Something of a twinkle for diamonds

This small, speculative, globally listed sector continues to attract specialist interest as it returns from clinical death.

Author: Barry Sergeant
Posted: Tuesday , 22 Dec 2009

JOHANNESBURG -

Measured from July this year, listed diamond stocks have attracted the strongest net inflows of any mining subsector, which may sound like a grand story. This is a lesser story than it appears to be, given the lightness of the global listed diamonds sector, a total investible US$2.8bn worth of market value, spread across 40 listed stocks.

De Beers, the biggest producer, is not listed; nor is ALROSA, the substantial Russian producer, and nor is MIBA, the ruined Democratic Republic of the Congo outfit. Anglo American holds 45% of De Beers, but is far more heavily invested in other subsectors. There is exposure to quality rough diamonds, but very indirectly, via BHP Billiton and Rio Tinto.

The biggest listed diamond miner specialists are Canada's Harry Winston, which also, however, runs a substantial jewellery business, and Gem Diamonds, which has become something of a one horse show, with its Lesotho mine, given that most of its other operations, often acquired at substantial cost, have hit brick walls of varying thicknesses.

The global diamond sector has had one of its most traumatic years, for decades. As is well known by now, De Beers is actively seeking additional funding, of around US$1bn, from its three shareholders. If that amount is provided, by way of loans or fresh equity, the proportional contribution would be US$450m from Anglo American, US$400m from the Oppenheimer family, and US$150m from the Botswana government.

De Beers took it on the nose this year, slashing production, but returning substantially to normality in recent months. According to Des Kilalea, an analyst at RBC Capital Markets, "our figures suggest De Beers sold some US$3.2bn of rough diamonds in 2009, 46% below 2008's figure but above the US$3bn we had projected three months ago".

Sales projected by De Beers for 2009 are "the lowest annual figure since 1987". Kilalea says that "the absolute level of sales demonstrates the impact of a collapse in diamond demand and the drying up of bank credit in cutting centres. Had De

Beers not cut back production and restricted supply rough prices would not now be recovering".

Kilalea says that the final rough diamond sales of 2009 by De Beers, BHP, Rio Tinto, Gem Diamonds, Rockwell Diamonds and Petra Diamonds all appear to have realised higher prices: "demand for Gem Diamonds's high-end goods was strong in the December tender with prices rising back over US$2,000/carat for the first time in a year".

Investors with a well developed sense of risk may like to take a closer look at Lucara, Peregrine Diamonds, and Stornoway Diamonds. More broadly, clear reasons for the secular derating of the global diamond sector are yet to be articulated. Cynics might say that diamonds have little intrinsic value, while some investment strategists may go for the argument that increasing numbers of alternatives draw potential customers elsewhere.