Bank of America Merrill Lynch has singled out Petra Diamonds (LON:PDL) as its top pick in the sector, after predicting a modest rise in the price of rough diamonds this year.
It expects the value of the stones to rise by around 2.1% in 2013 compared with a 14% fall in 2012 following a “correction” in the market.
Petra, rated ‘buy’ with a target price of 140 pence share, stands out because it offers “low risk, low capex growth”.
“We like Petra’s strategy of focusing on recapitalising existing mines rather than pursuing higher cost (and risk) Greenfield projects,” said analyst Jason Fairclough in a note to clients.
Merrill maintained its ‘neutral’ stance and 160 pence a share price objective on Gem Diamonds (LON:GEMD), which is currently changing hands for 151.5 pence (down 0.5 pence).
Petra, meanwhile, was off 1.68 pence at 116.82 pence.
On the sector, Fairclough added: “We view diamonds as an interesting, secular, late development commodity.
“We forecast a deficit in the medium to long term. Chinese per capital consumption of diamonds is increasing but lags well behind developed markets.
“This contrasts with earlier development commodities such as steel, cement and base metals where Chinese per capita saturation is close to, and in some cases greater than 100% of US “steady state” levels.
“We expect rising demand from the emerging markets to drive global demand growth. Supply is very limited; no new large mines have come on stream in the past five years and few greenfield mines are planned.”