Allan Hochreiter, a boutique corporate finance advisory company, says diamond supply will decline over the next decade as mines “go deeper and underground”.
Presenting a paper recently at the Botswana Resource Sector Conference, the company’s founder James Allan said although Marange diamond fields, in Zimbabwe was touted by some as the major diamond discovery in the 21st century, there had not been any new significant discoveries of diamond deposits for some time.
He said the debilitating effects of the global economic downturn had also forced several miners to slash their production levels, and the increase seen in output of late, as most companies resume production, would likely last till 2013.
Allan was not the only one projecting an era of depressed diamond output.
Petra Diamonds said that the global diamond production was expected to remain relatively flat, unless there are any new major discoveries, whereas demand would continue to rise.
It said mine supply had reduced as existing reserves were depleted and the only two stockpiles of any consequence, Russia and De Beers, had also been largely eroded.
Petra noted that in spite of the growth in exploration expenditure worldwide prior to the 2008-2009 cutbacks, there had been no major discoveries since the Ekati and Diavik mines in Canada in the early 1990s.
“Structural constraints in the diamond mining industry, combined with a steadily declining mineral reserve base and a continued lack of major new discoveries, continue to hamper the prospects of further supply growth,” it said.
The miner said finding economic kimberlites was also difficult with less than 1 percent of all orebodies discovered being brought into production.
Petra said there was about 30 major diamond mines globally, and of the annual $12 billion world diamond production, only 13 mines produced $300 million or more each.
“On the supply side, the only significant new mines coming into production recently …are De Beers’ Snap Lake and Victor operations in Canada and the AK6 kimberlite in Botswana,” it said.
“Snap Lake and Victor will add some 2 million carats to world supply, while AK6’s production should be around 900,000 carats.”
Petra said in a global supply of $12 billion, this was no great deal, particularly as Diavik, Ekati, Argyle, Venetia and some of De Beers’ older mines would be slowing.
Allan projected that this year’s global diamond output would go up to 124 million carats.
Botswana and the Democratic Republic of Congo (DRC) would each contribute 21 percent of the projected total diamond output this year, he said.
Russia, he said, would contribute 17 percent, while Canada would produce 10 percent of the total output.
Angola and Australia would both contribute 9 percent, while South Africa would follow with 8 percent, he said, adding that Namibia was expected to produce a mere 2 percent of the world’s diamond output.
Allan, however, said a decline in diamond out would reach its peak in 2030 and the resulting deficit would feed into price increases.
James projected that diamond prices would increase by over 10 percent per annum till 2020.
His figures, however, conflicted with the ones given recently by DeBeers’ executive director Stephen Lussier.
He said that diamond prices were now above pre-crisis levels after a 35 percent to 40 percent rise so far this year, buoyed by increased scarcity and an emerging role as an investment.
"Diamonds are more scarce than before the crisis. And there are three markets where demand is very strong: China, India and the United States," he said.
He said the U.S still represented 40 percent of global demand, adding that Americans had rediscovered diamonds as a form of diversification investment.
Allan was spot on in his presentation when he noted that although there had been a strong demand of gems from China and India of late, one cannot afford to write-off the U.S as the world’s largest consumer of diamonds.
Polished diamond imports into the U.S. were said to have increased 59 percent year-on-year (y-o-y) to $2.52 billion last May.
The volume of polished diamond imports also increased 31 percent y-o-y to 1.48 million carats, while its rough diamond imports improved in the month by 15 percent to $70 million.
Already companies are going deeper and underground as Allan noted.
Reports recently noted that Russia's state-owned diamond producer, Alrosa was planning to spend over $250 million on underground diamond mines in 2011.
De Beers, which Allan said was battling to increase its production to “match” demand but failing to do so, currently had two underground mines, Finsch in South Africa and Snap Lake, in Canada.
De Beers said earlier this year that it had approved the next stage of a feasibility study on the underground expansion of Venetia mine in South Africa.
The underground expansion would increase Venetia’s mine life to 2046, from 2021.
Debswana, the mining joint venture between De Beers and Botswana, also launched launched the cut-8 project at the Jwaneng mine last year.
The cut-8 project was expected to extend operations at Jwaneng by eight years to 2025 and ensure an additional 102 million carats from the mine.
In Namibia, there had also been talk of offshore mining as the future of the diamond industry in the country, as land operations get depleted.
This saw Windhoek pushing to gain an equal stake in De Beers Marine Namibia.
This push paid dividend recently, as De Beers yielded to demands from the Namibian go0vernment to have its exposure in the diamond marine firm boosted from 15 percent to 50 percent.
Previously De Beers Marine Namibia was previously owned by De Beers (70 percent) and Namdeb (30 percent).
Namdeb was a 50/50 partnership between De Beers and the Namibian government.
Several examples can be cited that shows how mining companies are battling to boost output in the absence of new major discoveries and as existing reserves dwindle.
The industry watches with a baited breath if there would be any new discoveries, but as they wait, diamond prices will surely continue on an upward trajectory path.
Mathew Nyaungwa, Rough&Polished
