In February, Fortune hypothesized that diamonds could replace gold as the high-end commodity of choice for investors. That’s a great topic to speculate on for an article, but whether or not a massive paradigm shift like that will ever happen is certainly open for debate as to its likelihood.
Fact is, though, that diamond demand is still strong and likely to continue to grow with recovering global economies and demand consistent in China, despite flatlining gross domestic product. Market research firm Rapaport Group said yesterday that a Hong Kong diamond show in March demonstrated steady Chinese demand for commercial-quality diamonds. Buyers had a particular affinity last month for polished diamonds 0.3 carat in size, with prices rising 13.1% compared to March 2013, while 0.5-carat polished stones were selling for 5.4% more year-over-year.
Rapaport noted that the increased prices were attributable to retailers restocking their showcases after a busy Christmas holiday season and Chinese New Year, adding that they expect demand to slip back to normal ranges as inventories are refilled and polished diamond prices remain high. The research firm cited a slowing of demand in part because industry giant De Beers raised its prices by 3 – 4%.
"While sentiment remains positive, diamond market growth is projected to stabilize in the coming months, after a relatively strong first quarter," said Rapaport in its monthly report.
There are a limited number of public North American-based diamond miners, but two that investors should be keeping an eye on are Mountain Province Diamonds (NYSE MKT:MDM) and Brazil Minerals, Inc. (OTCQB:BMIX).
Mountain Province Diamonds said late in March that its massive Gahcho Kue diamond project at Kennady Lake in the Northwest Territories is almost 20% complete and on that production is slated to begin in the third quarter of 2016. This is a bit of a letdown as
production was hoped to commence around December 2015, but regulatory restrictions put the clamps on shipments this winter, causing a delay in construction. Shipments to Canada’s Northwest Territory diamond mines regularly face logistical challenges as ice roads are only open for about two months out of the year.
All production delay aside, the mine will have a major presence in the industry. Gahcho Kue, a joint venture between De Beers (51%) and Mountain Province Diamonds (49%), is the largest new diamond mine in the world. Estimations have the mine producing five million carats of diamonds annually for a minimum of 15 years.
To put the production estimates of Gahcho Kue in perspective, consider that the Diavik mine, a JV between Rio Tinto (NYSE:RIO) and Dominion Diamond Corp. (NYSE:DDC) in Canada’s Northwest Territories, was the last mine opened that produces at least one million ounces per year. Diavik opened a decade ago and only has about seven years of production left in it.
Brazil Minerals, Inc. is a diversified mining company and producer of diamonds and gold at its Mineração Duas Barras Ltda. subsidiary located in the state of Minas Gerais in Brazil. Brazil Minerals also owns all of the mining rights to a gold project covering 24,700 acres in the state of Amazona, as well as interest in projects in titanium, vanadium and iron in the state of Piaui´.
Minas Gerais is famous for its diamond and gold production, having produced precious gems, including highly desirable colored diamonds, for nearly 300 years. The area was home to some tremendous stones, including a 263-carat rough diamond that was cut and polished into two 70-carat pear-shaped stones. The company’s 55% ownership of Duas Barras includes present and future mining concessions and the largest alluvial processing plant in Latin America.
A published NI 43-101 geological report, which only covered about 7% of the more than 1,400 acres that comprise the Duas Barras property, shows Indicated and Inferred resources of 432,000 carats of diamonds and 17,320 ounces of gold that are available for open-pit mining.
About 97% of the diamond production is gem-quality, equating to about $140 per carat.
Extrapolating estimates from this information, the property contains approximately 6.2 million carats of diamonds and 250,000 ounces of gold. Even at $120 per carat and $1,200 per ounce of gold, that is roughly $1.4 billion in resources.
Brazil Minerals is already selling diamonds from Duas Barras in both the U.S. and Brazil, with one of the latest sales of cut and polished diamonds going to an established Brazilian jewelry chain, a new client of Brazil Minerals. While unnamed and details of the sale were not disclosed, Brazil Minerals did say that the buyer has been in business since 1944 and has 11 retail outlets in Brazil.
Brazil Mineral’s bank account received a cash infusion of nearly $1 million in recent months as well, without selling any stock outright. Generating funds for corporate and mining developments, the company negotiated transactions for polished diamonds for delivery across a one-year period. "The groups and principals transacting with BMIX have been financially sophisticated, and have included investment managers, venture capitalists, and natural resource experts, all of whom performed due diligence on the Company and its assets," said the Company in a statement announcing a $500,000 agreement in March.
With cash in the bank and a portfolio of assets, a valuation of $6.9 million is arguably low for Brazil Minerals, especially considering that Mountain Province Diamonds is sporting a market cap of $507.9 million with no revenue and a $26.6 million net loss in 2013. That’s not to say that Mountain Province Diamonds doesn’t have a strong upside, as its cut of production from Gahcho Kue could tally more than 2.5 million diamonds each year; it more succinctly implies that Brazil Minerals could be a hidden gem in the industry.
