Diamond producers have staged something of a comeback this year amid higher prices for rough diamonds and a general resurgence in mining stocks.
Petra Diamonds (LON:PDL), which has seen its shares rise 35%, has said the market for rough, or uncut, diamonds strengthened in recent months and that these firmer conditions are expected to continue for the first half of this year.
Shares in some of the smaller producers and developers have also rebounded strongly.
Stellar Diamonds (LON:STEL) has jumped 87% this year, although it has still lost almost a quarter of its value since last February; DiamondCorp (LON:DCP) is up 12% and Paragon Diamonds (LON:PRG) has risen almost 5%.
Emeralds and ruby producer Gemfields (LON:GEM), up 9.5%, has also benefitted from higher demand for coloured stones.
“In general, we are bullish on the gemstone sector for 2014 and more specifically the diamond miners,” said analysts at VSA Capital Research.
Sunrise Resources (LON:SRES), meanwhile, said this month that it has resumed its exploration work as the market outlook has improved and this optimism carries over to the top end of the market.
De Beers and Russia’s Alrosa, which together account for almost half of the world’s diamond production, have made encouraging noises.
Alrosa has said it expects global prices for uncut diamonds to rise 2-3% this year, while De Beers anticipates a pick up in demand.
“Global diamond demand is set to accelerate this year, increasing by as much as 4.5% as Chinese and US consumers buy more of the precious stones,” Philippe Mellier, chief executive of De Beers, told Bloomberg on 14 February.
Diamond consumption was up about 3% in 2013.
De Beers’ rough diamond price index has climbed 2% since the start of the year, while average realised rough diamond prices rose 5%.
“The outlook for rough diamond prices remains broadly positive as the wider economic recovery and limited supply growth is counterbalanced by the reduction in cutting centre liquidity,” said Kieron Hodgson, analyst at Charles Stanley.
However, he also noted that the first three months of the year are traditionally the strongest quarter and explained that demand from India is likely to be affected by planned liquidity restrictions set to be introduced when the country’s new financial year starts in April.
“We believe that market demand may flatten through the second quarter but we expect to see price growth coming in the second half of the year as inventory levels reach critical levels coinciding with the traditionally strong final quarter,” he said.
He estimated that prices for rough diamonds increased around 4.5% in 2013 and rises have already approached those levels in 2014.
Uncut prices may temporarily dip, but experts share a positive view of the market over the longer term supported by supply constraints, strong emerging markets growth and a recovery in the US market.
The US continues to account for about 37% of global diamond demand.
Any concerns about oversupply can also be put into context.
A report from Bain & Co estimates that 11 mines are expected to start production by 2023, adding 18 million carats a year to global output, yet the depletion of just one major operation, such as Rio Tinto’s Argyle mine (as is expected by 2023), would offset this additional production on its own.
Petra notes that many of the world’s major diamond mines are in decline and cannot maintain previous high levels of output.
“Whilst some new mines are planned to come on stream in the coming years, there is nothing of significant size to make up for this shortfall and there have been no important new discoveries since the early 1990s,” it said.
The prospect of dividend payments could also give diamond companies a lift.
Petra said it will consider making dividend payments from fiscal 2016, while Lucara Diamonds (TSE:LUC) said it will pay a maiden semi-annual dividend in June and that it may also issue special dividends based on revenues generated from the sale of exceptional stones.