As a class, listed diamond stocks - which exclude unlisted De Beers, 45% held by Anglo American - are among the worst-performing resources stocks, with little available to indicate any near-term change in the trend.
De Beers, the world's biggest producer of rough diamonds, reported sales of USD 6.84bn in 2007, along with a 14% increase in underlying earnings to USD 483m. Interest bearing debt rose strongly from USD 2.9bn to USD 4.1bn, while cash utilized in investing activities remained high at USD 1.6bn as the group continued the build of four new mines.
Unlike the vast majority of mining companies, De Beers spends a disproportionately large slice of its profits promoting diamonds directly to the ultimate consumer. Unlike most mined raw materials, the highest-margin diamonds compete with top end luxury goods, where demand is more elastic than for basics such as iron ore and coal.
Somehow, the commodities supercycle, if that's what it is, has left the diamond sector behind. Listed diamond stocks appear to be out of fashion, unable to offer the kind of profits growth literally visible from the leading sub-sector performers such as iron ore. Given the overall context, it comes as little surprise that at least some diamond explorers and developers are looking for crafty ways out.
West Australian diamond explorer and miner Bonaparte Diamond Mines is refocusing its attention on marine phosphates (and also onshore diamonds) in southern Africa. Phosphates are one component in the red-hot NKP (nitrogen, potassium and phosphate, the three key elements in fertilizer) sector, led by potash, the key raw material for the potassium component.
Meanwhile, Australia's Flinders Diamonds has changed its name to Flinders Mines, and will start to trade under a different symbol (FMS AU). The new title, says the entity, reflects the recent expansion of the company's core business from an exclusive focus on diamonds to exploration for both diamonds and iron ore.
Stranger things have happened. In its 2002 annual report, Australia-listed Allied Mining & Processing said it was considering an entry contribution for an investment in an operating gold business in Peru. Much time and effort had been put into evaluating the opportunity, and the board was confident that within 12 months it would be successful in securing a project on which it will be able to put its principal assets to use.
As a consequence of the strategy, the board had decided to divest its non-core businesses, including Allied Medical and the Mt Nicholas iron ore project. In 2003, The Metal Group acquired Allied Mining & Processing. Going beyond substantial tenements at Mt Nicholas, the new owners promptly acquired Iron Ore Australia - along with its Mt Lewin tenements - and went big on iron ore.
The acquiring group bought with it a new CEO, Andrew Twiggy Forrest, and a change in name to Fortescue Metals. Today the stock ranks among, or close to, the Top 20 most valuable global mining stocks. As for the gold projects, two - the Jinya gold project in China and the Colibri Mining projects in Peru - had been taken to an advanced stage but did not ultimately proceed.
Forrest saw off most of the previous directors and oversaw the sale of Australia's Red Dam gold project and the Mobile Mineral Process Evaluation Unit to Allied Gold for AUD 2.5m. Today, Allied Gold has a market value of USD 226m, less than 1% of Fortescue's USD 27.9bn market value.
And then consider this description of objectives by another Australian listing, Golden West Resources, an exploration company. The company's projects include the Wiluna West project, Doherty's project and the Bullabulling South project. The Wiluna West Project contains an indicated and measured gold resource for a contained 87,000 ounces of gold. The development of iron ore assets is the company's priority.
As if this were not enough, investors appear to be conservative in valuing diamond assets, in contrast with valuations seen in the vast majority of global resources subsectors. Mountain Province Diamonds, a Canadian listed diamond exploration and development entity, holds as a primary asset 49% of the Gahcho Kué diamond project in Canada, described as the largest diamond mine under development globally. De Beers Canada holds the other 51% of Gahcho Kué. In the stock markets, Mountain Province Diamonds is accorded a current market value of USD 254m.
Selected diamond stocks
Diversifieds with diamonds
** Holds 45% of unlisted De Beers
Source: market data; table compiled by Barry Sergeant
GLOBAL LISTED RESOURCES STOCKS
Composite weighted 12-month net gains/losses
* Investable market capitalisation
** IMC counted in other sub-sectors
Source: Analysis by Barry Sergeant