Sea of Diamonds
Sea of Diamonds (e-Diamond, Inc.)
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Sea of Diamonds to Outpace Metals as Scarcity, Asia
Sales Boost Prices
Aug. 7, 2006 (found at Bloomberg)
-- For the first time in 25 years, diamond production is declining and that may
make the world's most coveted stones a better investment than copper, nickel and
zinc, this year's top-performing commodities.
Output from diamond mines worldwide is likely to fall 2 percent by 2015, says
James Picton, a diamond analyst at W.H. Ireland who's been following the
industry for 35 years. Production has increased about 9 percent in the past five
years, according to the New York-based World Diamond Council, as mining
companies hurried to find new deposits to meet soaring demand.
A rally in prices will fuel earnings for producers African Diamonds Plc and
Petra Diamond Ltd., according to Merrill Lynch & Co. and JPMorgan Chase
& Co. The drop in production comes as purchases of the stones rise, helped
by the booming economies of China and India. China alone doubled jewelry
purchases since 2001 and may buy 20 percent more this year, according to www
Diamond Forecast Ltd., a London-based research firm.
Diamonds have ``the best fundamentals,'' said Evy Hambro, who manages the
$6.6 billion World Mining Fund in London for Merrill Lynch. ``The gap between
supply and demand is much bigger relative to other commodities.''
Rough, or uncut, diamonds don't trade on commodity exchanges. Instead
Johannesburg-based De Beers, which sells 60 percent of the world's uncut gems,
holds 10 sales a year, known as sights, to a select group of customers called
sightholders from countries known for diamond cutting, including Belgium and
Israel. That leaves shares of diamond producers as the easiest way to invest in
the gems.
`Very Positive'
Hambro, with 1.5 percent of his assets in diamond companies, said he will buy
shares of Germiston, South Africa-based Gem Diamond Mining Corp., which goes
public this year, and Toronto- based Aber Diamond Corp. Ian Henderson, who
manages $2.5 billion in natural-resource assets for JPMorgan in London, said he
has increased his diamond-share holdings to 4 percent from 1 percent in the past
year. He declined to elaborate.
``I am very positive about diamonds, given the overall supply-demand
situation,'' said Henderson. ``Of the 170 diamond companies out there, only 25
are actually producing.''
One of those is Dublin-based African Diamonds, whose shares almost tripled
this year. Another is Sierra Leone Diamond Co., a Hemel Hempstead, U.K.-based
company operating in West Africa, whose stock has also tripled. Shares of Petra
Diamonds, a Jersey, U.K.-based explorer in Angola, South Africa and Botswana,
have risen 52 percent. By contrast, the Bloomberg World Mining index of 48
companies, including OAO GMK Norilsk Nickel, the world's No. 1 nickel producer,
is up 21 percent.
``There are no big mines out there in the foreseeable future,'' said John
Teeling, chairman of African Diamonds, which made its first and only
diamond-mine discovery two years ago in Botswana. ``We'd be very lucky to find a
second.''
Retail Boom
Declining production is a boon for retailers. Consumers bought $70 billion of
diamonds worldwide last year, Picton said. Retailers including De Beers and
Tiffany & Co. aim to increase that figure this year with new stores from
Wall Street to Beijing. De Beers plans to open 20 new jewelry stores this year
and next with Paris-based LVMH Moet Hennessy Louis Vuitton SA.
``There's something about diamonds that is completely seductive for people,''
said Stephen Webster, who designed the wedding rings for singers Madonna, Pink
and Christina Aguilera. ``Everything else feels second-best.''
Thirty Percent Increase
The value of rough diamonds, as the uncut stones are called, is likely to
increase 30 percent in the next six years, says Picton at Manchester,
England-based W.H. Ireland. His research shows that diamonds provided better
returns than gold since 1948.
Diamonds, the hardest substance in the world, formed in primeval carbon rock
structures known as kimberlites at least 150 kilometers (93 miles) underground.
Volcanic activity brought the gems closer to the surface, and the first were
found in the riverbeds of India's Golconda region. About 7,000 kimberlites have
been discovered and only 15 percent bear diamonds. Since the first were
discovered more than 2,000 years ago in India, the world has produced 380 tons
of diamonds.
The scarcer they are, the higher the price. The average value of the 114
million carats (50 pounds) of diamonds sold worldwide each year is little more
than $7 billion, according to the World Diamond Council. In 2000, when 110
million carats were produced, the value was $7.8 billion.
``Diamonds could very well outperform base metals'' in the coming years, said
Andrew Ferguson, who manages about $313 million at New City Investment Managers
Ltd. in London. ``Given the huge increases in demand and the imbalances in
supply, I expect good returns.'' He declined to say how much.
One threat to rising prices is the growth of synthetic diamonds. Since 1955,
when General Electric Co. developed a process to develop synthetic gems for use
in drilling, cutting and grinding tools, the use of non-natural gems has soared,
today accounting for about half of all diamonds.
Industrial use of diamonds accounted for 25 percent of supplies by weight or
5 to 10 percent by value, according to www International Diamond. Gemesis Corp.,
producer of most of the world's synthetic gem-quality diamonds, said it will
raise output about eightfold in 2006 from last year to take advantage of rising
prices.
The rally in commodity markets, now in its fifth year, has sent prices for
raw materials to records. Copper has more than doubled in price in the past
year. Nickel is up 77 percent. Gold has surged almost 50 percent and reached a
26-year high in May. Prices in London were at $646.30 an ounce on Aug. 3.
``To have matched the average diamond-price increase since 1948, gold would
have to be around $750,'' said the 70-year-old Picton. ``To have matched a
basket of the finest, largest-quality gems, gold would have to be around
$2,000.''
Some untapped diamond deposits are too dangerous to develop, adding to a
shortage. Disputes over access to the gems have sparked violence in Angola and
in the resource-rich Democratic Republic of Congo during the civil war that has
killed more than 4 million since 1998.
Diamond investments will enjoy ``above-average'' returns in the next several
years, according to Trevor Steel, who manages $600 million in natural-resource
assets at Baker Steel Capital Managers in London. ``Prices of diamonds and
precious metals generally are more resilient to the short-term effects of an
economic slowdown compared with base metals.''
W.H. Ireland's Picton says falling production, led by declines at the biggest
producers, including Rio Tinto Group's Argyle mine in Australia, the world's
largest, will leave $10 billion of demand unfulfilled. The drop will occur even
after Botswana boosted output 17 percent last year. The nation, the world's
biggest producer of diamonds, accounts for 25 percent of the gems.
`Another Botswana'
``In order to meet the shortfall, you would have to find at least another
Botswana, or better yet, two,'' said Picton, whose company is based in
Manchester, England. ``It can't be done.''
Canada's Ekati mine, run by BHP Billiton, will be depleted by 2015, Picton
said. Ekati, which produces about $700 million of rough gems a year, will last
until 2017, said BHP spokeswoman Emma Meade in Melbourne. Rio Tinto's Diavik
mine in Canada will drop ``sharply,'' Picton said. Rio Tinto said in December it
will spend $910 million to extend the life of its Argyle mine to 2018.
With diamonds hard to come by, some stocks have sputtered. Shares of Gravity
Diamonds Ltd., a Melbourne-based company that explores in Congo, have slumped 45
percent in the past year. European Diamonds Plc of London, which explores and
mines in Finland and Lesotho, southern Africa, is down 60 percent in the past
year.
``The really tricky bit with diamond-exploration companies is finding a
kimberlite that is actually economically viable,'' said Sacha Borthwick, an
analyst at stockbroker Hargreave Hale Ltd. in London. ``The odds of that are
very low.''
Most Expensive diamonds
Global demand may rise 6 percent a year to $23 billion by 2015, Picton says.
About 1.2 billion diamonds weighing 160 million carats and worth $13.4
billion were produced last year, according to www International Diamond. Uncut
diamond prices rose 3.7 percent on average last year to $84 a carat, with the
most expensive pink and red stones selling for $50,000, the consulting company
said.
The most expensive diamond ever sold is the 100.1 carat Star of the Season,
bought for $16.5 million in Geneva in 1995 by Saudi Sheikh Ahmed Hassan Fitaihi.
The largest gem ever found is the Cullinan, which was discovered in 1905 in
South Africa and weighed 3,106 carats, according to London-based Diamond and
Trading Company.
Finding Stones in a sea of Diamonds
Diamond miners are spending more to find the stones. De Beers plans to invest
1.2 billion rand ($175 million) in opening South Africa's Voorspoed mine, which
was closed 97 years ago, and a further 1 billion rand on a project on the sea
bed off South Africa's coast. In Canada, De Beers is spending C$2 billion ($1.8
billion) digging the Snap Lake and Victor mines.
``Diamond stocks have underperformed other mining stocks in this commodity
bull-run,'' says New York-based James Passin, whose $500 million Firebird Global
Fund has a 10 percent holding in diamond stocks. ``This is about to change.''
