Markets rightly call August the ’silly season’ when all sorts of ’news’ gets a run. At other times of the year the experts wouldn’t be on the beach, but at their desks filtering out the taller stories. So it was several days before cold water doused excited reports from Johannesburg of the “world’s largest diamond”.
The 1.6 kilo, green, 7,000 carat boulder was apparently found in South Africa’s North-West Province. But no details, not even the name of the mining company, could be extracted from Brett Joli, described as a British property developer, who came out brandishing the stone. The area is virgin territory as far as diamonds are concerned. So, the find is more than a mystery.
The stone is now locked up in a vault, yet to be tested. Joli’s first action seems to have been to rush to his lawyer. But dreams of a £15 million-plus coup are deemed on the diamond bourses to be unlikely. Diamond traders around the world were certainly startled. But they are sceptics, only too familiar with the frenzies and wild hopes of diamond explorers. From Mumbai’s Prasad Chambers to London’s Hatton Garden traders are telling everyone that this is just a mammoth lump of crystal. Well, we’ll see.
Whether the owner of this huge stone gets lucky or not, prospects for diamond prices are looking better. That is good news for mining shares, which have been in the doldrums. Diamonds were not exactly an exciting investment last year — there were too many stones around. This year they’ve at last been moving and stones are ahead of shares in the UK. The FTSE 100’s one year chart is dipping into negative territory. By contrast, PolishedPrices.com, the index compilers, said last week that its overall diamond index was currently up 0.3% on the year to date. This index covers the smaller stones.
Prices of five carat polished diamonds up 8.4%
The bigger diamonds are doing better than that. Prices of five-carat polished diamonds jumped 8.4% in the first half of 2007, four times the 2.1% advance of a year earlier, according to Canada’s National Bank Financial.
Diamond giant De Beers is also sounding chipper and looking at the numbers it should be. Its diamond prices had won back all of their 2006 declines by the second quarter and it says it is now looking for “very strong gains.” This forecast came out with De Beers’ first half financial results a couple of days ago. Ok, as the world’s biggest diamond miner they’ve an interest in saying that. But others agree.
A big bull, who certainly knows his stuff, is Pierre Lassonde, who’s just retired as president of Newmont Mining Corp, the world's second-biggest gold producer. He recently said “I love diamonds because when you look at the supply-demand side of it, it is extremely favourable for a price increase''. He put his money where his mouth is, personally buying 17% of Canadian diamond explorer Olivut Resources.
Another diamond bull is Evy Hambro, who runs the world’s top mining fund. He is the London-based managing director of BlackRock Inc’s World Mining Fund, which has $10.2 billion invested in mines. He agrees diamonds are getting scarce. " We are seeing dwindling stocks and a shortage of new mine development," said Hambro.
The drop in stocks has been drastic. They’ve tumbled 75% since 2000, National Bank Financial says. On the supply side, another of North America’s mining specialists RBC Dominion Securities reckons it will be three to five years before any new diamond mines are ready.
Inevitably it is the East that is behind the rising sales. Annual incomes in India and China, the two fastest-growing diamond markets, are climbing by as much as 18%. China's diamond imports rose more than threefold in the first half, according to industry publication Rapaport TradeWire. India's imports increased 14% in the second quarter, according to the Gem & Jewellery Export Promotion Council's Web site.
Rise a huge relief for investors
This is a huge relief for investors. Awful is the only word to describe the performance of diamond mining shares this year. Aber, Gem Diamonds and Shore Gold, the world's three biggest diamond mining companies by value, have tumbled as much as 50%. Even then they are far from cheap. Shares in Canada’s Aber, for example, and South Africa’s Trans Hex both trade at almost 20 times forecast annual earnings. That still leaves them twice as expensive as the big diversified miners, such as BHP Billiton and Anglo American. So, they were vulnerable to more profit-taking in the current scary stock markets.
Unfortunately to get any real benefit for higher diamond prices it is the small, niche diamond miners going for the big gem stones that have to be bought. Global production is dominated by fewer than 20 major mines. Rio Tinto Group, Anglo American and BHP, and Russia's closely held ZAO Alrosa control three-quarters of diamond output. These big companies are into too many different minerals to get any huge upside move from diamonds.
So, after losing a few billion, Jo’burg gem company investors were ordering bottles of Bolly when Trans Hex, Africa's biggest publicly traded diamond producer announced first half figures. It swung to a profit as output from its largest mine recovered. Net income was $5.3 million compared with a loss of $2.95 million a year earlier. Since then other smaller diamond players around the world have joined in the chorus with good news.
While there is no guarantee of a risk-free investment in diamond shares, the prospects look better than those for Brett Joli’s ‘diamond’.
Keep polishing!
Erin and Isabel
