Diamonds show signs of coming good

[] — IT’S astonishing to hear from diamond-market analysts
that the appetite for such luxuries remains stable, if not outstanding, despite these
financially strained times This is especially so considering the mainstay of the market
is the US which, in 2010, accounted for 38% of global jewellery demand for the

Helping to explain the relative health of the diamond market, however, is the
emergence of China. From a near-standing start in 2000, sales in China/ Hong Kong
account for 11% of world diamond jewellery demand. Diamond-industry experts say
there’s a small but growing interest in diamonds for investment purposes.

The emerging middle class in China is a showy group, so it’s no coincidence that a
company owned indirectly by Beny Steinmetz, the Israeli diamantaire who has offices
in Johannesburg, is considering a listing in Hong Kong. According to a report by the
Financial Times, Sierra Leone’s largest diamond mine – the 500,000 carat/year
Koidu mine – will make its debut in Hong Kong during the second half of 2012, raising
between $400m and $500m in the process.

The listing will be done through a subsidiary of Beny Steinmetz Group called Octea.
It won’t be alone. Already Chow Tai Fook, a Chinese jewellery retailer, floated in
Hong Kong, while the posh London jeweller Graff Diamonds is also said to be
considering a listing there. Russian diamond marketer, Alrosa, is also said to be
mulling over going public, again in China. Throw in the fact that Anglo American was
prepared to pay $5bn for full control of the Oppenheimer Family’s shares in De Beers
and one begins to build an interesting medium-to long-term business case for

This spells potentially good news for the JSE’s diamond plays, particularly Rockwell
Diamonds, which is making a fist of a recovery following a difficult time of infighting
between shareholders and previous management.

James Campbell, CEO of Rockwell Diamonds, commented that the market has been
under pressure but is showing signs of coming good. In December, the company sold
a 35-carat diamond through Christies in Hong Kong, fetching $8m; equal to $232 000
per carat. It was sold with another 35-carat gem provided by De Beers.

Des Kilalea, an analyst for RBC Capital Markets, says the diamond market won’t rise
again until the second half of 2012. The first sight of the year by De Beers – where it
sells rough diamonds to selected cutters and polishers – is likely to be a modest
offering totalling $500m to $550m. Asia remains “a relatively bright star in the
diamond firmament,’ but the sluggishness of the largest markets, the US in
particular, continues to dictate the pace of market recovery.

Unfortunately, the ebbs and flows of the diamond market are difficult for local
investors to access because choice for pure play diamond exposure is limited.
Investors may want to dip into foreign investment allowances in which case there’s a
wealth of investment options, but it’s a shame Petra Diamonds isn’t listed on the JSE,
or for that matter Harry Winston, the high-end jeweller.

Instead we have Alexkor and the relatively illiquid diamond exploration hopefuls
Thabex Exploration and Tawana Diamonds which, in terms of investment payback,
are slow burners at best.

Anglo American is the only other exposure JSE investors can really enjoy in diamonds.
“The capital base just isn’t here,’ says James Allan, a former diamond analyst and
founder of AllanHochreiter.

Anglo American knows, however, what it has in its diamond exposure. With BHP
Billiton putting its diamond assets on the block, and with few of the other diversified
having much exposure to the sector, Anglo American has an asset class with
extraordinary promise. The supply of minerals such as iron and copper may have
timing issues, but we know that new projects will eventually be delivered. This can’t
be said of diamonds, with major fresh discoveries a pipe dream.

– The article first appeared in Finweek. If you want to subscribe to the digital
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