No one is forecasting that 2015 will be a boom year for diamonds, but diamond miners are still looking good..
“Our view is that the diamond sector continues to offer one of the better medium-term investment cases given lack of new production once the likes of Renard (Stornoway), Gahcho Kué (De Beers and Mountain Province) and Jay (Dominion), as well as Petra Diamonds’ expansion, come onstream,” wrote RBC Capital Markets mining analyst Des Kilalea in a March research note
With several large mines, including Argyle, Ekati and Diavik, nearing the end of their mine lives in 2020, the analyst forecasts that production will be flat to falling that decade.
“This bodes well for rough prices to be supported, provided global growth and jewelry sales growth remain robust,” Kilalea continued.
That caveat is important, and diamond miners know it. While they can’t do anything about global economic growth, they are thinking about what they can do to feed demand for diamonds.
It’s one of the reasons eight miners, representing the vast majority of the world’s supply of diamonds, got together in February to talk about forming a producers’ association (See Page 20).
The idea is to create a group that would promote the sector, conduct research, and tackle common issues such as undisclosed synthetic diamonds and the need for generic advertising to boost diamonds’ competitiveness against other luxury categories.
“I think it’s very important for the producers to come together to really try to push the diamond category as a luxury item,” said De Beers CEO Philippe Mellier in an interview with Bloomberg TV in March. “It has to start with the producers because it’s very important for us to create and sustain demand, so we thought it was a pretty good idea to sit down with the other producers to talk only about one thing: promoting the category.”
We see this as a positive development for the industry, for investors, and for consumers.
Another topic we’re monitoring is the tight liquidity in the sector. While diamond miners are generating lots of cash, diamantaires are finding funding difficult to get.
Antwerp Diamond Bank, which according to RBC Capital Markets was responsible for about 8-10% of midstream funding, announced in September that it was closing down. Other major diamond lenders, ABN Amro Diamond Bank and Standard Chartered, have put in place tougher lending criteria as non-performing loans have risen from 1% to 4-10% over the past decade.
Another, perhaps more important reason for the lack of liquidity is actually due to concerns about undisclosed synthetic diamonds, says Lucara Diamonds president and CEO, William Lamb (see Page 21). Because of reports of synthetics being mixed into parcels, lenders began to insist last year on GIA certification for diamonds as small as 0.2 carat. That created a six-month backlog at GIA, which is not set up to handle such volumes.
As Lamb points out, diamantaires aren’t able to sell diamonds they don’t have.
That brings us back to the potential producers’ association — which could reassure lenders and consumers about the sector’s ability to detect synthetics.
There hasn’t been any official word on the group yet, but the need — and the potential rewards for the industry — are clear enough.
As ever, we welcome your feedback at firstname.lastname@example.org.
— This editorial was originally published in the May 2015 issue of Diamonds in Canada.