For some time, diamond producers have dug deep for a new way to punt their wares. 'Diamonds are forever' may be one of the most successful slogans in advertising history, but times move on, and the De Beers-coined jingle now carries some faded, unhelpfully traditionalist baggage.
The answer? "Real is rare," suggests the Diamond Producers Association, a marketing group formed in 2015 with the mandate to "maintain and enhance consumer demand for, and confidence in diamonds". The campaign launched just under two years ago, with backing from seven of the sector’s largest miners, including the London-listed Rio Tinto (RIO), Gem Diamonds (GEMD) and Petra Diamonds (PDL).
That clique also includes De Beers, the Anglo American (AAL)-owned industry leader. Which is why many jewellery market watchers would have been surprised to read a recent press release from the group announcing the launch of a new fashion brand, Lightbox.
The source for the range? Laboratory-grown diamonds. The product line, which will be backed by a $94m (£73m) investment into synthetic-gem subsidiary Element Six, was billed as "a new, complementary commercial opportunity" for De Beers, rather than a hedge against the appetite for 'real', and the associated cognitive dissonance.
Until now, the diamonds grown by Element Six have largely been sold to other natural resources companies, who use them to drill holes in the ground. But from 2020, De Beers will buck with tradition and produce 500,000 rough carats of lab-grown diamonds a year, from a new facility in Portland, Oregon. A one-carat stone is expected to retail for $800, a discount of at least 80 per cent on the 'real' thing.
So why is the market leader trying to disrupt one of the world’s strongest oligopolies? The answer is complicated. If De Beers is confident its synthetic diamonds will sell, then this looks like a canny investment. Compared with the enormous cost of finding, exploring and then building a modern diamond mine, $94m looks like a low rate of capital intensity. Second, by getting in ahead of the competition, De Beers sets the benchmark for a product it can market as second rate, rather than cannibalising its own sales.
But it’s a gamble nonetheless, and one its peers will be watching with some apprehension – as if diamond miners (and their investors) needed another reason to worry.
Sluggish price recovery
The first issue has been with prices. Although the year appeared to get off to a strong start when De Beers reported a $665m haul from its first rough diamond sales cycle, year-on-year price increases have been modest. And despite strong jewellery store sales in China in recent months, the polished diamond price index "has pretty much flatlined", reports Liberum mining analyst Ben Davis. "[There are] still plenty of issues in India that the industry has to digest before it can really get going," he cautions.
Despite this, costs continue to weigh heavily on the producers, a trend reflected in the share price of London’s three 'pure play' diamond miners. Although a run of big recoveries at its Letšeng mine has helped it reverse course of late, Gem Diamonds – as well as Petra and Firestone (FDI) – has made a loss for its shareholders since the start of 2015.
Investors would have had better luck – just about – with Lucara Diamonds (Ca:LUC), thanks to some important finds, including the second-largest gem-quality diamond in history. The Lesedi la Rona, recovered in the Karowe mine in Botswana in 2015, was finally sold last September for $53m, after initially failing to meet its listing price at a standalone Sotheby’s auction – and $10m short of the value fetched for an 813-carat Type IIa clear stone sold in May 2016.
The mid market has proved equally temperamental. Petra spooked some of its investors at the end of July when it told the market it would remove price guidance, and "report historical and actual prices achieved and provide additional commentary as required to highlight any anomalies". Shareholders had only just doubled down on their bullish views on the company in a discounted $178m equity fundraising in June, without which management could not be assured of the group’s solvency. One large contributor to that liquidity shortfall was a sharp rise in onsite mining costs, exacerbated by a strengthened South African rand.
Cost inflation is evident elsewhere. Rising overheads prompted Gem to launch a $100m cost savings drive by the end of 2021. Even De Beers saw unit costs rise 6 per cent to $67 a carat in the first half of 2018, and expects more inflation before the year’s out.
In relative terms, that matters less if life is getting more expensive for everyone; since 2013, De Beers’ production has moved from the third to the second quartile in the global cost curve. But in absolute terms, higher costs – particularly when they overtake realised price increases – will always gnaw at margins. De Beers’ underlying cash profits fell 9 per cent in the six months to June to $712m, a thinner contribution to Anglo’s earnings than both the copper and metallurgical coal divisions.
