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Investment Insights - A rough diamond story

The Diamond Trading Company (DTC), the marketing arm of De Beers, the world's biggest miner and marketer of rough diamonds by value, announced further price increases this week, for a 16% cumulative increase since the start of the year. But just as rough diamond prices have continued to rise, so investors have continued selling down listed diamonds stocks.

The anomaly is that while a number of commodity prices have corrected over the past few months, diamonds have been an exception, but listed diamond producers have been treated as common victims of a malaise, in the manner of a contagion. Apart from diamond prices not only holding, but rising, there are a number of further positive factors underpinning diamond producers.

A fuller picture of the performance of diamond stocks is poorer given the unlisted status of De Beers, 45% held by diversified miner Anglo American. The biggest listed diamond stock by market value, Harry Winston, has lost 55% of its market value in the past while. Harry Winston's principal asset is a 40% ownership interest in the Diavik Diamond Mine, operated by diversified mining giant Rio Tinto at Lac de Gras in Canada's Northwest Territories. A new USD 787m underground mine at Diavik is anticipated to come into production some time in 2009, with a mine life of 16 to 22 years.

Rio Tinto does not report separate numbers for its diamond division, and Harry Winston operates a well known retail jewellery business. Gem Diamonds, the second most valuable listed diamond stock by value, has stuck, like De Beers, to the rough diamond business. There are other substantial mine builds going on in the global business, beyond the upcoming underground mine at Diavik.

During 2007, De Beers spent $1,5bn on capital expenditures, including stay-in-business items, and will be opening new mines in due course. Gem Diamonds spent $ 391m on acquisitions during 2007, and $110m on capital expenditure. Mining builds and stay-in-business capital expenditure for all kinds of mining have become increasingly expensive, posing mounting challenges for smaller players in the market.

Market valuations for De Beers are not available, but, if listed, it is likely that the group would carry a market value of at least $5,5bn, based on its 2007 earnings and cash flows. Healthy earnings and cash flows were also posted for the year by Harry Winston and Gem Diamonds, with the latter noticeable for its high margins, based to a material extent on the diamonds that emerge from the Letseng Mine in Lesotho.

2007 RESULTS EXTRACTS
De Beers
Harry Winston
Gem Diamonds

Sales
USD m
6836
679
153