Why diamonds are becoming investors’ best friends…again

4 December 2020

On 3 December 2020 in Resources Stocks Down Under we discussed a relatively new company on ASX called Burgundy Diamond Mines (ASX: BDM). Burgundy is exploring for diamonds in Canada and a lot of investors have been taking notice lately because one of Burgundy’s directors is Michael O’Keeffe, the Montreal-based mining executive with a track record of success in finding quality assets at the bottom of the relevant price cycle.

It’s there’s an industry that has been out of favour for a long time now it has been diamonds. The peak for diamond prices, both rough and polished, was 2011, and while prices stabilised in 2017 the Coronavirus Crisis impacted the industry in a serious way in 2020 before prices started a tepid recovery in April. As a result of prolonged price weakness over close to a decade there’s been no new diamonds mines in a long time and and that has many industry observers fearing a supply shortfall emerging later this decade given rising jewellery demand, particularly in fast-developing economies such as China. How serious could the future diamond shortfall be? We believe that diamond jewellery remains valuable as a luxury good for people in emerging countries whose incomes are rising. In 2019 world production of diamonds was about 142 million carats, but to keep up with demand that probably needs to expand by 35 to 75 million carats a year.

A cartel no more

Traditionally, the diamond industry was a virtual monopoly of South Africa’s De Beers and its distribution system, called the Central Selling Organisation. It was De Beers that gave the world the legendary ‘A Diamond is Forever’ campaign, first run in 1948. The cartel approach was formally abandoned in 2000 but it had been breaking down for years before that, as supply emerged from outside the ‘system’ in countries such as the Democratic Republic of the Congo. The diamond game today is still very concentrated, but with De Beers/Anglo American facing at least one major competitor, a company called Alrosa that dominates the significant Russian diamond industry, diamonds now face supply and demand like any other product.

If you’ve seen the 2006 film Blood Diamond, starring Leonardo DiCaprio, you’ll appreciate the opportunity for potential developers of new diamond mines in 2020. Multiple industries these days are at pains to show that their supply chains follow ‘best practice’. With diamonds having a reputation for fuelling conflicts and exploiting child labour in emerging countries, a new diamond mine that can sign off on best practices has a shot at enjoying decent distribution of its output once pricing returns to normal.

BHP used to be a player in diamonds, but it sold its Ekati mine in Canada in 2012 as a response to waning prices. Rio Tinto (ASX:RIO) remains a major producer through its Argyle mine in the Kimberley region of Western Australia and the Diavik in mine Canada’s Northwest Territories, which was started up in 2003. Behind these two, the diamond players on ASX right now are much smaller companies, like Burgundy. Newfield Resources (ASX: NWF) is developing a new mine in eastern Sierra Leone called Tongo. Lucapa Diamond Co (ASX: LOM) currently operates two producing mines, one called Lulo, an alluvial mine in Angola, and another called Mothae, a kimberlite mine in Lesotho. And finally, there’s Gibb River Diamonds (ASX: GIB), which is developing its Blina Diamond Project in the WA Kimberley.

A Diamond is Forever. Bear markets in diamonds are not.

We believe that we are in the early days of a diamond market recovery. The diamond companies on ASX today will have several years to develop their mines before pricing really gets strong. Lucapa has an early start because it actually has producing mines. For the others, watch carefully as they work on bulk sampling of their properties ahead of formal mine development. Above all, do your homework ahead of the bull run we suspect is coming for diamonds. A Diamond is Forever. Bear markets in diamonds are not.

 

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