Diamonds were first discovered in South Africa in 1867. This and subsequent discoveries dramatically increased potential supply and put downward pressure on price. In 1888 Cecil Rhodes formed De Beers Consolidated Mines with the successful objective of forming a monopoly over diamond production.

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Dwaneng Diamond mine in Botswana, owned 50% De Beers, 50% Botswana, produced 12M carats in 2016.

De Beers stockpiled diamonds and made strategic sales to control the price. But De Beers also wanted to control demand. And so, in 1938 the company engaged ad agency NW Ayer to develop demand for diamonds. They did this by convincing Americans, and then the world, that engagements and marriages were not complete without diamonds.

To prevent people selling diamonds they coined the phrase “A Diamond is Forever”. This brilliant phrase was named the #1 slogan of the century in 1999.

Today, however, things have changed. De Beers has long lost its monopoly and worse, synthetic stones are taking an increasing share of the global diamond market. As synthetics have for the emerald, ruby and sapphire markets. At first De Beers campaigned that synthetic diamonds were inferior to natural diamonds, and that may have been the case at the beginning.

Today the two are indistinguishable. In 2018 De Beers commenced selling synthetic diamonds online to the public and last year partnered with Bloomingdale’s and Reeds Jewellers to sell in store for the first time. Synthetic diamonds are much cheaper than natural, 5-10 times less. De Beers sells a one carat stone for USD800, while a one carat natural sells for USD5,500.

There is an oversupply of mined diamonds and to many, mining diamonds is unethical and environmentally harmful.

Conclusion

Diamond exploration and development appears a short-term proposition, as synthetic stones continue to increase market share. However, diamond exploration and development is ongoing in Australia, although a mere shadow of the 1990’s heyday. Listed below are five companies with an Australian background.

  • Gibb River Diamonds (“ASX: GIB”) has the Ellendale project which includes the historic Ellendale 9 and 4 mines along with associated alluvials. The company plans bulk testing/trial mining of various alluvial targets. Below four listed companies active in diamonds in Australia.
  • Lithoquest Diamonds Inc. (“TSXV: LDI”) is exploring the North Kimberley Diamond Project. Micro-diamonds have been discovered in kimberlites within the project. Further drill targeting is required prior to bulk sampling.
  • Rio Tinto Ltd (“ASX: RIO”) operates the Argyle diamond mine in western Australia. The mine is expected to close in 2020 as costs have increased with depth.
  • Lucapa Diamond Ltd (“ASX: LOM”) operates two diamond mines in Angola. The company received net cash from operations of USD(2.4M) on sales revenue of USD14M during calendar 2019.
  • Merlin Diamonds Ltd used to operate the Merlin mine in the Northern Territory. The company is now in liquidation and the mine is on care and maintenance.

In my view the mined diamond investment space has seen its best days. However it may be worth keeping an eye on GIB and LOM as both companies have a chance to surprise on the upside.

25 February 2020 Commodities