1. 118 October 2013 |
WHY DIAMONDS?
AN INDUSTRY VIEW FOR INVESTORS
OCTOBER 2013
2. 218 October 2013 |
AGENDA
• Unprecedented changes in the diamond industry
• Investors’ perception of diamonds
• Past diamond demand
• Key drivers of diamond demand
• Long-term diamond demand vs. short-term demand forecast
• Supply forecast
• New supply from potential new projects and expansions
• Supply-demand balance
• Diamond substitution
• Diamond price development
• Profit pool in the pipeline
• Diamond equity performance
• Equity performance of individual diamond producers
• Diamond cost curve
• Investing in diamond equities and investment grade diamonds
Four +100 carat rough diamonds recovered by Rockwell:
Middle Orange, August/September 2013
4. 418 October 2013 |
PERSISTENT SCEPTICISM AMONG INVESTORS
Why investors don’t like diamonds… despite relative performance and positive diamond outlook
Relatively small diamond investment market Notoriously opaque requiring specific insider knowledge from investors
Apparent rough price fluctuations No clear benchmark with lack of industry rough price list
Polished prices not 100% aligned with rough prices Difficulty in predicting correlation between rough and polished markets
Polished diamond grading perceived as subjective
Valuation of investment grade diamonds is complex
Resale value of polished diamonds not always attractive
Wide ranging factors affecting valuation of diamond
exploration or mining projects
Including diamond price movement, political risk, mining project risks
Establishing fair entry point for diamond investment Limited access to players with scale could be alleviated by Alrosa IPO
Analysts offer cautious optimism at best
Erosion of shareholder value of diamond exploration and mining companies
over last 15 yrs
Poor sector record Few publicly-known diamond investment success stories
5. 518 October 2013 |
DIAMOND INDUSTRY FUNDAMENTALS:
CONSUMER APPETITE FOR DIAMONDS HAS DECLINED
• 2006 to 2012
• Diamond content value (retail
sales) grew faster than global
jewellery sales
• Strong diamond retail performance
• Surging gold and diamond prices
• Jewellers expected to reduce gold
and diamond content to contain
price points
Source: DMM Advisory Group Analysis, IDEX, Tacy Ltd. Chaim Even-Zohar, Polishedprices.com, Kitco
Total diamond jewellery + diamond content retail sales ($bn) vs
polished diamond and gold price indices (%)
18.5 20.2 18.4 15.9 18.2 23.6 22.6
80
100
120
140
160
180
200
220
240
260
280
0
10
20
30
40
50
60
70
80
2006 2007 2008 2009 2010 2011 2012
Global diamond jewellery retail sales ($Bn)
Value of the diamond content in the jewellery retail sales ($Bn)
Polished price index average p.a. (2006=100%)
Gold price index (2006=100%)
68.5
73.1
64.8
58.7 60.2
70.8
72.1
0.9%
3.4%
2.9 %
18.5%
CAGR (2006-12)
$bn %
Jewellery produced from Rockwell diamonds
6. 618 October 2013 |
KEY DRIVERS OF FUTURE DIAMOND DEMAND: HIGH NET WORTH
INDIVIDUALS (HNWI) AND CHINESE ENGAGEMENT RINGS
Source: DMM Advisory Group Analysis, CapGemini
• ±5% historic growth p.a.: Number + average wealth of HNWIs
• Trend anticipated to persist to 2015
• Industry challenge: Maintain share of increased wealth spent on
diamonds and diamond jewellery
0
10
20
30
40
50
60
0
2
4
6
8
10
12
14
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012F
2013F
2014F
2015F
Number of HNWIs (M)
HNWI Wealth ($Tr)
Number (m) and wealth ($tr) of HNWI
m
CAGR (1999-2011): 5.1%
CAGR (1999-2011): 5.8%
Source: DMM Advisory Group Analysis, De Beers
$tr
First time brides receiving a diamond engagement ring
• 40 yrs to reach 80% penetration in USA
• Japan needed ±30yrs to reach 77%
• Significant headroom in China: 10-20 yrs until saturation
• Millions of additional Chinese brides receiving diamond
engagement rings in the future
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1940
1950
1960
1970
1980
1990
2000
2010
2020
2030
USA
Japan
China
Possible saturation level
80%
77%
1%10% 5%
31%
7. 718 October 2013 |
0
5
10
15
20
25
30
35
40
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F
2021F
2022F
2023F
Polished diamond demand: Value
of the diamond content in the
jewellery retail sales
Rough diamond demand (Bain &
Co. base case)
Rough diamond demand (Bain &
Co. lower case)
Trendline for the polished demand
based on 2003-2012 data
POSITIVE LONG TERM FUNDAMENTALS: DEMAND FOR POLISHED AND
ROUGH DIAMONDS EXPECTED TO RISE
CAGR (2003-12): 4.8%
CAGR (2012-23): 5.1%
CAGR (2012-23): 4.2%
Source: DMM Advisory Group Analysis, IDEX, Tacy, Bain & Co.
Polished and rough diamond demand (actual and forecast) ($bn)
• Rough demand: Expected to grow
between 4.2% and 5.1% p.a. until
2023 (Bain & Co.)
• Rough and polished demand:
Expected to correlate long-term
• Clear long-term trend: Increasing
demand
• Short term deviations from trend
line anticipated: Both up and down
Deviation from the
long term trend
Polished
demand
Rough
demand
Large stones recovered by Rockwell in 2010
8. 818 October 2013 |
195-205 230-240
320-330
470-480
610-620
855-895
980-990 1,010-1,020
365-375 315-325
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
World diamond exploration spend ($m)
Source: NBF Research; Metals Economic Group
CAGR
26%
CAGR
-64%
ROUGH DIAMOND SUPPLY FORECAST TO DECLINE AFTER 2018:
SUPPLY DEFICIT EXPECTED TO ARISE
• Factors impacting supply: Low liquidity for new projects
• Lack of market transparency
• Difficulty in finding diamond resources
• Price volatility
• The global financial crisis
• Inadequate historic investment: Replacement of existing
diamond production
• Direct impact on future diamond supply
Rough diamond supply actual and forecast (mcts)
Source: DMM Advisory Group Analysis, Bain & Co, Allan Hochreiter, Charles Stanley Securities
0
20
40
60
80
100
120
140
160
180
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F
2021F
2022F
2023F
Rough diamond supply - Bain & Co.
Rough diamond supply - Allan Hochreiter
Rough diamond supply - De Beers, Charles Stanley Securities
9. 918 October 2013 |
ADDITIONAL SUPPLY OPTIONS:
INSUFFICIENT TO BRIDGE SUPPLY DEFICIT
Source: DMM Advisory Group Analysis, Bain & Co. Industry publications
Additional rough diamond supply from potential new projects and
expansions (kcts)
2014F 2017F 2020F 2023F
ALROSA
GROUP
PRODUCTION
increases 1,811
4,682
6,768
6,853
BUNDER -‐
2,500
2,500
2,500
GAGHOO 100
230
230
230
GAHCHO
KUE -‐
4,500
4,500
4,500
GRIB 2,000
4,000
4,000
4,000
KARPINSKOGO-‐1
/
LOMONOSOV 1,656
2,466
4,647
5,000
KRONE
ENDORA 180
180
180
180
LACE -‐
300
300
300
LERALA 250
500
-‐
-‐
MERLIN 50
250
250
250
PETRA
EXPANSION -‐
1,000
2,000
2,000
RENARD -‐
1,600
1,600
1,600
STAR
ORION
SOUTH -‐
-‐
1,700
1,700
TOTAL 6,047
22,208
28,675
29,113
• Limited additional supply including potential new projects and expansions
• Potential new projects and expansions likely to add only limited new future supply
Total supply forecast and expected supply from
potential new projects and expansions (mcts)
0
20
40
60
80
100
120
140
160
180
2014F 2017F 2020F 2023F
Total diamond supply forecast by Bain & Co.
Supply from potential new diamond projects and expansions
(DMM estimate)
10. 1018 October 2013 |
10
12
14
16
18
20
22
24
26
28
2012 2013F 2014F 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F
Rough diamond demand forecast - Bain & Co. base case for demand forecast
Rough diamond demand - Bain & Co. lower case for demand forecast
Rough diamond supply forecast - Bain & Co. base production forecast
Rough diamond supply forecast - Bain & Co. including production increase
POSITIVE LONG-TERM OUTLOOK FOR DIAMOND PRODUCERS:
EVEN UNDER CONSERVATIVE SUPPLY-DEMAND SCENARIO
Demand
forecast
Rough diamond supply and demand forecast (2012 prices) ($m)
Source: DMM Advisory Group Analysis, Bain & Co.
• Diamond supply-demand gap: Appears
inevitable
• But, there are still some questions:
• When will the supply deficit emerge?
• How wide will the supply gap become?
• What will be the mix of reactions that fills
this gap?
• How far will the supply deficit translate
into increased diamond prices or diamond
substitution?
Supply
forecast
Supply
deficit
11. 1118 October 2013 |
SUPPLY SIDE GAP: LONG TERM IMPACT OF RECYCLING AND
LAB-GROWN DIAMONDS
• Catalyst for significant polished diamond recycling: More established polished diamond investment market
• Impediment for recycling: Difficulty evaluating polished diamonds and low liquidity in investment diamonds
• Still more attractive to keep diamonds: Sale to retailers generally at deep discounts
Recycling: Not new to the industry but gaining ground
• Technology developed some time ago: Technological improvements enabled higher volume / lower cost production of
high-quality diamonds
• Misperception among natural diamond stakeholders: Selling lab-grown diamonds for jewellery more profitable than
industrial end-uses
• Fact: Industrial application for optical, electrical and cutting tool applications more lucrative
• High production costs for jewellery-grade synthetics: Synthetic producers likely to remain focused on industrial sector
• Production of jewellery-grade lab-grown diamonds in 2012 estimated 50-100k carats vs 130mcts of natural
diamonds: Few synthetics actually used in jewellery
• Rapid advances expected for lab-grown diamond production technology: Jewellery application will become more
attractive for producers
Lab-grown (synthetic) diamonds: Jewellery end use still low
12. 1218 October 2013 |
ROUGH AND POLISHED DIAMOND PRICES:
OUTPERFORMED OTHER KEY COMMODITIES
Price indices for diamonds and other commodities 2010-2013 (2010 Jan=100%)
Source: DMM Advisory Group Analysis, eDiamond, polishedprices.com, indexmundi, Johnson Matthey, IMF
80%
100%
120%
140%
160%
180%
200%
220%
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Rough Diamond Price Index
Polished Diamond Price Index
Copper Price Index
Commodity Price Index (Non-Fuel)
Platinum Price Index
Gold Price Index
13. 1318 October 2013 |
IMPACT OF FUTURE SUPPLY DEFICIT:
PRODUCERS BEST POSITIONED TO BENEFIT
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Diamond producers Rough diamond
trading
Diamond
manufacturing
(cutting and
polishing)
Polished diamond
trading
Diamond jewellery
manufacturing
Diamond jewellery
retail
Average operating margins in the diamond pipeline 2012 (%)
16-20%
1-3%
Sequence in the diamond pipeline
2-5%
1-4%
3-5%
4-14%
Highest margin
in the pipeline
Source: DMM Advisory Group Analysis, Bain & Co.
14. 1418 October 2013 |
50%
70%
90%
110%
130%
150%
170%
190%
210%
230%
250%
HSBC Global Mining Diamonds Index
S&P/TSX Capped Diversified Metals & Mining Index
Anglo American Share Price Indexed
S&P 500 Indexed
HIGH HISTORIC CORRELATION: PERFORMANCE OF DIAMOND
SHARES VS DIVERSIFIED MINING & METALS
HSBC Global Diamond Mining Index performance compared to diversified mining
companies and portfolios (Mid price on 1/07/2010=100%)
• High correlation: Aggregated price
index of diamond miners and S&P/
TSX Capped Diversified Metals &
Mining Index
• That is, diamond companies perform
on average along diversified mining
portfolios
• Diamond miners on average
outperformed (three year horizon)
Anglo American, a diversified mining
company
Source: DMM Advisory Group Analysis, Yahoo Finance, S&P, HSBC
15. 1518 October 2013 |
SIGNIFICANT VARIANCE: PERFORMANCE OF DIAMOND MINING
PEER GROUP
Source: DMM Advisory Group Analysis, Yahoo Finance, HSBC
HSBC Global Diamond Mining Index performance vs peer group diamond miners
(mid price on 1/07/2010=100%)
60%
110%
160%
210%
260%
310%
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
HSBC Global Mining Diamonds Index
Petra Share Price Indexed
Dominion Share Price Indexed
Rockwell Share Price Indexed
Lucara Share Price Indexed
16. 1618 October 2013 |
FEW DIAMOND INVESTMENT OPTIONS: LARGE / LOW COST
MINES HARD TO ACCESS FOR INVESTORS
Source: DMM Advisory Group Analysis, De Beers
More than 70% of De Beers production is located on the lower half
of the cost curve
28
Higher margin assets
Jwaneng
GahchoKue(project)
Venetia
Orapa
Namdeboperations
Damtshaa
Snaplake
Cost/revenue
Cumulative revenue
Source: De Beers
Diamond mining project cost curve (2012) and projects are difficult to access
DeBeers
Limited access for investors to low cash cost projects: Either part of a diversified mining company or not publicly traded
Cumulative revenues
DeBeers
DeBeers
DeBeers
DeBeers
DeBeers
???
???
???
???
Cost/revenue
17. 1718 October 2013 |
DIAMOND INVESTMENTS:
ATTRACTIVE OPPORTUNITIES FOR SPECIFIC INVESTORS
• Diamond producer equities and investment grade diamonds offer attractive market fundamentals with significant
future supply-demand deficit
Positive market fundamentals
• Diamond investment is for long-term investors as short-term volatility might be difficult to judge without deep
insider knowledge
Diamond equity is for long-term investors
• Due-diligence and selection of right investment target is important when investing in diamond mining companies
as risks involved need to be judged realistically
Due-diligence is important for diamond equity investors
• Investment grade diamonds offer a good opportunity for diversified portfolios as alternative investment form
Investment grade diamonds offer an attractive alternative investment class
• Finding access to attractive diamond producers might require new investment solutions and external support
Finding access to investment opportunities is key
18. 1818 October 2013 |
SUCCESSFUL MARKET PARTICIPANTS EXIST:
CAREFUL SELECTION OF INVESTMENTS IS KEY
• Direct exposure to diamond market (production vs. exploration)
• Track record of delivery and success
• Size of resources
• Good position on the cost curve
• Industry and mining knowledge
• Strong management team
• Risk management
• Prudent financial management
• Consolidation opportunities
Recommended selection criteria for investment in diamond equities
August 2013: 10.3ct mackle; 37.8ct sawable;
13.6ct sawable (Saxendrift Extension)
June 2013: 25.2ct D colour (SHC), 56.8ct
makeable (Saxendrift)
September 2013: 126ct, 169ct makeable
(SHC)
19. 1918 October 2013 |
FEW EXPLORATION / DEVELOPMENT COMPANIES:
CONSOLIDATION POTENTIAL IN CANADA & SOUTHERN AFRICA
Alrosa
De Beers/MPV
Dianor
Dominion
Grizzly Discoveries
Kennady Diamonds
Metalex Ventures
North Arrow
Peregrine
Rio Tinto
Shore Gold
Stornoway
Alrosa
De Beers
Gem
Itm
Lucapa
Mwana
Sml
Transhex
Alrosa
Botswana Diamonds
Debswana
Gem Diamonds
Kimberley Diamond
Petra Diamonds
Tsodilo
Pangolin
CNK
Rio Tinto
De Beers
Lucara
Paragon
Firestone
Namakwa Diamonds
Karelian
Mantle
Sunrise
Res.
True North Gems
Stellar
Sunrise
Delrand
Blue Rock
Diamcor
Diamondcorp
Alrosa
Lukoil
Alrosa
• Numerous single project companies Ÿ Financing challenges
20. 2018 October 2013 |
CONCLUSION: THE INVESTMENT CASE FOR DIAMONDS
• Unprecedented changes and volatile short term development
Diamond industry has been difficult to judge
• Despite positive relative performance and industry outlook
Investors remain cautious of diamonds
• Consumers still have a strong appetite for diamonds
• Future demand drivers: High Net Worth Individuals, steady uptake for Chinese engagement rings
• Long term demand for polished and rough diamonds expected to rise, with some short term deviations
• Supply deficit anticipated after 2018: Anticipated decline in rough diamond supply
• Limited additional supply options from potential new projects and expansions: Insufficient to bridge supply deficit
• Recycling / lab-grown diamonds could reduce supply-demand gap, unlikely to halt positive long-term diamond outlook
Industry fundamentals
• Producers best positioned to capture impact of anticipated supply deficit
• Diamond mining stocks on average have been correlated with diversified mining & metals portfolios
• Significant variance between share price performance of individual diamond mining companies
• Few investment options for diamond investors: Low cash cost operators typically occur among few large mines or private
companies
Rough and polished diamond prices: Good performance relative to other key commodities
• Successful market participants exist but careful selection is key
Diamond investments can offer attractive opportunities for specific investors
21. 2118 October 2013 |
THANK YOU FOR YOUR ATTENTION: QUESTIONS?
116.3 carat sawable, recovered at Saxendrift plant from Saxendrift Extension gravels (August 2013)
22. 2218 October 2013 |
FOR FURTHER INFORMATION CONTACT:
Rockwell Diamonds Inc.
James Campbell
Chief Executive Officer
Email: jamesc@rockwelldiamonds.com
Tel: +27 (0)11 484 0830
WWW: rockwelldiamonds.com
DMM Advisory Group
Krisztina Kalman-Schueler
Managing Partner
Email: kks@dmmadvisorygroup.com
Tel: +44 (0) 208 832 3765
WWW: dmmadvisorygroup.com
Two identical internally flawless D-colour polished
diamonds weighing 35 carats each. Sold in December
2010 for $232,000 per carat. One of the pair was
polished from a 105ct Saxendrift stone.