Questions, but no answers (yet)

These are interesting times for an industry that is still recovering from the Great Recession.

BHP Billiton and Rio Tinto announced in recent months that they’re looking to leave the diamond party they crashed in the 1980s and 1990s.

Both operate mines in Canada — the country’s first (Ekati) and second (Diavik) diamond mines, in the Northwest Territories.

The decision to review their diamond businesses in each case was not because of the outlook for the sector but because diamonds lack the scale of their other commodity businesses.

The diamond divisions are big by global standards, together accounting for about 12% of the world’s rough diamonds by volume. But, as bluntly stated in a recent report by Australia’s Nomura Equity Research: “Diamonds are no longer material contributors to the diversified miners.”

While the two majors may sell their diamond assets or restructure them, another diversified major, Anglo American, is going all in on diamonds. Spurred by the gem’s status as a  late-cycle development play that will pay off big time once China’s and India’s economies really throttle up, Anglo is buying out the Oppenheimer family’s 40% stake in De Beers for US$5.1 billion. That will give Anglo an interest of up to 85% in the iconic diamond miner and retailer. The early November announcement, which kicked off the rash of major diamond news. Opinion is divided as to what these potentially huge changes will mean for the industry.

While there is a lot of optimism about the resulting opportunities opening up in the space, U.K.-based mining analyst  and founder of Fairtrade Gemstones, David Hargreaves, believes that Rio and BHP’s announcements are “quite a blow” for  juniors.

“The exploration companies were never well funded enough to lead through for the length of time it takes to go from  finding a kimberlite to making it a working mine,” Hargreaves says, noting that the market has tired of giving them money for little returns.

Hargreaves believes that unless another company comes in to fill the function that De Beers did until about a decade ago — controlling supply to the market and providing price stability — the continuing volatility in prices will keep  investors away.

That volatility has become a defining feature of the market since prices for rough diamonds plunged by 50-60%  during the financial crisis. While much of that was due to credit drying up for the diamantaires, the price drop could have been  worse if the big players had not co-operated and cut down production (De Beers) or sales to the market (Alrosa).

Hargreaves  says the “sine wave” of diamonds is even more pronounced than other commodities, like copper or iron ore. When the  economy’s good, demand for diamonds booms, but when it goes south, diamonds are the first to “hit the skids.”

On the upside,  the lack of money flowing into exploration will at some point make for an exaggerated jump in diamond prices, a point that  Canada’s seasoned juniors have been making for years.

“For a while, there has  been a concern among explorers that diamond prices have generally been doing well — although there was a softening of  prices from August last year, prices are still good — and yet there’s very little money currently being spent on exploration,” says Shore Gold executive George Read. “That will ultimately add to the strength of the diamond price because there’s very few projects in the pipeline.”

With so much up in the air, the questions are many. Will Anglo or another buyer step up to consolidate the industry and provide stability? Will price spikes result in serious demand destruction? Will investors be won over by the  fundamentals of the luxury item? And how will juniors stay afloat in the meantime?

Also in this issue, diamond consultant Martin Irving reports on the growing investment demand for diamonds. And Northern Miner staff writer Ian Bickis  explores the issue of Marange diamonds, which have started to make their way out of Zimbabwe with the blessing of the Kimberley Process.

As ever, we welcome your feedback at ahiyate@northernminer.com