Financial Times: Diamonds: miners’ best friend

By Ariel Carmely | 07.12.14

Diamonds may have been a girl’s best friend since the late 1940s, but Rio Tinto has only just seen the light. This week, the Anglo-Australian company renewed its vows to a division it tried to dump just last year. Now, Rio has earmarked $350m of a shrinking capital spending budget to prolong production at its Diavik mine in Canada, to be spent over four years. This compares with first-half diamond capex of $84m, and rival Anglo American’s $320m via De Beers, of which it owns 85 per cent.

 

As hard commodity prices sink, diamonds still shine. This September, De Beers produced its first industry Insight Report, showing sales of diamond jewellery at $79bn in 2013 (Rio’s total diamond revenues that year were $850m; Anglo’s, $6.4bn). De Beers expects diamond demand to grow by 4.5 per cent this year, largely because of growth of 6 per cent in the US.

 

Production, meanwhile, is unlikely to keep pace. A McKinsey report, also from September, forecast that (at best) output will be flat on 2013 at about 140m carats. And De Beers says that exploration budgets peaked in 2007 at just over $1bn. In 2013 the industry spent about half of this – below Rio’s total group exploration spend of $566m for the first nine months of 2014 alone.

 

This month, the Fancy Color Research Foundation (FCRF) unveiled the Fancy Color Diamond Index. In an industry notorious for opacity, the index aims to introduce some clarity into price trends. Based on data from Hong Kong, Tel Aviv and New York, it shows that pink diamond prices have nearly quintupled since January 2005.

 

This might be nice buzz for Rio, whose Argyle mines produce some of the world’s most famous fancy pinks. But the company’s diamond division is less than 2 per cent of sales. The business is bigger for Anglo American, via De Beers, at one-fifth of revenues. But pure plays such as Dominion Diamond as ever look better. And diamonds themselves, the best.

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