Lukewarm investor sentiment for natural diamonds seems to contradict the stable demand and favourable supply forecasts for natural diamonds, US-based diamond analyst Paul Zimnisky notes in a statement released last week.
He recalls that during State-owned Russian diamond company Alrosa’s Capital Markets Day, on March 18, the company noted that the questions most frequently asked during one-on-one meetings with investors were related to the impact of laboratory-grown diamonds on the business.
Zimnisky adds that an analyst call, following Toronto-based diamond company Mountain Province Diamonds’ full-year results presentation last month, reaffirmed investors’ preoccupation with laboratory-grown diamonds, when a portfolio manager “posed more of a statement than a question in the Q&A portion . . . starkly reflecting a wider sentiment of institutional investors’ view of the diamond mining industry at the moment”.
He recalls that the portfolio manager “bluntly” stated that they believe laboratory-grown diamonds pose a threat to natural diamonds, adding that, the portfolio manager noted that, while they were appreciative of the attempts to “dance around the issue”, the diamond industry would have to accept the fact that technological improvements would continue and laboratory-grown diamonds would continue to be a “much larger factor”.
Zimnisky says “the frustration for any investor that has had exposure to the diamond space in recent years” is understandable, given the segment’s underperformance, adding that “diamond mining stocks have felt like a vortex that takes your money and does not give it back”.
However, he notes that it “is . . . a stretch too far” to believe investors’ sentiment signals a decline that implies the natural-diamond mining industry’s collapse.
Zimnisky says that, while laboratory-grown diamonds will “inevitably” take some market share from natural diamonds – just as moissanite and cubic zirconia did – the extent of that market share is yet to be determined and will most likely depend on the success of the marketing of both the laboratory-grown diamonds industry and the natural-diamonds industry. He adds that the latter “has a very resilient history”.
Traditionally, “natural diamonds have been the envy of the luxury industry”, Zimnisky states, noting that the penetration of diamonds is “unmatched”.
He cautions, however, that maintaining such an overwhelming market position is almost as difficult as building it, “especially in the post-De Beers monopoly era with the absence of the ‘A Diamond is Forever’ campaign.”
Zimnisky says, even if the challenge of maintaining market penetration in the diamond industry’s most developed markets has been partially offset by new growth in emerging markets – with the Indian and Chinese having the potential to eventually overtake the US in terms of size – the natural-diamond industry faces stiff competition.
Nevertheless, he believes that the natural- diamonds industry will persevere for the foreseeable future.
“Natural-diamond supply is estimated to come off this year and continue to incrementally decline through at least 2021, which should be supportive of diamond prices and, as a result, miners,” says Zimnisky.
Further, he notes that weaker prices over the last five years “have led to a natural paring of supply, which is approaching more normalised levels after reaching a post-global-financial-crisis high in 2017”.
Additionally, he points to a “significant amount of a multiyear inventory deleveraging” in the Indian midstream sector, which has resulted in inventories there approaching a normalised level as well.
“Despite various global macroeconomic concerns, global demand for natural diamonds appears to be relatively stable at the moment,” he adds, citing Tiffany & Co’s recently released sales guidance increasing at a “low-single-digit percentage” for the year ending January 31, 2020.
“Further, the largest jeweller in Greater China, Chow Tai Fook, opened a record number of new stores in the fiscal year ended March 31, 2018 – an undeniable bid of confidence in the growth potential of that market,” notes Zimnisky, adding that neither Tiffany nor Chow Tai Fook offers laboratory-grown diamonds.
He comments that, while investor sentiment drives equity valuations, the other driving factors are price and operations fundamentals.
“Seemingly stable global demand for natural diamonds and an apparent favourable supply picture should be supportive of diamond prices and the companies producing them, especially those with derisked mining operations and a manageable debt load,” he concludes.