Aktsionernaya kompaniya ALROSA ZAO (ALRS), Rio Tinto plc (RIO): A Deeper Look At the World of Diamonds

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Paul Zimnisky currently creates and develops new exchange-traded products as CEO of PureFunds. This past November, PureFunds launched three innovative ETFs, including the world’s first ETF to exclusively invest in the diamond and gemstone industry; it is traded on the NYSE Arca under the symbol GEMS. Prior to PureFunds, Paul worked as a buy-side equity analyst focused on the metals and mining space, and as an ETF arbitrage trader [for more commodity news and analysis subscribe to our free newsletter].

Commodity HQ (cHQ): What can you tell us about new diamond supply?

Paul Zimnisky (PZ): As far as significant new production, the Grib project in Russia is estimated to produce about 4 million carats annually with production commencing towards the end of this year. Right now the project has an estimated mine life of about 20 years. Grib is owned by the Russian oil major LUKoil (London:LKOD).

DiamondsBut, the largest new diamond project in the foreseeable future is Canada’s Northwest Territories Gahcho Kue mine, estimated to produce 5 million carats annually for at least 15 years with production expected to start in 2015. This project is a joint venture between De Beers (London:AAL) and Mountain Province Diamonds, Inc-Ord Shs (TSE:MPV) with a 51%/49% split, respectively [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].

Other projects of note are Russia’s Botuobinskaya mine, expected to begin production in 2015, and what would be Quebec’s first diamond mine, Renard, expected to commence operations in 2015-2016. Both projects are estimated to produce between 1.5 million and 2.0 million carats annually. Botuobinskaya is owned by Russian state run Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS), and Renard is owned by Quebec-based Stornoway Diamond Corporation (TSE:SWY).

Its been 10 years since a new major diamond mine with an output of at least 1 million carats annually commenced production. The last example is the Diavik mine in Canada’s Northwest Territories, which began commercial production in 2003. The project’s economic open-pit depth has already been reached and has since been converted to an underground mine with only about 7 years left of production. The Diavik mine is owned by Rio Tinto plc (LON:RIO) and Dominion Diamond Corp (TSE:DDC), 60%/40% respectively.

Bottom line, there is not a lot of new production coming on online, and existing mines are approaching depletion levels. Using Bain & Company’s 15 years of 6% annual growth in global diamond demand number, there does not appear to be enough new supply coming online in the coming years to offset new demand.

cHQ: How big of an impact has the structural change of DeBeers had on the diamond world?

PZ: Most people think that De Beers still has complete control of the industry, but they don’t. In the mid-1980s De Beers controlled almost 90% of global diamond supply and did in fact use this power to control prices. But with new discoveries in the second half of the 20th century in Russia, Australia and Canada, it became very difficult for De Beers to maintain control of supply as some of these new industry players chose not to participate in the De Beers model.

By the early 2000s, De Beers gave up on the monopolistic model, and restructured the company to focus on branding the company, not the whole industry. Today, De Beers controls less than 40% of global diamond supply through its mines and distribution company. De Beers is not even the world’s largest diamond player in terms of carats produced anymore, Russia’s Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS) is [see also A Deeper Look At Russia’s Commodity Industry].

I would not go as far as saying that the industry is now “fragmented,” but on a relative basis diamond prices are being driven by supply/demand dynamics more than ever before.

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