploration report from its Leadbetter project in Ontario and a buy recommendation by Westwind Partners.
The primary driver of the rising share prices is that a fundamental shift in the supply-demand balance for diamonds is imminent. After 25 years of supply surplus the diamond industry is on the cusp of moving into an era of supply deficit, in which pricing power will shift to the miners and explorers.
Demand
On the demand side, growth has been accelerating. The sales performance through much of the 1990s was disappointing; between 1992 and 1998 diamond jewellery sales grew by just 1% per annum.
However a new chapter in demand growth began in 1999/2000 when industry giant De Beers undertook a major strategic review of the business that identified the “opportunity gap” – the chasm between the sluggish sales growth of diamond jewellery (where marketing investment by the industry represented just 1%-2% of sales) and the booming sales growth of luxury goods (where the marketing to sales ratio was 10%). De Beers therefore embarked on a new strategy to transform the marketing landscape, to increase marketing investment and branding throughout the industry and to convert the industry from one that was demand-driven rather than supply-led.
Growth was kick-started by the millennium opportunity. The buoyant global economy and a campaign which featured captions such as “What are you waiting for? The year 3000?”, and “Every Thousand Years or so it’s nice to get her something really special for her birthday”, spurred demand growth to 11% in 1999 and 8% in 2000.
Since then new concepts such as three-stone jewellery to celebrate a couple’s “past, present, future” have proved the most successful product since the diamond engagement ring; sales in the U.S. rose from $500 million to $3 billion in just four years.
The latest U.S. campaign, “I forever do” aims to tap into the 150,000 wedding anniversaries celebrated there every day of the year. The strategy has also been able to ride the wave of economic growth and expansion of the middle classes in India and China.
India is now the third largest market for diamond jewellery in the world; sales have more than trebled in the last 10 years. In China sales have increased six-fold since 1990 and in Shanghai now around 85% of brides receive a diamond wedding ring, up from 3% 15 years ago.
Worldwide demand growth has averaged 6% per annum since 1998 and De Beers are anticipating a figure of 7% this year. There is significant potential for future growth especially in China, India and the Middle East. Consider, for example, that even in Shanghai, the most mature of the Chinese markets: fewer than one in five women own diamond jewellery compared with four in five in the U.S.
Supply
On the supply side growth in production, like demand, has also been accelerating since the millennium after a relatively flat period in the 1990s. Growth since 2000 has averaged 5%-6% per annum in volume.
However – and this is the nub - for the last 10 years, new production has not been sufficient to meet demand. Demand has been met only by massive destocking by the producers, firstly by the Russians, and latterly by De Beers who have destocked from a peak of almost $5 billion in 1998 to working levels today. De Beers have also achieved further one-off gains by shortening the pipeline which has reduced the amount of time taken to get from mine to consumer and thus reduced the level of working stock.
The diamond majors (De Beers, Rio Tinto [TSX:RTP; LSE:RIO], BHP [NYSE:BHP; LSE:BLT] and the Russian company Alrosa) have already invested extensively to optimise production and diamond recovery at all mines. This, together with two new Canadian mines explains the acceleration in production growth since the millennium. But now most of the possible gains have been achieved.
Rio last year agreed to invest $910 million to take its Argyle mine underground from 2008 to 2018 even though production underground is expected to average just 60% of the previous open-pit average of 34 million carats per year.
Meanwhile diamond exploration has been booming; global spending last year exceeded $620 million, the highest level recorded in the 17 years it has been measured by the Metals Economics Group, with more than 500 projects on five continents. But it takes 8-10 years from discovery to bring a mine on stream.
While there are a few new medium-size mines on the horizon such as De Beers’ Snap Lake project in Canada, which will come on stream in 2008 and Victor mine in 2009, they will only just compensate for declines anticipated in some of the current mines. The bottom line, according to forecasts produced by WWW International Diamond Consultants, is that production, which totalled 158 million carats in 2005 will stay in the range of 155-165 million carats for the next nine years.
For the moment the diamond pipeline is still digesting the final vestiges of surplus stock in the diamond cutting centres. But the combination of encouraging demand prospects, tight supply and rising prices means that the medium and long-term future should be bright; for the miners, for explorers who find diamonds and for the investors who finance the exploration and production.