Goldman Sachs believes things are set to improve for listed diamond miners as prices rise over the remainder of this year and into 2014.
The US broker says the fundamental case for diamonds is still strong as new demand from growth markets, such as China, meets constrained supply, as older mines run down, with few new discoveries to replace them.
The only thing diamond equities have lacked, it added, is the catalyst of price increases due to the patchy economic recovery. This is set to change as stronger economic growth and the personal wealth effect lead to improved demand.
Asian retail demand coupled with an economic recovery in the US is likely to underpin a firming in diamond prices, Goldman said Friday morning.
Rough diamonds, in particular, have been strong for the past five months and are now at the highest level for almost two years.
Prices for rough stones are said to be 9% higher this year while De Beers lifted prices at its uncut auctions by 4% in May and 3% in April.
Polished diamond prices have lagged but are set to show a similar recovery as consumer confidence returns to the luxury market.
Robust demand for luxury watches and jewellery from Asian retailers has seen this area outperform in the hard luxury segment, and manufacturers expect mid-high end watches to outperform in 2013 says the broker.
As a result of the better price environment, Goldman has upgraded both Petra Diamonds (LON:PDL) and Gem Diamonds (LON:GEMD) to buy from neutral.
One year price targets increase to 180p (from 125p) for Petra and to 180p (from 170p) for Gem, implying upside potential of 60% and 40% respectively.
Both companies should also benefit from the broker’s view that the South African rand will weaken, while exceptional diamond sales (Petra sold a 26 carat blue diamond for US$16.9 mln and Gem sold a 164 carat diamond for US$9 mln) will also boost earnings.
Petra rose a touch to 126.75p, while Gem Diamonds climbed 1.5% to 114.7p.