Boom times around the corner for diamond producers?

Nearly 20 years ago, when Dia Met and BHP Billiton announced the discovery that would become the Ekati diamond mine, there were more than a few skeptics who doubted that an economic diamond deposit would ever be found in Canada. As former Northern Miner editor Vivian Danielson – who covered the ensuing staking rush in the paper at the time – recounts in her profile of Randy Turner (see “Refections of a diamond industry pioneer,” Page 6), the search had already been going on for decades and had turned up nothing.

While the Lac de Gras rush vividly related in the story proved the skeptics wrong, these days, there’s still some uncertainty around diamonds. After having come through a devastating global financial crisis, it’s the strength of the market itself that isn’t fully recognized outside of industry circles.

Vaaldiam Mining CEO Robert Jackson, whose company is advancing the Brauna project in Brazil, says most people are unaware of the dearth of discoveries since the Lac de Gras rush – or of the “yawning gap” between the supply and demand of rough diamonds.

“We get a phone call every week from people who want to buy our diamonds,” he says. “If you look at the overall dynamics of the diamond market, there is not sufficient supply of rough diamonds to meet demand.”

Rough diamond prices have surpassed their pre-recession highs, with polished rising nicely as well (up 10% last year and 11.5% in the first quarter of 2011, according to Rappaport Research).

With the multiple crises in Japan likely to create a headwind for the recovering market, (see Martin Irving’s story on Page 11), the strength of the Asian market outside of Japan is worth noting. According to De Beers, demand for diamond jewelry in China grew by 25% last year, but Indian demand grew even more, at 31%. (U.S. demand rose by 7%.)

Until recently, only the wealthiest Indians were interested in diamonds, but the country’s middle class has started to develop an appetite too, says Harry Winston Diamond executive James Pounds. “Suddenly, people have a lot of money and they want to enjoy and to show their wealth.” he told Bloomberg in April.

Considering that India has the better demographics and that its economy is on track to outpace China’s by 2040, I would say this is a pretty meaningful development.

But because there are few bellwether companies in the diamond industry – the biggest producers being unlisted – and because the diamond trade takes place outside of the public eye, many investors haven’t yet caught on to the recovery.

“The greatest challenge we’ve got as diamond equities is the non-transparency of the market and pricing,” says Stornoway Diamond president and CEO Matt Manson.  “Investors will wake up in the morning, see that gold has gone up US$20 an oz. overnight and go and buy gold stocks. We don’t have that dynamic because diamonds are not traded on a commodities exchange the way all the other commodities are.

“It’s one of the reasons why, from an investor’s point of view, the diamond business is a smaller business. There are fewer companies to invest in, but there are also fewer investors.”

While your average investor isn’t seeing as many headlines about rising diamond prices  – unlike those that have touted gold, copper and silver’s rise – they will catch on eventually.

Manson says there’s actually greater awareness now than ever of the investment opportunity diamonds present.

But there’s room for a lot more interest and Vaaldiam’s Jackson says when it happens, it could come virtually overnight.

“What will happen is you’ll get this huge spike – I don’t know whether it’s six months or three years down the road – in the shares of diamond producers, because they have not really kept pace with the increase in rough diamond prices,” he predicts.

Of course, there is still considerable risk that the diamond recovery could be blown off course. But if it isn’t, the gains could be tremendous.