Diamonds Regain Their Sparkle for Miners on Rising Demand and Prices – by Alexis Flynn (Wall Street Journal – July 8, 2014)

Sector Now Delivering Some of the Healthiest Returns in the Mining World

LONDON—Diamonds, it turns out, may not be forever. There hasn’t been a major new diamond lode discovered for years. Along with rising demand from new consumers in the East, that is good for mining companies whose profits are rising at the most lucrative part of the business: the rock face.

The industry’s shifting dynamics have prompted a rethink by some the world’s biggest mining companies, including Rio Tinto and Anglo American.

For years, falling commodity prices and rising costs made many of them question whether it was worth staying in the diamond business. But now, diamonds have regained their sparkle.

“We expect the demand requirements to grow around 6% per annum for the course of the decade,” said Alan Davies, head of the diamond unit for Rio Tinto, the world’s third-largest diamond producer. “And when you look at the supply response there hasn’t been a major find brought on for a long time.”

Just 18 months ago, BHP Billiton and Rio Tinto each had their diamond units on the block. In 2012, BHP sold its Ekati mine in Canada to jewelry maker Harry Winston Co. for $500 million.

Rio Tinto, however, didn’t get a satisfactory offer, say bankers who advised the company. Instead, Rio hung on to its mines in Canada and Australia.

Now digging the stones out of the ground is the most profitable part of the diamond value chain. In 2012, rough diamond miners achieved average profit margins of between 16% and 20%, according to a study by Bain & Co.

The next highest margins—achieved through the sale of finished jewelry products by retailers such as Tiffany & Co. and Cartier—averaged between 11% and 14%.

For Anglo American and Rio Tinto, diamonds now deliver some of the healthiest returns. Last year, margins from Rio Tinto’s precious stones division were double those of aluminum, while the rate of return from Anglo American’s diamond unit was higher than core businesses such as platinum and coal.

“If you look at prices across the mining industry, diamonds stand apart with prices continuing to rise,” said René Medori, Anglo American’s Chief Financial Officer.

No major diamond finds have occurred since Rio Tinto’s 1997 discovery of three kimberlites—mineral-bearing igneous rock—at Murowa in southern Zimbabwe. Without further discoveries, world diamond supply could peak in 2018, according to Bain & Co.

Meanwhile, a newfound taste for diamonds as part of the betrothal process in China, India and Japan—once a purely Western phenomenon—has boosted demand. Last year, demand for diamond jewelry grew 18% in China, the world’s fastest-growing market.

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