30-31 Diamonds Oct 12_WI 31/10/2012 17:25 Page 30
Diamond jubilation
Could diamonds be an investor’s best friend too? Rob St George investigates
G
old is still the preferred option
for investors looking to diversify
into something precious. But
for those scared off by the notorious
volatility of the metal, diamonds have
considerable attractions.
For all gold’s recent meteoric rise, it’s easy
to forget that for a 25-year period starting
in 1980, the price of the yellow metal went
nowhere. Gemstone-grade diamonds have
increased nearly tenfold in value at a steady
rate since 1961. Gold has ended 19 of the
past 50 years cheaper than it started;
diamonds have seen three down years.
The simple reason is supply and demand.
On the supply side, one company – De
Beers – produces 35 per cent of the world’s
diamonds. By contrast, the world’s largest
gold miner digs up less than 10 per cent of
global production.
Diamond supply is set to decline, as
deposits are exploited but not replaced by
new discoveries, and De Beers is committed
to using its grip on supply to maintain
prices. ‘If there was an economic crisis that
was going to drive diamond prices down,’
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Vashi Dominquez, managing director of
retailer Diamond Manufacturers, predicts,
‘De Beers would stop supplying and prices
would pick up again.’
Demand is thriving. Diamonds benefit
from the same consumer trends as gold,
particularly widening wealth in emerging
markets. Des Kilalea, an analyst at RBC
Capital Markets, is bullish. ‘Once the US
starts growing again and China’s growth
resumes, I would expect to see prices pick
up fairly strongly. In the long run, provided
people still want to buy diamonds as
jewellery, it’s likely that prices will increase
quite significantly.’
Routes to market
Investors sold on diamonds have a few
ways to access their potential. The most
direct exposure comes from simply buying
the things. However, Dominquez cautions,
‘They are definitely not a short-term
investment – the guaranteed returns come
with longevity.’ He counsels a minimum
holding period of around ten years.
One reason is liquidity. Unlike gold,
diamond prices aren’t conveniently listed
online. The benchmark price list, the
Rapaport Report, must be bought. And even
then, Dominquez warns, ‘not even 1 per cent
of diamonds trade at the prices on the list’.
Kilalea has the same problem: ‘There is no
easy way to agree on a diamond’s value; you
basically have to sell it.’ Therefore, advises
Dominquez, holders of diamonds ‘need to
have some trade contacts’.
They will ideally also have bought the
diamonds from a contact, rather than a
retailer. Says Dominquez, ‘If you buy a
diamond from Tiffany, even if its true value
goes up 300 per cent you’re still going to
make a loss because you generally pay a 500
per cent mark-up.’
Physical ownership may be the purest
way to invest in the stones, but it’s far
from the easiest. ‘For the average investor’,
Dominquez concedes, ‘it’s a very timeconsuming investment. It can be very
lucrative, but initially the due diligence
process is going to be a lot longer than it is
with precious metals like gold.’ For Kilalea
too, ‘the lowest-risk way to do it is to buy
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‘Prices will increase quite significantly as there are very
few material new deposits coming into production’
quality polished diamonds, but you need to
know what you’re doing, and therein lies
the problem.’
Those determined to buy diamonds should
remember three essential requirements.
First, the diamond should be of the highest
rating – D colour and internally flawless
(DIF) – to maximise its resale value.
Second, it should be certified by the
Gemological Institute of America (GIA);
investors should not succumb to the lower
prices quoted for gems certified by other
bodies, as these limit the resale value. Third,
the certificate should guarantee that the rock
is conflict-free. ‘If you buy a blood diamond,
even if you were unaware of it,’ states
Dominquez, ‘it can be seized from you.’
A rich seam
An alternative way into diamonds is through
a listed specialist miner. Kilalea thinks this
offers ‘the highest risk, but probably the
highest return’. He explains, ‘Many of the
mines are in southern Africa, where labour,
politics and currencies become issues.’
On the other ring finger, miners have their
merits. Kilalea first says that investors should
shun the massive conglomerates, which have
a minimal exposure to diamonds. Second,
‘Stick with the people who are producing
diamonds, and particularly those who are
not only producing but growing production.
Then you get two shots at the pot: diamond
prices going up and the benefit of selling
more diamonds at higher prices.’
Of the miners that offer this dual
opportunity, Kilalea tips Petra Diamonds as
boasting the ‘best growth profile’, while
Gem Diamonds also has high hopes for
expansion. But he does caution that neither
has a broad geographical spread: Petra has
operations in just three southern African
countries, while Gem Diamonds focuses on
one just one mine, Letšeng in Lesotho.
Kilalea regards others such as Botswana
London-listed miners (and a retail gem*)
Name
Botswana Diamonds
DiamondCorp
Firestone Diamonds
Gem Diamonds
Karelian Diamond Resources
Mwana Africa
Namakwa Diamonds
Namibian Resources
Paragon Diamonds
Petra Diamonds
Stellar Diamonds
Sunrise Resources
* Harry Winston
Listed
Share price
Latest sales
Latest pre-tax profit
Dividend
London
London
London
London
London
London
London
London
London
London
London
London
Toronto
3.88p
4.75p
4.63p
184.7p
0.53p
4.05p
3.24p
3.38p
24.25p
98.25p
3p
1.45p
787p
nil
nil
£2.5m
£247m
nil
£50.5m
£58m
£0.01m
£0.73m
£138m
£1.5m
nil
£438m
-£0.7m
-£4.2m
-£2.8m
£97m
-£0.15m
-£0.75m
-£32m
-£0.33m
-£14m
£40m
-£15m
-£0.5m
£25m
nil
nil
nil
nil
nil
nil
nil
nil
nil
nil
nil
nil
nil
Source: Digital Look (13/9/2012)
900%
Increase in diamond prices
since 1961 Source: Antwerp Diamond Index
Diamonds and Firestone Diamonds as
longer-term bets, since they are
predominantly explorers, not producers.
Quoted jewellers give investors some
exposure to diamonds, but they are typically
too closely correlated to equity markets to be
much use as an alternative asset class. An
interesting exception is Harry Winston,
which owns 40 per cent of a diamond mine.
Kilalea likes the company ‘because not only
does it have exposure and leverage to rough
diamond prices, but it also seems to be
succeeding in putting its luxury brand
business on an improving track all the time’.
A third potential route to diamonds is
through a fund, or at least it would be, if
there were any decent ones available.
Diamond Circle Capital, an investment
trust, announced in July that it would wind
itself down, having seen its share price
plunge a less than sparkling 59 per cent.
Diamond exchange-traded funds (ETFs)
have been much talked about but no
provider has yet been able to overcome the
barriers to establishing one.
‘There are costs in holding the diamonds,
there are costs in valuing the diamonds, and
you can’t make a rent,’ outlines Kilalea. ‘I
wish they could work because they would be
a very useful index.’
For investors in diamonds or miners,
though, it’s a ‘pretty rosy picture’, according
to Glenn Turner, chief legal and commercial
officer at Gem Diamonds. His company’s
commitment matches his confidence: Gem
is increasing capital expenditure on its
mines from £1.25 million last year to
£112.5 million by 2014. This devotion to
diamonds is justified, asserts Turner, by the
simplicity of ‘the supply/demand equation’.
Romance is dead. ◆
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