Diamond demand rises in China enabling Aber, Trans Hex rebound
Sunday, 2 September 2007
Jesse Riseborough and Thomas Kutty Abraham
Diamond producers' shares have trailed mining companies since early 2006 as an abundance of gemstones weighed on prices. Now the outlook is brighter, says Evy Hambro, who runs the world's No. 1 metals fund.
Stockpiles have tumbled 75 percent since 2000, Canada's National Bank Financial Inc. said in a July report. No new mines are scheduled to start production in the next three to five years, according to RBC Capital Markets. At the same time, annual incomes in India and China, the two fastest-growing diamond markets, are rising as much as 18 percent.
Prices increased 8.4 percent in the first half, four times as fast as the same time last year, according to National Bank Financial. That may help shares of Aber Diamond Corp., Shore Gold Inc. and Trans Hex Group Ltd. rebound after tumbling as much as 50 percent in 2007.
``The supply and demand fundamentals are very supportive for prices,'' said Hambro, the London-based managing director of BlackRock Inc.'s World Mining Fund, which has $10.2 billion in mining assets. ``We see dwindling stocks and a shortage of new mine development.''
Aber, Gem Diamonds Ltd. and Shore Gold, the world's three biggest diamond mining companies by value, have trailed the Bloomberg World Mining Index's 39 percent gain this year.
Hambro's fund owns shares of Aber, which is changing its name to Harry Winston Diamond Corp. after purchasing that company in 2006. The fund also became the biggest investor in London-based Gem Diamonds earlier this year, according to data compiled by Bloomberg. Gem Diamonds had its initial public offering in London in February.
Trans Hex, Africa's biggest publicly traded diamond producer, swung to a profit in the six months ended in March as output from its largest mine in South Africa recovered from rains. Net income was 38.95 million rand ($5.3 million), compared with a loss of 21.2 million rand a year earlier.
Demand for diamonds may grow as much as 5.0 percent annually, according to Anglo American Plc, after hovering under $15 billion a year since 2005. Anglo American owns 45 percent of De Beers, the world's biggest diamond mining company. Demand will likely breach $20 billion by 2014, RBC said.
Toronto-based Aber, the biggest producer of the precious stones by value, is up 1 percent from this year's low on Aug. 15. Gem Diamonds, the third-largest, has added 11 percent after it fell as much as 8.9 percent from its IPO. Saskatoon, Canada-based Shore Gold has risen 5.1 percent since Aug. 17 when it fell to its lowest in more than 2 1/2 years.
The declines haven't made the shares cheap. Aber, with a market value of C$2.4 billion ($2.3 billion), and Cape Town, South Africa's Trans Hex are trading at about 20 times forecast profits. The price-earnings ratios are almost twice those of diversified miners BHP Billiton Ltd. and Anglo American.
Diamond stocks trailed other commodity shares even before the effects of the equity market rout triggered by a global credit crunch. The U.S., the world's biggest consumer of the gems, accounts for roughly half of world retail diamond sales of about $57 billion.
Still, diamond prices won back all of their 2006 declines by the second quarter and will likely extend gains, says De Beers, which mines 40 percent of the world's gems. Prices of five-carat polished diamonds jumped 8.4 percent in the first half, four times the 2.1 percent advance of a year earlier, according to National Bank Financial. A carat is a fifth of a gram.
Henk Groenewald, who helps manage the equivalent of $16.8 billion at Coronation Fund Managers in Cape Town, recommends Vancouver- based Rockwell Diamonds Inc. and Johannesburg-based Diamond Core Resources Ltd.
Demand for polished diamonds ``will increasingly be driven by the faster-growing countries,'' he said.
China's diamond imports rose more than threefold in the first half, according to industry publication Rapaport TradeWire last month. Rapaport Group, a New York-based provider of gem prices, also provided the data cited by National Bank Financial.
India's imports increased 14 percent in the second quarter, according to the Gem & Jewellery Export Promotion Council's Web site. De Beers said last month it expected ``very strong'' jewelry demand in China and India to boost prices in the second half of this year.
Average per-capita disposable income in China's biggest cities rose 17.6 percent to 7,052 yuan ($931) in the first half, according to the National Bureau of Statistics. India's per-capita income surged 8.4 percent to 22,483 rupees ($545) in the year ended March 31. India processes 11 out of every 12 of the world's diamonds, accounting for 80 percent in terms of volume.
``I love diamonds because when you look at the supply-demand side of it, it is extremely favorable for a price increase,'' said Pierre Lassonde, who retired as president of Denver-based Newmont Mining Corp., the world's second-biggest gold producer, in December. Lassonde bought 17 percent of Canadian diamond exploration company Olivut Resources Ltd. of Vancouver with a venture-capital partner.
The increasing popularity of gemstones in emerging markets may not be enough to make diamond stocks a sure bet, according to Gavin Wendt, senior resources analyst at mining and investment advisory firm Fat Prophets in Sydney.
``There has been a lot disappointment historically on the part of investors,'' Wendt said. ``Over the last 20 years a lot of funds have chucked money at diamond hopefuls and there has been pretty much zero return.''
Fox-Davies Capital Ltd. said in an April report that diamond exploration is ``high-risk'' because of the difficulty in locating deposits. Explorers search for so-called kimberlite pipes to find diamonds formed up to a billion years ago and brought to the earth's surface through a volcanic eruption.
Global production is dominated by fewer than 20 major mines. Rio Tinto Group, Anglo American and BHP, and Russia's closely held ZAO Alrosa control three-quarters of diamond output.
``The opportunity to make a return for an investor is going to come from the smaller guys, the niche guys who are focusing on the top end of the market,'' said Peter Major, who was appointed in March to run the Cadiz Titanium hedge fund for Cape Town-based Cadiz Holdings Ltd., which manages 50 billion rand.
Major holds Diamond Core, a gem prospector that merged with BRC Diamond Corp. of Toronto to become BRC DiamondCore Ltd. in July.
Bloomberg
Diamond producers' shares have trailed mining companies since early 2006 as an abundance of gemstones weighed on prices. Now the outlook is brighter, says Evy Hambro, who runs the world's No. 1 metals fund.
Stockpiles have tumbled 75 percent since 2000, Canada's National Bank Financial Inc. said in a July report. No new mines are scheduled to start production in the next three to five years, according to RBC Capital Markets. At the same time, annual incomes in India and China, the two fastest-growing diamond markets, are rising as much as 18 percent.
Prices increased 8.4 percent in the first half, four times as fast as the same time last year, according to National Bank Financial. That may help shares of Aber Diamond Corp., Shore Gold Inc. and Trans Hex Group Ltd. rebound after tumbling as much as 50 percent in 2007.
``The supply and demand fundamentals are very supportive for prices,'' said Hambro, the London-based managing director of BlackRock Inc.'s World Mining Fund, which has $10.2 billion in mining assets. ``We see dwindling stocks and a shortage of new mine development.''
Aber, Gem Diamonds Ltd. and Shore Gold, the world's three biggest diamond mining companies by value, have trailed the Bloomberg World Mining Index's 39 percent gain this year.
Hambro's fund owns shares of Aber, which is changing its name to Harry Winston Diamond Corp. after purchasing that company in 2006. The fund also became the biggest investor in London-based Gem Diamonds earlier this year, according to data compiled by Bloomberg. Gem Diamonds had its initial public offering in London in February.
Trans Hex, Africa's biggest publicly traded diamond producer, swung to a profit in the six months ended in March as output from its largest mine in South Africa recovered from rains. Net income was 38.95 million rand ($5.3 million), compared with a loss of 21.2 million rand a year earlier.
Demand for diamonds may grow as much as 5.0 percent annually, according to Anglo American Plc, after hovering under $15 billion a year since 2005. Anglo American owns 45 percent of De Beers, the world's biggest diamond mining company. Demand will likely breach $20 billion by 2014, RBC said.
Toronto-based Aber, the biggest producer of the precious stones by value, is up 1 percent from this year's low on Aug. 15. Gem Diamonds, the third-largest, has added 11 percent after it fell as much as 8.9 percent from its IPO. Saskatoon, Canada-based Shore Gold has risen 5.1 percent since Aug. 17 when it fell to its lowest in more than 2 1/2 years.
The declines haven't made the shares cheap. Aber, with a market value of C$2.4 billion ($2.3 billion), and Cape Town, South Africa's Trans Hex are trading at about 20 times forecast profits. The price-earnings ratios are almost twice those of diversified miners BHP Billiton Ltd. and Anglo American.
Diamond stocks trailed other commodity shares even before the effects of the equity market rout triggered by a global credit crunch. The U.S., the world's biggest consumer of the gems, accounts for roughly half of world retail diamond sales of about $57 billion.
Still, diamond prices won back all of their 2006 declines by the second quarter and will likely extend gains, says De Beers, which mines 40 percent of the world's gems. Prices of five-carat polished diamonds jumped 8.4 percent in the first half, four times the 2.1 percent advance of a year earlier, according to National Bank Financial. A carat is a fifth of a gram.
Henk Groenewald, who helps manage the equivalent of $16.8 billion at Coronation Fund Managers in Cape Town, recommends Vancouver- based Rockwell Diamonds Inc. and Johannesburg-based Diamond Core Resources Ltd.
Demand for polished diamonds ``will increasingly be driven by the faster-growing countries,'' he said.
China's diamond imports rose more than threefold in the first half, according to industry publication Rapaport TradeWire last month. Rapaport Group, a New York-based provider of gem prices, also provided the data cited by National Bank Financial.
India's imports increased 14 percent in the second quarter, according to the Gem & Jewellery Export Promotion Council's Web site. De Beers said last month it expected ``very strong'' jewelry demand in China and India to boost prices in the second half of this year.
Average per-capita disposable income in China's biggest cities rose 17.6 percent to 7,052 yuan ($931) in the first half, according to the National Bureau of Statistics. India's per-capita income surged 8.4 percent to 22,483 rupees ($545) in the year ended March 31. India processes 11 out of every 12 of the world's diamonds, accounting for 80 percent in terms of volume.
``I love diamonds because when you look at the supply-demand side of it, it is extremely favorable for a price increase,'' said Pierre Lassonde, who retired as president of Denver-based Newmont Mining Corp., the world's second-biggest gold producer, in December. Lassonde bought 17 percent of Canadian diamond exploration company Olivut Resources Ltd. of Vancouver with a venture-capital partner.
The increasing popularity of gemstones in emerging markets may not be enough to make diamond stocks a sure bet, according to Gavin Wendt, senior resources analyst at mining and investment advisory firm Fat Prophets in Sydney.
``There has been a lot disappointment historically on the part of investors,'' Wendt said. ``Over the last 20 years a lot of funds have chucked money at diamond hopefuls and there has been pretty much zero return.''
Fox-Davies Capital Ltd. said in an April report that diamond exploration is ``high-risk'' because of the difficulty in locating deposits. Explorers search for so-called kimberlite pipes to find diamonds formed up to a billion years ago and brought to the earth's surface through a volcanic eruption.
Global production is dominated by fewer than 20 major mines. Rio Tinto Group, Anglo American and BHP, and Russia's closely held ZAO Alrosa control three-quarters of diamond output.
``The opportunity to make a return for an investor is going to come from the smaller guys, the niche guys who are focusing on the top end of the market,'' said Peter Major, who was appointed in March to run the Cadiz Titanium hedge fund for Cape Town-based Cadiz Holdings Ltd., which manages 50 billion rand.
Major holds Diamond Core, a gem prospector that merged with BRC Diamond Corp. of Toronto to become BRC DiamondCore Ltd. in July.
Bloomberg