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» Alluvial miners find fresh legitimacy
» Gilbertson in Alrosa supply talks
» Falling diamond supplies knocks De Beers
» Gem Diamonds buys third producing mine
» Elphick targets five mines by year-end
» Diamond Core to merge with BRC
» De Beers blocked from buying mines


Diamond market turned up notch
David McKay
Posted: Wed, 29 Aug 2007

[miningmx.com] -- IT’S AS IF SOMEONE dimmed the lights and cranked up the music: suddenly, the diamond market has turned from a De Beers monopoly into fertile ground for new ventures, fresh exploration spend and intense interest in Africa. Circa 2004, the diamond industry got exciting.

From a market perspective there’s a deepening realisation that new diamond finds are proving more difficult to locate. Canada, the source of so much exploration buzz in the Nineties, has disappointed; while Africa continues to be the main source of diamond production. On the demand side, industrial growth in China and India is creating new markets; while the US demand for diamonds remains strong.

The outcome has been a flowering of new listed diamond ventures, particularly in London, which has shown special affection for diamond exploration enterprises. How else to explain the meteoric rise of companies such as GEM Diamonds, the brainchild of former Oppenheimer adviser Clifford Elphick.

GEM Diamonds – which started life buying a controlling stake in Letseng for $144m in 2006 – was worth $1.2bn just months after listing in London earlier this year.

Diamond exploration is worst kind of gambling
Des Kilalea, a diamond analyst at RBC Capital Markets, says there’s huge change in the diamond market, mostly brought about by the lack of new diamond finds. “To meet potential demand growth a major new mine – such as BHP Billiton’s Ekati mine (producing 2.56 million carats in its 2006 financial year), would need to be added to production each year within four or five years,” says Kilalea.

That’s despite the large amounts of exploration money being thrown about. De Beers, which desperately needs a successful exploration strategy (because competition rules mean it can’t bid for operating mines) is to spend $100m this year on exploration, says the company’s newly appointed financial director, Stuart Brown.

Rio Tinto Diamonds, a subsidiary of London-listed Rio Tinto, is another company in search of new diamonds. Keith Johnson, CEO of Rio Tinto’s diamond division, says its major Australian mine, Argyle, can produce 20 million carats/year for another 20 years after going underground. But Rio Tinto’s horizons have clearly changed, as evidenced by its bid for De Beers’ Cullinan mine in South Africa. “We’re interested in anything that might become available,” Johnson says.

The fact of the matter is that just 1% of kimberlites discovered turns into a mine. That means the expectation of a major supply deficit in rough diamonds is real. That has, in turn, sparked a number of new developments in the industry. First, there’s new respect for alluvial diamond miners, companies that mine stones washed along riverbeds rather than in the pipes of extinct volcanoes, the kimberlites.

Second, a number of new ventures have sprung up. In fact, in London alone there are 100 listed diamond companies. Unfortunately, a mere 10 companies account for 66% of the total sector market capitalisation and few of those are actually producing diamonds. Contraction by dint of corporate action is expected. “There’s going to be huge rationalisation in the industry,” says Kilalea.

Sourcing property is most difficult. Commenting on buying diamond-bearing land in Botswana, Firestone Diamonds CEO Philip Kenny says the only way to break into that country’s diamond region is to joint venture or buy land somebody else doesn’t want anymore. “Every scrap of prospective ground is keenly sought,” says Kenny.

Is this Rio Tinto we're hearing?
Firestone Diamonds has been uncovering kimberlites in the Tshabong field in Botswana’s south-west. It also has a joint venture with De Beers in the Orapa and Jwaneng regions, which have yielded the world’s largest diamond mines. “All we need is a little bit of luck,” says Kenny.

Kenny’s words could be the diamond miner’s mantra.

Take Theo Botoulas, CEO of the proposed new company, BRC DiamondCore. He reflects with humour that diamond mining is “the worst kind of gambling”. And a gambler’s disappointment is common, as supported by the number of failed ambitions in Canada.

Diamond executives estimate anywhere between $1bn to $2bn has been invested in Canada for its diamonds – with little success. “The business couldn’t put money in elsewhere, so it put it in Canada,” says De Beers’ Brown. “Now we’re reducing our budget in favour of Angola and the Democratic Republic of Congo.”

“Canada is becoming expensive,” says Johnson. “There’s only two (operating) mines found there,” he says.

Says James Campbell, CEO of African Diamonds: “We believe Botswana is the best diamond address – and we’ve got the best house”. The ₤91m African Diamonds, which is in joint venture with De Beers, is one of the few companies with a real diamond mine in the making. Its AK6 could deliver more than 1 million carats/year, according to company estimates.

The exploration money is squarely back on the emerging market, including India, where De Beers says it’s competing hard to win access to good property. Rio Tinto is also exploring in India.

As for GEM Diamonds, it’s bid for BDI Mining, a company that controls and operates an alluvial diamond mine on the Indonesia island of Kalimantan.

In Africa particularly, there’s few regions that don’t host exploration firms. Battle-scarred Sierra Leone and Central African Republic, said to be in a state of low-level civil war, both have diamond exploration activities. Appetite for fresh risk is discernible everywhere. Says Rio Tinto’s Johnson: “It’s a tough place Zimbabwe. But we all have to put up with a bit of noise.” Is that Rio Tinto we’re hearing?

Diamond exploration and production may be noisy in Africa (politically) but it’s also far less expensive, as Kilalea acknowledges. “Not only are the geology and history of production from those countries (Africa: Botswana, DRC, Angola) supportive of exploration but so is the cost of extraction.”

Kimberlite production costs in Botswana are generally reckoned to be $10/t to $15/t of ore, compared to $25/t in Angola and the DRC. Compare that to the $100/t for extraction in Canada.

However, sooner or later diamond exploration companies need to become producers or have producing mines to sell to the majors.

Says Petra Diamonds chairman Adonis Pouroulis of the company’s exploration in Sierra Leone: “This is a critical year. We’ll know if we have a mine there or not.” The company is banking on producing around 500,000 carats/year in two years’ time. Of that, 300,000 carats/year will be from its existing mines, including South Africa production.

The balance will come from Petra’s production at its Angolan mine, Alto Cuilo, in which BHP Billiton is invested, and the rest from Sierra Leone – with some luck. “We’ve got enough exploration. What we need now is production,” says Pouroulis. Petra was the first diamond company to list on London’s AIM. It now needs cash flow and shows all the signs of the difficulty in bringing new diamond production to fruition.

However, at Alto Cuilo it seems as if Petra has a company-maker of note. One unanswered question is the cost of operating in Angola. Apart from the lack of infrastructure there’s also unknown issues concerning state-owned Endiama’s demands on Alto Cuilo.

As an exploration venture, Endiama has a 51% free-carry. However, that may be diluted downwards on conversion to an operating mine. It’s not known to what level – and Pouroulis is reticent to say. Precedents show that Endiama will take a 30% to 33% stake in the project.

There’s also a growing incidence of governments passing legislation to force cutting and polishing where rough diamonds are mined. South Africa has taken the lead, followed by Botswana. That will mean less production through traditional outlets, such as Antwerp, and has led to calls for polishers and cutters to depart from traditional family lines into a more competitive and corporate mode. It could also encourage cutting of synthetic diamonds in India.

So where’s the growth in demand and a shortage in supply taking the diamond market? Perhaps surprisingly, diamond producers tend to play down the prospect of higher prices.

Says Alberto Calderon, who heads BHP Billiton’s diamond & specialist products division, of the current diamond market: “On average it will amount to higher prices – slowly, but it will”.

The pressure on the industry is not to increase diamond prices too aggressively for fear fickle investors will diversify into other luxury items. However, it’s worth noting that for the select few they’ll always be a place in their wallets for a diamond item, as evidenced by entry prices in Harry Winston jewellery stores of $3,200/piece. Some average selling prices in other stores owned by the chain are between $35,000 and $100,000/piece, the company says.

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Then there are the threats. The growth in synthetic diamonds is one, says De Beers’ Brown, who worries that confusing synthetic diamonds and natural ones could kill the industry. “Indian cutters aren’t going to go home,” he says of a possible dearth in supply of natural diamonds and the likelihood that they’ll be partly replaced by manufactured ones.

Others are slightly more sanguine, although wary. “Synthetics will form a segmented part of the market,” says Johnson. “We’d all be foolish not to stay on our guard.”

Charles Wyndham, who founded WWW International Diamond Consultants, a company that’s marketed Letseng’s diamonds, says: “I’m quite sanguine about them. There’s a huge opportunity – as long as there’s transparency.”

Then there’s the conflict diamond risk: that diamonds become tainted by negative publicity, as instanced by the fur trade. Johnson says that the Kimberley Process – the system by which diamonds are certified so the consumers know their origin – isn’t enough to combat the risk to the stone’s reputation. “The Kimberley Process is not just going to cut it,” says Johnson.

“We could wake up to find Angelina Jolie and Nicole Kidman don’t want to wear diamonds anymore.”