“With precious metals taking a beating, investors have turned their attention to another mining opportunity” —
Last month, a world record was broken.
A colorless diamond weighing a mind-boggling 101.73 carats was sold at auction for $26.7 million.
The pear-shaped carbon allotrope was found in a mine in Botswana and took 21 months to cut and polish.
The sale eclipsed the previous record of $21.4 million set just last November.
Talk about a diamond in the investment rough.
Surprisingly, while precious metals continue to fall out of favor in the markets, investors aren’t completely deterred from mining.
Instead, they are flocking to diamond plays to deploy their money.
And diamond miners couldn’t be more thrilled.
As gold heavyweights like Barrick and Newmont continue to see their stocks plummet, diamond companies have been moving in the opposite direction.
Since January, Lucara Diamond Corp. (LUC) is up 27%, while Mountain Province Inc. (MDM) has gained 33% and Dominion Diamond Corp. (DDC) has risen 8%.
Jewelers have been prospering as well.
Zale Corporation (ZLC) has had a phenomenal 12 months, posting a staggering 227% stock growth since last June.
Tiffany & Co. (TIF) and Signet Jewelers Ltd. (SIG) each shot up a commendable 43% and 52% respectively in the past year.
The lust for bling is as bright as ever.
Spurring the demand, according to Neil Gregson of JPMorgan’s Natural Resource Fund, is a market recovery in the US as well as long-term demand in China for engagement rings with their burgeoning middle class.
While US remains the world’s largest diamond consumer, China surpassed Japan in 2011 to capture the second spot.
China is such a lucrative market that Tiffany just opened up its 66th store in the region and is slated to open 4 more by the end of the year.
Also helping diamond’s climb is fast-growing India, which is now one of De Beers’ most important markets.
Although gold prices have dropped, the sharp depreciation of the rupee against the dollar has made it less affordable to own gold, because gold is priced in dollars.
Thus the decline in gold demand has spawned a fresh craving for diamonds in India.
But the shopping spree may not last for much longer.
In the short-term, we’re set to see a sharp rise in prices as South Africa’s largest diamond mine (and one of India’s biggest suppliers) is still recovering from devastating weather conditions faced earlier this year.
The Venetia operation owned by De Beers was crippled by heavy rains and severe flooding, which disrupted production levels.
This led to a shortage in rough diamonds, of which Venetia produced some three million carats worth in 2012.
Though the mine is expected to return to normal operations shortly, there are also long-term market conditions that are poised to keep prices elevated.
In a recent BMO Capital Markets report, diamond prices are expected to rise an average of 6 percent each year through 2020.
Global production reached 160 million carats just prior to the 2008 recession, which BMO believes will be the peak for the foreseeable future.
Tight supply remains the major culprit, as there have been no new mines of any significance coming online since 2003.
De Beers’ for example, operates the two largest diamond mines in the world: its 41 year old flagship Orapa mine and its 31 year old Jwaneng mine.
The two, as well as others, have seen production fall dramatically as near-surface diamond resources have depleted.
Scarcity coupled with rising demand – as you know – is a recipe for sending diamond prices skyward.
With diamond producers struggling to find large, new mines and output from existing mines declining, it’s an extremely bullish outlook for investors in search of a different mining play.
If your appetite for mining has soured, perhaps a change in flavor is just what the doctor ordered.
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