Emirati investors find gem in Lesotho diamond industry
CAPE TOWN // Diamonds it turns out, are not forever — at least not when it comes to supply.
Declining deposits present a looming shortage but also an opportunity for investors.
Although the wealthy have traditionally collected precious stones, diamonds have not been part of a formal portfolio of value, such as gold, cash and equities. However this may change as natural stones become harder to find, something on which a UK company with Emirati backing is hoping to capitalise.
AIM-listed Paragon Diamonds is developing the sizeable Lemphane Mine and has recently agreed to acquire another sizeable mine, the Mothae Mine, both in the tiny mountain kingdom of Lesotho, in southern Africa. In January, Paragon announced it had teamed up with International Triangle General Trading, a Dubai-based firm, for a debt and equity package of up to US$28 million.
“These investors are connected to the royal families of the UAE and Saudi Arabia,” says Hugo Philion, a member of the management team at Paragon, although he declines to name them. “Through them, we will be talking to some very interesting people who are interested in acquiring our sizeable supply of large investment grade diamonds direct from the mine, and intent on making Dubai the number one Diamond centre in the world.”
Strong demand and a decline in world production will kindle interest in gems as a long-term asset that grows in value over time.
“We see a shift into diamonds both as an asset class and a store of value as a currency surrogate, especially for the ultra-wealthy, as both geopolitics and the global monetary system becomes more unstable with persistent quantitative easing,” Mr Philion says.
Most of the world’s diamonds were formed deep in the earth millions of years ago — up to 300 kilometres down, in some instances. They are usually brought to the surface by volcanic activity — in pipes of larva. These pipes harden and become the diamond-bearing kimberlites that miners seek.
However, the pipes are exceedingly rare. “There’s been no major kimberlite discovery in 25 years,” says Mr Philion.
According to the financial management firm Bain & Co, natural diamond production is set to decline from 2019 as existing mining assets begin to deplete.
“Demand, however, is projected to maintain a robust growth rate, thanks to strong fundamentals such as expanding wealth and a growing middle class in developed and developing countries alike,” reads the Bain & Co’s report, prepared for the Antwerp World Diamond Centre last year.
A growing middle class in Latin America, Africa, and Russia and Asian countries, where consumers show increased interest in diamond engagement and wedding jewellery, will add to demand for gems, Bain says.
Artificial diamonds can be manufactured, and some are extremely good. However, with the right equipment, fakes can easily be identified and just as with high-quality copies of a treasured artwork, to collectors and investors they are worthless.
Even when talking solely of real gem stones, there are diamonds and there are diamonds. It is only the best-quality sparklers that will make the investment grade — and therefore they are the most expensive, says Paul Zimnisky, a New York-based independent diamond analyst and consultant.
“On a real basis adjusted for inflation, the performance of most diamonds has really not been that impressive compared to other asset classes,” Mr Zimnisky notes. “Only the highest quality, rarest, most desired diamonds have outperformed: the blues; the pinks; the reds; and larger flawless whites.
“With the price point of these diamonds starting in the high-tens and hundreds-of-thousands of dollars, the investor base is limited.”
Currently all it takes is a mouse-click for a retail investor to access gold through an exchange traded fund. Diamonds, though, are more difficult to acquire as currently there are no similar investment instruments for them. Instead, purchases of physical stones must be made from dealers or specialised retailers.
This is where the Emirati-backed Lesotho project aims to benefit. “Paragon will publicise their production in Dubai to investors wishing to acquire diamonds at prices more related to the cost of production and thus more transparent than in places like Antwerp, 49th St New York and Hatton Garden in London,” says Mr Philion.
There’s also a growing market for diamond bullions — sealed cards that contain investment grade stones. These can be bought for as little as US$100 — but others will go for hundreds of thousands of dollars, depending on total carat starting at 0.5 and upwards, and quality, says the online dealer wholesalecoinsdirect.com.
“The diamonds are sealed inside a NDX Diamond Certicard, which protects the stones and guarantees their authenticity and all-important 4 C’s [colour, cut, clarity, carat],” it says on its website.
“It’s the easiest way to get in the diamond business. Total carat weight [TCW] is rounded to the nearest digit and the exact number of stones in each card may be slightly more or less than indicated, based on the precise weight of each stone.
“TCW listed on each card is honoured when selling back.”
However, until diamonds can be bought with the ease of other investment commodities, they are unlikely to become part of the average portfolio. There is talk that the Singapore Diamond Investment Exchange is considering launching a regulated electronic exchange but until it does, it will be left to the ultra-rich to pursue high-value gems themselves.
“For the foreseeable future, I see the appeal of diamonds as an investment limited to high-net-worth individuals, those looking to store value, using diamonds as an additional portfolio diversification tool, with the added benefit being the very high value-to-weight ratio diamonds provide,” Mr Zimnisky adds.
Still, the mere fact that interest has been sparked in investment-grade stones is good news for emerging gem markets such as Dubai.
The emirate has indicated it wants to take on Antwerp as a diamond market, pushing to be the hub of choice for Middle East and Asian buyers. Singapore is another contender for regional diamond dealing.
As things stand now, Dubai has an edge over rivals. It has money and is home to many high-net-worth individuals. Antwerp is making heavy weather of competing at the moment, as credit to the industry has dried up following years of volatility in the diamond market.
The UAE’s Emirates NBD, Mashreqbank, and National Bank of Fujairah stepped in last year to begin financing diamond cutters, polishers and traders operating on the Dubai Diamond Exchange, according to Bloomberg. They began the funding after the Antwerp Diamond Bank, the go-to funder for almost a century, closed its global operations last year. In 2014 Dubai traded $25 billion in diamonds, up from a negligible $5 million in 2001, according Dubai Diamond Exchange figures.
With care Dubai can assume the role that the Belgian city has played in the industry, while at the same time developing a new asset class for ultra-wealthy investors. What remains is to avoid obvious missteps, such as allowing conflict diamonds — those illegally mined, or sold to finance violence — to slip in, although there are no major conflicts occurring in big diamond areas in Africa at the moment.
“Having strict guidelines in place to only allow the trade and manufacturing of ethically sourced stones is imperative for the region to succeed longer term,” Mr Zimnisky concludes.
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Updated: May 19, 2015 04:00 AM