Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Paul Zimnisky, CEO PureFunds
Diamonds may be forever but their supply certainly isn’t. What happens when millions of new potential customers enter the diamond market while some of the world’s biggest mines close shop?
If you’re Paul Zimnisky, profit.
In 2012 Zimnisky launched GEMS, the world’s first ETF to exclusively invest in the diamond and gemstone industry. The CEO of PureFunds is convinced that we’re about to see a diamond supply crunch and demand boost as the rapidly-growing Asian middle classes enter the market and few new mining projects step in to replace expiring ones.
Citing a report by Bain & Co., Zimnisky says global demand is forecasted to grow by 5.1% on an annual basis over the next ten years while supply lags with only 2% growth.
The key lies in the East where for decades the global diamond industry was missing millions of customers in the form of Chinese brides getting married without diamond rings. Now, as the country adopts some Western traditions, more and more newly-weds are tying the knot with expensive rocks – a welcome phenomenon for the diamond industry whose “bread and butter” depends on these gem-quality stones, Zimnisky says.
According to a 2012 report by Bain & Co, China and India are expected to lead a 60% surge in diamond consumption by the end of this decade. The two countries are the world’s second and third largest diamond consumers respectively – the US still holds the number one spot.
Zimnisky also notes that it’s not just jewellery that’s fuelling the industry.
“Investment demand is coming from high-net-worth individuals primarily in Asia.”
But investment only represents about 1% of total diamond demand – compared to 40% for gold – “so there is definitely room for that number to grow,” says Zimnisky.
Some businesses are taking note. Two US companies, Index IQ and GemShares, have filed initial paperwork to set up physically backed diamond ETFs.
As for supply, there are few options when it comes to replacing existing production.
“Globally there are only six projects in development estimated to eventually produce in excess of 1 million carats a year,” says Zimnisky. “So, there is not a lot of new production coming online in the foreseeable future, and quite a few existing mines are approaching depletion levels.”
Gahcho Kue, the largest of the bunch, is expected to begin production in 2015 putting out 5 million carats per year. Other upcoming mines include Russia’s Botuobinskaya mine and Quebec’s Renard project.
Supply is relatively easy to predict because it takes about 10 years to take a project from discovery to production, explains Zimnisky. And while there are few new projects, the exploration scene looks even more barren.
“At the moment there is little indication that the future supply picture is going to change anytime soon, especially given that the pure grassroots diamond exploration business is virtually non-existent today,” says Zimnisky. “North Arrow Minerals (TSX-V:NAR) is one of the only public companies solely focused on diamond exploration.”
About Paul Zimnisky: Paul currently creates and develops new exchange-traded products as CEO of PureFunds. This past November, PureFunds launched 3 innovative ETFs, including the worlds first ETF to exclusively invest in the diamond and gemstone industry, traded on the NYSE Arca under the symbol GEMS. Prior to PureFunds, Paul worked as a buy-side equity analyst focused on the metals and mining space, and as an ETF arbitrage trader. Paul has a bachelor’s degree in finance from the University of Maryland’s Robert H. Smith School of Business.
5 Comments
Paul
What happens when we have another global economic “meltdown”? Last time investors sold platinum ETF’s to cover their losses / commitments which resulted in the Pt price being hammered. The same will happen with diamonds except they will battle to sell them. This is a luxury product not an industrial necessity!
Wayne D. Prentice, G.G.
Many will still prefer having physical possession over ETF and use tools like the DiamondMaster App (ios) which is the only resource that calculates every diamonds’ appreciation over the last year and 5 years for every classification, quality, shape, size and medium of exchange …11 currencies, gold’s moving average and SDR basket of currencies unit.
benjanow
It is always interesting to read comments or viewpoints generated by observers from the mining or investment sectors when addressing the diamond business. Diamonds, or more accurately gem quality diamonds, are an odd bird. De Beers, for decades, did a generally great job of promoting, building and protecting the image and value of diamonds. They did that over years when productions could easily overwhelm demand, something they carefully controlled. When they erred, as they did in the late 70’s and early 80’s, it quickly became apparent that this statue has clay feet.
Today, as the article points out, we see demand building while mine production is waning. So it is easy project that based on that, prices must rise. But many other factors are ignored in this assumption, most of which are peculiar to this business. To note only a few:
1. This industry has tens of thousands of dealers based all over the world. Maybe hundreds of thousands. Many are hoarding diamonds in the same belief as stated in the article – prices must rise! Meanwhile, the pipeline is stuffed with stocks that are not moving downstream and which represent many years of supply.
2. Retailers have long realized that the US public is a wonderful source of diamonds. Diamonds recycled very efficiently, and there is enough held by the public to be recycled over and over again for many years. And it where the big profits now lie for dealers and retailers.
3. Making any kind of comparison between diamond investment and precious metal investment is ludicrous. Precious metals, aside of being an established currency hedge, is instantly salable anywhere in the world at any moment for an internationally established price. The price of any one diamond (as they are all different) is argued over by seller and buyer, no two of which will agree exactly with any other two. The price is dependent on seller’s and buyer’s knowledge, need, mood, location, lighting, day of the week, and even hour of the day. Even a casual look at how diamonds are offered for sale on the Internet would show that diamonds with apparently identical characteristics and official grading reports, are offered at widely divergent prices. Diamond investment ETF’s will appeal to those who think diamonds are a reasonable hedge against investment, but the essential lack of liquidity will prevent those ETF’s from ever being more than a blip in the diamond world.
Much more can be said, including changing societal values that could radically alter how well diamonds will sell. Japan is a great example. But in general, any simplistic view that diamonds will act the same as commodities badly misunderstands what they are about.
Pete c
Uh, guys…. Diamonds have no value: http://www.huffingtonpost.com/rohin-dhar/diamonds-are-bullshit_b_3708562.html
Nick steel
This creation of an ETF sounds like just the next modern step in the diamond cartel’s scam they’ve been perpetuating since the 60’s. Remember… You can buy diamonds but they’re very difficult to sell and you’d likely get about 30% of what you paid. Do your research before falling for this ETF scam.