Diamond Resources Might Not Be Forever

RAPAPORT... While it's true that value comes from rarity, no naturalresource lasts forever, and the rare is becoming even rarer. Diamond productionis set to peak in 2019, after which it will begin a steady decline. De Beersestimates global output will fall by 1% to 2% a year until 2030, while some analystspredict as much as a 5% annual drop.Regions that have heavily dominated the trade over the lastfive decades are now reaching the end of the line, and new exploration projectsmay not be able to compensate fully for their loss. Rio Tinto's Australian asset, Argyle (pictured), is expected to closein 2020, while its Diavik deposit in Canada's Northwest Territories (NWT) has amine life through 2034. These resources are a drop in the bucket in terms oftheir contribution to Rio Tinto's finances, but the same can't be said fortheir impact on the industry. Argyle's 14 million-carat yearly production makesup around 10% of the world's total annual diamond output, and the mine is adominant player in the colored-diamond market. Other NWT assets, including Dominion's Ekati mine and thejoint Mountain Province-De Beers venture Gahcho Ku?(C), are also expected to runout around 2034. And while extensions have been discussed, they have yet tocome to fruition. A case in point is the Jay pipe expansion of Ekati, which hasbeen suspended several times while Dominion conducts viability testing. New horizons to exploreAs these old and loyal fields dry up, newer pastures aretaking their place. But newer doesn't always mean greener. Angola, adiamond-rich country, has long been a questionable prospect due to stringentrules that make it difficult for potential miners to invest in projects. TheCentral African Republic (CAR) only recently came into line with the KimberleyProcess, and in any case, its diamond reserves are not as great as othercountries'. Dmitry Amelkin, head of strategic projects and analytics forAlrosa, nonetheless thinks Angola and other, less-explored parts of Africa willhelp compensate for the decline in "great measure." "I think Angola is a standout...given the geological endowmentthat's in the country," says Kieron Hodgson, executive director of commoditiesand mining research for investment bank Panmure Gordon. "That will definitelybe attracting new capital, given the size of deposits...and the economic viabilityof those deposits." Hodgson also thinks the African nation of Lesotho could helpcounterbalance the deficit in other countries, as well as relatively unexploredregions of Russia. However, the shift won't happen immediately, nor will it bea simple endeavor. While almost all economically viable deposits can be mined,says Hodgson, the investment required to establish them can often exceed thereturn. "Mining in alluvial areas like Angola, Democratic Republicof Congo and CAR is a completely different game," says Peter Meeus, chairman ofthe World Diamond Mark and special government adviser to the CAR diamondindustry. "The sector stands for the largest changes to come in the nextdecade. At the same time, these procedures cost money and are not too easy toapply." Jean-Marc Lieberherr, CEO of the Diamond ProducersAssociation (DPA), agrees. "I think there is likely to be a shift toward newlocations," he says, but notes that "diamond exploration is very difficult, andthe 'easiest' locations have already been extensively explored. Now explorersare moving to places that are either physically more difficult - deeper or moreremote - or to places which have previously been inaccessible for politicalreasons but which are now opening up." Ripples through the pipelineBeyond the impact on miners, what does the potentialshortage mean for the industry as a whole - for diamond manufacturers andjewelers? What about for the average consumer? Will sourcing become moredifficult, and will prices inevitably rise? Experts seem to have mixedfeelings. While Hodgson doesn't fully believe in an imminent shortage,he concedes that "it's sort of an economics 101. There's a shortage potentiallyat certain price points, but in a different pricing arena, there may not be ashortage, so it's...in the eye of the beholder." Amelkin says the drop in production will lead to a shortage,one that will mean an increase in prices for rough, while Boris Sinitsyn - ametals and mining analyst with VTB Capital - says its biggest effect will be onthe end consumer, as the scarcity will surely push the price of diamond jewelryup. The real consequences won't be felt until retailers have totell consumers something isn't available, adds Meeus. At that moment, he says,"scarcity will become a reality, not a mere expectation," and that "shouldsupport price increases." Lieberherr thinks any price changes will be gradual as thediamond supply decreases, and therefore won't be as noticeable down the line.That said, he believes price inflation is good - not only for the industry, butfor the diamond-buying public. "An environment in which prices are rising modestly isbeneficial for the industry and for consumers alike," he says. "Slightly risingprices underscore the value proposition of diamonds." A boon to synthetics? One particularly timely question is the effect a diamondshortage will have on the synthetics industry. Will lab-grown stones gain astronger foothold in the wake of depleting natural supply and rising prices? In that regard, most of the experts agree thenatural-diamond trade has nothing to fear from its lab-created competitors. Atbest, they predict synthetics may take over the lower end of supply. "I do think...that synthetic production would displacematerial volumes at the lower end of the value chain, just simply on aneconomic basis," says Hodgson. Lieberherr feels synthetics have a place in the fashionjewelry market, as does Michael Minister, owner of Canada's Maple Leaf Diamonds- but "not for engagement or bridal," Minster says. Sinitsyn and Meeus also seelab-grown as a lower-end substitution or "niche" product, but not as an actualcompetitor, regardless of the supply. So what will actually happen as some of the world's biggestmines turn their lights out and shut their doors? "I think the sector is in a period of change," says Hodgson,"but it doesn't really know, in my view, what the change will be. I like tothink positively."This article was first published in the August 2018 issue of Rapaport Magazine.Image: Rio Tinto