Why now is a good time to buy diamond miners
August 17, 2022EXCERPTS FROM AN ARTICLE BY: David J Stevenson
Demand for the gems is set to outstrip supply, making it a good time to buy miners, says David J. Stevenson.
“Diamonds are a girl’s best friend,” sang Marilyn Monroe in the 1953 film Gentlemen Prefer Blondes. And who, regardless of gender, wouldn’t want to own the renowned Pink Star diamond? This stunning 59.6-carat (the industry’s diamond weight measurement unit: one carat equals 200 milligrams) gemstone sold at auction in 2017 for $71m, the highest price ever paid for a jewel. However, stockmarket-listed diamond shares could also be a great friend for investors. To understand why, let’s start at the beginning.
Diamonds began to form in the ground around three billion years ago and are the hardest natural material known to man. They are highly effective at conducting heat, and expand only slightly in high temperatures. They’re also resistant to most acids and alkali. Around two-thirds of diamonds come from Africa, with Angola and Botswana the top suppliers. But the largest individual producer is Russia – a fact that has assumed more significance for the supply outlook since its invasion of Ukraine, as the US has imposed sanctions on Alrosa, the state-owned diamond company. Open-pit mining – digging out diamonds on the earth’s surface – accounts for most of the industry’s output. Much of the rest is derived from mining underground to a depth of at least one kilometre. Ore containing rough diamonds is then crushed and processed to enable extraction. Alluvial mining of deposits of sand, gravel and clay along river banks, shorelines or the ocean bed can also produce diamonds.
Rough, or raw, diamonds vary in size, shape and quality. About 30% of diamonds are gem quality, and are cut and polished for jewellery manufacture. The other 70% are sold for industrial applications, including cutting, drilling and grinding. In total, global rough diamond output is worth $13bn a year and the industry that employs about ten million people from mining to retail, says the World Diamond Council, an industry group. Annual diamond jewellery sales have trebled within the last 25 years. Include the cost of precious metals and other gems, and this has become a $72bn market, of which the US accounts for half, followed by Japan (15%), Italy (5%), India (3%) and China (2%).
Diamond prices initially dropped in the pandemic, but recovered well from their mid-2020 lows and the outlook remains auspicious. Now the supply/demand balance for gemstones could lead to average prices for natural diamonds climbing up by 15% in 2022, according to analysis released last month by Bank of America. “[There] is a lack of substitutes for luxury spend amongst consumers, with tourism unlikely to rebound to pre-Covid levels amid ongoing travel restrictions,” says the report. So “demand will remain buoyant” with diamond sales forecast to grow by 10% this year. Strength in Asia and the US is expected to more than compensate for weakness in China.
However, the real kicker is that global diamond production is at its lowest since the 2008 financial crisis. Overall supply will stay flat over the next few years, as no major new projects will open up, reckons Bank of America. Despite possible output rises in Angola and Botswana, production drops are expected in South Africa and Canada, while sanctions on Russia could hit supply further. The bank anticipates shortages in small diamonds, given the rebound in the watch industry.
Meanwhile, diamond-exploration budgets have been reduced. “A diamond project now takes between ten and 15 years from exploration to first production, largely due to the need to deliver projects in an ESG [environmental, social and governance]-friendly manner.” The corollary of less exploration is a smaller increase in supply over the next decade.
Of course, a recession could cause near-term damage to demand. But the longer-term outlook for the sector is looking increasingly bullish.
SOURCE: MoneyWeek
Full article available at www.moneyweek.com