"Diamond demand exceeds supply but many juniors still suffering" (Source: Mineweb)

While the long term outlook for diamond mining is good, short term difficulties, not least in funding exploration, may make life difficult for some of the smaller players in the sector.

Author: Lawrence Williams
Posted: Wednesday , 30 Jan 2008

LONDON -

In his summary of the past year's activity in the diamond sector and his predictions for the year ahead, David Hargreaves, consultant mining and gemstones specialist for Hoodless Brennan, speaking at Mining Journal's 20:20 Diamond Day reckoned that diamond junior explorers "didn't have much to smile about". While prices have been firmer and the long term outlook looks very positive he feels that diamond explorers without production at present or in the immediate future will continue to find things tough going in the year ahead.

Over the years the market in diamonds has been relatively stable. Last year increase in supply was roughly matched by demand, but even so stockpiles are at historically low levels. But a fall-off in demand in the US, brought on by the current economic woes, left polished inventories in the jewellery sector higher. With the US accounting for around 50 percent of the market, the country's economy is extremely relevant to the current demand situation. Longer term though, rapidly growing economies like those of China and India which currently have a very small per capita diamond offtake, are likely to play an ever increasing role in the sector - but perhaps this won't really impact for a few years yet.

Meanwhile, Hargreaves believes, there are too many diamond mining juniors coming to the market with too little money and he feels a number of these will not survive the year.

Overall though, the established diamond miners are seeing production fall off as mines mature and start having to move from being big open pit operations to underground mines where the economics are different and overall production tends to reduce. The decline in production from the big mines is not yet being offset by large new diamond mines being brought into production and the general consensus is that the demand to supply gap will continue to increase in the next few years.

Looking at specific countries, Australia looks to be shedding about 25 percent of its annual output, Russia is struggling to maintain reserves, while much of Africa with key diamond producers Sierra Leone, Angola, Central African Republic, Liberia and the DRC all have inherent political and logistical problems which make diamond mining fraught with uncertainty, although there are indications that some of these may at least now be moving in the right direction.

South Africa has come up with some surprises though. De Beers has closed many of its older operations which might have led to a big production decline, but many of these have been snapped up by enterprising smaller mining companies which could lead to the country not only maintaining production, but increasing it.

Canada has Snap Lake and Victor coming on stream which should help it maintain its position in the production league table while Namibia is the scene of increasing activity as is Lesotho and potential is also being shown by increasing activity in Tanzania while there are interesting prospects in Finland adjacent to some of the largest Russian mines and in the same geological structures.

Because the diamond trade has been such a well controlled market over the years, t has not been subject to the peaks and troughs of the base and precious metals sectors and at the moment a steady rise in prices is not enough to make it as attractive to investors as other mined commodities, although the risks are probably lower too,

In the junior sector - where as one of the other presenters, Stephen Grimmer of Karelian Diamonds, which is working on some major kimberlites in Finland pointed out, the risks may be great, but the rewards from picking a good development can be great - Hargreaves reckons that the current financial squeeze could find second and third round funding difficult, if not impossible. "Those with production and cashflow will find it easier to raise finance for expansion or acquisition, a trend now developing. But it puts the conglomerates and the majors in the driving seat" says Hargreaves.

So saying there were some exciting presentations from some of the smaller mining companies presenting at the Diamond Day. African Diamonds and Firestone Diamonds both have very well advanced projects in Botswana where history has shown that there is a much higher success rate in finding economic kimberlites than in many other areas. In both cases some of their projects are joint ventured with De Beers which gives them a little more financial clout, and in its AK6 diamond pipe the former has what wll probably prove to be the next big Botswana diamond mine (owned 66% by De Beers though). Diamond Corp and Rockwell Diamonds both have their major operations in South Africa, with the former already in production at the Lace Mine, working tailings, but developing an underground operation too. Kopane Diamonds is in Lesotho working the Liqhobong pipe and again development is well advanced and here there is the bg added incentive of turning up bonanza stones, which command a huge premium per carat price.

Overall the diamond sector is in a situation where, as Hargreaves says, "Short term uncertainty conflicts with long term demand". However he also points out that premium value diamonds as gemstones are "wanted not needed" and thus demand is prone to the ups and downs in the world economy. Overall though, the long term demand to supply scenario looks very positive for the diamond sector, but ‘jam tomorrow' does not necessarily make for the best investment policy.