A rough diamond story

Rough diamond prices continue to rise, and listed diamond stocks continue going down, and down.

JOHANNESBURG  - 

The Diamond Trading Company (DTC), the marketing arm of De Beers, the world's biggest miner and marketer of rough diamonds by value, announced further price increases this week, for a 16% cumulative increase since the start of the year. But just as rough diamond prices have continued to rise, so investors have continued selling down listed diamonds stocks.

The anomaly is that while a number of commodity prices have corrected over the past few months, diamonds have been an exception, but listed diamond producers have been treated as common victims of a malaise, in the manner of a contagion. Apart from diamond prices not only holding, but rising, there are a number of further positive factors underpinning diamond producers.

A fuller picture of the performance of diamond stocks is poorer given the unlisted status of De Beers, 45% held by diversified miner Anglo American. The biggest listed diamond stock by market value, Harry Winston, has lost 55% of its market value in the past while. Harry Winston's principal asset is a 40% ownership interest in the Diavik Diamond Mine, operated by diversified mining giant Rio Tinto at Lac de Gras in Canada's Northwest Territories. A new USD 787m underground mine at Diavik is anticipated to come into production some time in 2009, with a mine life of 16 to 22 years.

Rio Tinto does not report separate numbers for its diamond division, and Harry Winston operates a well known retail jewellery business. Gem Diamonds, the second most valuable listed diamond stock by value, has stuck, like De Beers, to the rough diamond business. There are other substantial mine builds going on in the global business, beyond the upcoming underground mine at Diavik.

During 2007, De Beers spent USD 1.5bn on capital expenditures, including stay-in-business items, and will be opening new mines in due course. Gem Diamonds spent USD 391m on acquisitions during 2007, and USD 110m on capital expenditure. Mining builds and stay-in-business capital expenditure for all kinds of mining have become increasingly expensive, posing mounting challenges for smaller players in the market.

Market valuations for De Beers are not available, but, if listed, it is likely that the group would carry a market value of at least USD 5.5bn, based on its 2007 earnings and cash flows. Healthy earnings and cash flows were also posted for the year by Harry Winston and Gem Diamonds, with the latter noticeable for its high margins, based to a material extent on the diamonds that emerge from the Letseng Mine in Lesotho.

Observers and analysts of the global rough diamond mining sector argue that while major diamond producers such as De Beers and Rio Tinto continue to exert material effort in finding new mines, the low statistical probability of exploration turning into a producing mine in less than five years points to further consolidation within the sector. Given bashed down stock prices of listed diamond names, the process may start up in due course.

It has been noted that investors remain intent on distinguishing between alluvial and kimberlite mines, and as always, between explorers/developers and producers. Given the overwhelming influence of river flows on alluvial diamond deposits, confidence of contained carats is nowhere near as persuasive as with drilled out kimberlite pipes, themselves the original suppliers of diamonds found in alluvial deposits.

Unlike an increasing number of miners, like those associated with zinc, lead, silver, uranium, and nickel, among others, junior diamond players are generally capable of generating positive news flows, despite the recent poor news that BRC Diamondcore has liquidity problems that may not have been apparent when the two entities merged earlier this year.

While the global diamond exploration focus increasingly swings back towards Africa, in particular, Botswana, Angola and the Democratic Republic of the Congo, Canadian exploration and development projects remain important as potential future suppliers of rough diamonds. There is also renewed activity in South Africa; this week, for instance, Kimberley Consolidated announced that South Africa's Department of Minerals and Energy had given the go-ahead for the company to commence bulk sampling of the Shone Kimberlite at its Kimberley processing plant.

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Related Links ARTILCES:  Strong diamond demand allows De Beers to raise prices 16 percent this year  De Beers in brawl over AK6 diamond mine in Botswana  De Beers powers ahead with three new diamond mines  Ten percent rise in 1H diamond sales from De Beers  OTHER PAGES:  DIAMONDS AND GEMS AFRICA

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