Diamonds have been a bright light in an otherwise generally gloomy mining sector in 2014.
Demand is strong and prices are set to rise according to Russia’s Alrosa, one of the world’s top three diamond companies.
Increasing demand and lack of new rough diamond capacity in the next five years will help prices climb, it believes.
Much of that demand is coming from emerging markets with combined demand in China and India tipped to match US demand by 2020.
It’s a view shared by many analysts, who argue the sparkling stones remain the ultimate aspirational purchase therefore the long-term consumer demand story remains intact.
So, as the middle classes of developing economies such China and India become wealthier, demand will continue to tick upward.
“We strongly agree with Alrosa’s view of the diamond market going forward and we see the sector as one of the few bright sparks currently,” said Investec.
“The diamond sector remains a chronically underinvested industry facing strong demand growth from China and India and a recovery in demand from the US and Europe, its traditionally largest markets.”
Essentially it’s become market where supply struggles to keep pace with demand.
Aside from the Diavik Mine in Canada, which started producing in 2003, there have been no important new discoveries since the early 1990s.
Just thirty significant diamond mines are operating in the world today.
That’s good news for the miners already digging.
Analysts at Bain & Company expect global demand for rough diamonds is forecast to grow annually by a rate of 5.9%.
Dominion, formerly known as Harry Winston Diamond Corporation, predicts diamond supply from existing or new mines will grow annually by only 2.5% until around 2018, when production is expected to level off and probably decline.
Miners therefore, are in the enviable position of operating in a consolidated sector with a large and competitive client base.
Three miners - De Beers, part owned by Anglo American (LON:AAL), Alrosa and Rio Tinto (LON:RIO) – accounted for 80% - of world supply by value in 2013 according to Kimberly Process diamond statistics, with thousands of manufacturers vying for their rough.
“If you look at the iron ore market, the tanks are being filled with new projects,” said Kieron Hodgson, analyst at Charles Stanley Securities.
“The same can’t be said for diamonds, there just aren’t as many new projects in the hopper.”
This means existing diamond miners have become incredibly attractive for long term investors as they operate in an environment that supports price growth.
However, the market can be tough to access.
Polished diamond prices vary widely depending on a diamond's carat, colour, clarity and cut so investing in a supplier seems to make more sense.
“In our view, Petra Diamonds (LON:PDL) is a suitable long-term risk adverse investment,” said Hodgson.
“The firm has a number of key projects coming to fruition; it can generate considerable amounts of cash and has made dividend commitments.
The most important characteristic of the firm, according to Hodgson, is that is has seven different mines, a huge portfolio of assets by diamond mining standards and can produce everything from white crystals to coloured stones.
In terms of growth potential, DiamondCorp (LON:DCP) and Firestone Diamonds (LON:FDI) rank high on Hodgson’s list.
DiamondCorp has resolved its labour issues and its Lace project in South Africa is set to move into production in 2015.
That means the business is about to move into long term revenue growth.
Firestone, meanwhile, holds 75% of the Liqhobong Project in South Africa which is capable of an annual production of 3.6mln tonnes yielding in excess of 1mln carats.
Other notable players
Stellar Diamonds (LON:STEL) – The AIM quoted West African focused diamond development company has just passed a major milestone on its route to generating cash after revealing it had exported its first package of stones from its Baoulé kimberlite pipe in Guinea.
Stellar said its trial mining plant is now running at 55 tonnes of wet kimberlite per hour, which at the current average grade should result in 2,000 carats being produced a month. It expects to run a sale every two months.
Paragon Diamonds (LON:PRG) - The firm holds a number of hard rock and alluvial assets within Sub-Saharan Africa.
It has moved closer to start-up at the Lemphane project, in Lesotho, where stage one mining operations are due to begin in the first quarter of the coming year.
Design and order plans have now been finalised for a state-of-the-art diamond processing plant, the company told investors.
Modern technology, using X-rays, and a modular design will mean both capital and operating costs will be reduced, while diamond recoveries are expected to be improved.