11 Nov

Are diamonds an investor’s best friend?

This article originally appeared on Switzer DailySmall Caps and Livewire Markets.

The local diamond exploration sector has lost its glitter in recent years, but there’s renewed interest in finding the dazzling stones that the ancient Greeks thought were splinters of stars that had fallen to earth.

Underpinning the activity is a looming shortage of better quality stones spurred by pandemic-related supply problems and the backlash against ‘blood’ diamonds (those mined in certain African countries to fund conflicts).

Rough diamond prices are at their highest since 2012.

Supply has also been constrained by last year’s closure of Rio Tinto’s Argyle mine in WA’s Kimberley region, which had operated for close to 40 years.

The open pit (and then underground) mine was the world’s biggest producer by volume, supplying one-third of the global demand for industrial diamonds.

Argyle also supplied about 90% of the world’s pink or ‘champagne’ diamonds, which used to be known as brown diamonds until the branding gurus got on the job.

In its inaugural pink diamond index released this week, Australian Diamond Portfolio says the category has risen by an average of 30% in value over the last 12 months, with “industry estimates” suggesting a 10-12% per annum increase between 2005 and 2020.

With even the hot property sector gaining ‘only’ 6.5% per annum over that period, that makes diamonds an investor’s best friend – girl or guy.

ASX-listed diamond hunters

These days the field of ASX-listed diamond hunters has been reduced to a handful of players, mainly with side interests in diamond exploration. These include Astro Resources (ARO) and Devex Resources (DEV).

The private India Bore Diamond Holdings is exploring the concept of the ‘lost alluvials of Ellendale’, which refers to tens and millions of hidden subsurface stones resulting from the weathering of the 50 or so volcanic pipes in the area.

There are only two listed pure-play diamond stocks of substance: the producing Lucapa Diamond Company (LOM) and Burgundy Mines (BDM).

Burgundy Diamond Mines

Formerly known as EHR Resources, Burgundy Mine’s efforts are centred on kick-starting the Ellendale Mine, 135 kilometres east of Derby in WA, by as early as late 2022.

Ellendale produced 1.3 million carats between 1976 and 2015 when its owner, Kimberley Diamond Company, folded. Notably, the mine produced half of the world’s fancy yellow diamonds, which were sold by Tiffany & Co in an exclusive tie-up.

But Burgundy has a broader strategy to enter the downstream cutting, polishing and marketing of the diamonds at a time when proving good provenance of the stones is paramount.

In July, the company raised $50 million in equity to pursue the strategy, which will focus on building a leading position in the niche market for diamonds of one carat or more.

“We are not trying to boil the ocean, we are not going to dominate the diamond market with volume but have picked a small niche market with incredible value,” CEO Peter Ravenscroft says.

In September, the company lashed out $US1 million ($1.3m) on rough diamonds auctioned by the Artic Canada Mining Company, which runs the Ekati mine in the northwest territories.

The fancy vivid and fancy intense yellow stones will be processed at a facility in Perth.

Diamond cutting, polishing and marketing

As Peter Ravenscroft points out, mining the rough diamonds only captures 7% of the value of the global diamond trade, estimated by Bain and Company at $US180 billion in 2019.

Retailing accounts for 49%, jewellery making 32%, and cutting/polishing 11%.

“Burgundy is positioning itself as the world’s leading producer of polished fancy colour diamonds,” he says.

“We are no longer a diamond mining company, we are no longer an exploration company, we are a diamond producing company.”

Ravenscroft says he has a few innovative ideas about the marketing side. He’s not letting on too much, but it involves engaging Paris branding experts to hone the strategy.

While Burgundy intends to acquire rough diamonds from various sources – possibly on a profit-sharing basis – the Ellendale project is the source of short-term cash flow.

In entering the marketing and polishing game, Burgundy is playing to the need to source rough diamonds from responsible channels – and prove their provenance.

Not all participants are willing to play the game, with some of them refusing to sign an accreditation program called the Kimberley Process.

“Responsibly sourced diamonds will be more in demand,” said World Diamond Council president Edward Asscher recently.

“They will obtain better prices in the marketplace, and buyers at jewellery stores will demand proof that they are indeed responsibly sourced before purchasing them as polished,” he said.

“In the not-too-distant future, there will be a difference between rough diamonds that can be guaranteed to have fulfilled the consumers’ demands and expectations, and other diamonds,” he said.

Clearly, the former category will be more in demand and fetch higher prices.

Naturally, Burgundy intends to be on the side of the good guys.

Experienced management

For an Aussie junior, entering the cutting and polishing and marketing game seems ambitious, but management is not without a clue.

A former executive of Rio Tinto’s diamond arm, Ravenscroft has also had senior roles at De Beers Anglo American and Cleveland Cliffs.

Burgundy director (and soon to be chairman) Kim Truter was CEO of Argyle Diamonds and De Beers Canada’ leading the ramp-up of the $1bn Gahcho Kue diamond mine there.

Director Michael O’Keeffe is executive chair of the ASX-listed Canadian iron ore producer Champion Iron and a former boss of Glencore.

Lucapa Diamond Company

Lucapa is in the throes of buying NT diamonds mine from the ‘Diamond’ Joe Gutnick-chaired Merlin Diamonds, which was ordered into liquidation by the Federal Court after an ASIC probe.

The multi pit underground mine produced a 104 carat stone, the biggest ever found in Australia. But Lucapo’s main focus is in Africa and its producing, half-owned Lulo mine in Angola and Mothae in Lesotho.

The alluvial Lulo mine has been operating since 2015 and has produced more than 20 100-carat plus diamonds to date.

The Mothae mine is in a kimberlite pipe – the original source of diamonds – and has produced five 100-carat plus specimens, including a 213 carat beauty. Lucapa recently funded an expansion of the mine’s processing capacity from 1.1 million tonnes per annum to 1.6 mt.

Lucapa recently outlined calendar 2021 guidance of underlying earnings (EBITDA) of $26-28 million, up 45 per cent on the previous $17-21 million.

This is on the back of revenue of $US66-71 million and production of 35,000 to 37,000 carats, with an average per-carat selling price of $US1242-1312 and an all-in production cost of $US828-844 per carat.

Chasing alluvial diamonds to their hard-rock source has been a tiring business over the years for Lucapa, with its shares losing 85% of their value over the last five years.

The shares have bounced 13% over the last 12 months, valuing the company at roughly $90 million.


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