The long-term fundamentals of the diamond market remain intact, according to Nomura, which gave a guardedly optimistic assessment of the prospects of some of the industry’s leading companies.
The bank acknowledges that rough diamond prices have been in reverse gear following an “overshoot” in 2011. However, it reckons they have now stabilised.
“Except for a scenario that provides a better-than-expected global recovery, we forecast that rough prices will remain near current levels in 2013,” said analyst Tyler Broda.
“However, after this correction, we believe that there is limited downside in the equities.”
Long-term, the outlook is relatively bullish for those now producing and new entrants. Supply constraints will remain thanks to the industry funding problems following 2008’s financial meltdown.
Meanwhile, demand from the newly minted middle and upper classes of Asia is expected to place a floor under prices.
“We expect demand to outstrip supply from 2015,” said Broda.
“This should lead to enhanced margins for the already robust producers and likely start a new diamond exploration cycle.
“With secular Asian middle class expansion driving demand growth, we see many characteristics supportive of a long-term bull market.”
Investors should ‘avoid’ Gem Diamonds [LON:GEM] as it reviews its growth strategy, the bank added. It rates the stock ‘reduce’ and says it is worth 135 pence.
“Although current pure-play diamond exposure is scarce, we see two opportunities that we rate very favourably,” Nomura analyst Broda said.
Petra Diamonds provides a financed, long-term growth story and Harry Winston (soon to be Dominion Diamond Corporation) has recently restructured itself via corporate activity to provide pure-play diamond mining equity with a strong balance sheet and attractive geopolitical exposure.
“We believe troubled Gem Diamonds is best avoided and we initiate coverage of that stock with a reduce [rating].
“We see the diamond subsector as one that is likely to grow its size in the equity market as positive longer-term forces should move equity capital towards growth projects.”
Among the large-caps Rio Tinto [LON:RIO] and Russia’s ALROSA [MCX:ALNU] offer the potential for high margin cash generation.
“Rio Tinto Diamonds should enter a phase of high cash generation with the completion of the Argyle expansion, and ALROSA’s high-margin business provides a long-term resource with production and importance to the rough diamond market approaching that of De Beers.”