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Chart: the big diamond effect

Chart: the big diamond effect
June 22, 2016
Chart: the big diamond effect

Any shareholder in a diamond miner will also hope for the sort of announcement Petra Diamonds (PDL) put out yesterday. The South Africa-based company said it had recovered a 121.26 carat white diamond "of exceptional colour and clarity" at its Cullinan mine, which in the six months to December 2015 booked scaled-back revenue of $25m (£17m) amid the construction of a new plant.

The Type II diamond will be sold in the last tender of this financial year, which is currently under way in Johannesburg. Whenever a discovery like this is made, there is huge potential upside; a 29.6ct blue diamond Petra recovered in February 2014 was sold for a massive $25.6m in its rough form. Last year, the polished stone - which the company did not retain an interest in - fetched $48.5m at auction, achieving a record price per carat in the process.

Such discoveries inevitably change market sentiment, particularly if they bring the expectation of further significant finds. Canadian-listed Lucara Diamond (TSE:LUC) is a case in point. The company's Karowe mine in Botswana, constructed in 2012, has been nothing short of a revelation, producing a stream of high-value large diamonds including - most recently - an 813-carat Type IIa clear stone which fetched the highest price ever for a rough diamond when it sold for $63m.

Whether the rally in Lucara's shares will continue will depend on its ability to keep finding big stones. In the case of Petra, the most recent discovery actually led to a 2 per cent fall in the share price yesterday, although as the chart below indicates, the announcement of a significant discovery tends to be followed by an improvement in the share price.

This isn't to forget the myriad factors affecting the diamond market, which has long been dominated by a less than crystal clear system of pricing. As such, the heavy share price decline between September 2014 and November 2015 was caused by much more than a dearth of big diamond discoveries. But as catalysts for positive share price momentum, such announcements are unique.