From Gem Diamonds to Petra Diamonds: Why are Diamond Miners so unloved by investors?

[Editor's Note: Originally published Nov. 19, 2010] – News that Sotheby’s, Geneva, this week set a world auction record for any diamond and any jewel raises questions over why diamond miners seem so unloved by investors. The answer, in a nutshell, is that they’re yet to fully recover from the cataclysmic market events of 2008. The signs are there, but it seems that investors need more convincing.

This good news is that the Sotheby’s record suggests that demand for rare diamonds is as good as ever; this jewel ranks among the top 2% in rarity in the history of mined diamonds. The auctioneers sold a single, cut and polished, pink diamond weighing 24.78 carats for CHF 45.4m (about USD 46.2m).

Just where the stone was mined was not mentioned: it was previously seen on the market 60 years ago, in the hands of celebrity jeweler Harry Winston. The new owner, Laurence Graff, surprisingly named the stone “The Graff Pink”, and gushed that “It is the most fabulous diamond I’ve seen in the history of my career and I’m delighted to have bought it.”

The warm and fuzzy headlines generated by the Sotheby’s sale contrasts sharply with the mysterious journeys of the world’s diamond miners over the past few years.

De Beers, still the world’s biggest digger of rough diamonds, faced a March 2010 recapitalisation of USD 1bn, mainly to repair a somewhat battered balance sheet. De Beers’s sales collapsed from USD 6.9bn in 2008 to USD 3.8bn in 2009, in the wake of well known global events. The group was forced to rationalize in all directions: output was slashed, some mines were closed, others sold, and many jobs fell by the wayside.

Sales by De Beers soared to USD 3bn during the first half of 2010, from USD 1.7bn for the same period in 2009. Perhaps most important of all, De Beers produced positive free cash flow (operating cash flow, less capital expenditure) in the first six months of 2010, to the tune of USD 621m.