SMALL CAP IDEA: Will diamond costs bounce again this 12 months?

Are diamonds yesterday’s standing image, or can we anticipate a bullish rebound following the bruising worth shock witnessed in 2023?

That’s a tricky query to reply, however in response to the higher echelons of the diamond-mining business, there’s trigger for optimism.

Take De Beers, the world’s largest miner of those treasured – and sometimes controversial – carbon constructions.

With pure diamond costs holding their floor towards lab-grown alternate options, De Beers sparked hope going into 2024 following the disappointing 2023.

‘We see 2024 as a 12 months of restoration,’ De Beers’ chief government Al Cook just lately stated in a Bloomberg TV interview, though ‘we anticipate that upturn in diamond demand to be gradual relatively than sudden’.

Recovery: Are diamonds yesterday’s standing image, or can we anticipate a bullish rebound following the bruising worth shock witnessed in 2023?

He agreed that 2023 ‘was a really difficult 12 months for the diamond business’.

Lower demand was pushed by a mixture of a fall in financial progress, a lag in ‘engagement charges’ within the US and China, and encroachment into the sector by lab-grown diamonds.

However, Cook sees much less competitors from lab-grown diamonds as standing symbols in 2024, given their costs have fallen by greater than 90 per cent in simply two years.

‘Customers clearly see now that pure diamonds and lab-grown diamonds are two totally various things,’ he commented.

As John Teeling, chairman of AIM-listed diamond explorer Botswana Diamonds plc put it: ‘A Ferrari and a Ford Mondeo are each good automobiles however that is the one commonality they share.’

According to StoneAlgo’s lab-grown diamond worth tracker, the typical worth of a one-carat lab-grown diamond fell over 37 per cent previously 12 months alone, from greater than $1,200 in February 2023 to round $750 at this time.

In comparability, pure diamonds fell lower than 19 per cent, from greater than $5,000 for a one-carat diamond in February 2023 to round $4,100 at this time.

‘The lab-grown diamond market is topic to the identical provide/demand imbalances that have an effect on all markets,’ stated StoneAlgo.

‘Lab-grown diamond costs are primarily affected by declining prices for rising and manufacturing lab diamonds, elevated competitors from suppliers, and elevated competitors from jewellers which has resulted in decrease revenue margins on the retailer degree.’

StoneAlgo stated it’s unclear whether or not lab-grown diamond costs will cease falling because the know-how for rising diamonds continues to grow to be cheaper and extra out there, which is driving up competitors and driving down lab-grown diamond costs.

Furthermore, lab-grown diamonds supply little in the best way of worth retention and resale worth in comparison with their pure alternate options.

Even so, De Beers, because the world’s largest diamond miner, is clearly below pricing stress for one cause or one other.

In its first sale of 2024, the group reduce costs by 10 per cent in an try to stimulate demand.

In essence, the pure diamond business is struggling the identical destiny as different discretionary objects, with costs overcorrecting steeply following record-breaking luxurious items demand within the Covid-19 lockdown period.

Yet indicators of a diamond restoration are rising.

De Beers’ tough diamond gross sales of $370million for Cycle 1 (representing gross sales between 19 December 2023 and 30 January 2024) elevated 170 per cent sequentially because of US vacation demand and the resumption of gross sales in India.

You’d be unsurprised to listen to that market valuations within the small-cap area are low proper now.

Botswana Diamonds is down 60 per cent 12 months on 12 months at 0.45p, whereas production-stage gamers Petra Diamonds and Gem Diamonds are down 40 per cent to 46.2p and 70 per cent to 9.98p respectively.

Speaking on the state of the diamond business, Petra’s chief government Richard Duffy acknowledged: ‘While we’re seeing encouraging indications of worth restoration and a few stabilisation within the tough diamond market, following actions taken by each producers and the mid-stream, we proceed to undertake a cautious strategy to the market within the close to time period.’

Sparking an identical tone, Gem Diamonds noticed: ‘The world tough diamond market continued to expertise downward stress in fourth quarter 2023.’

‘There is cautious optimism for 2024 (and) any upswing will remodel sentiment,’ Teeling informed buyers in December.

Recovery is just not going to be simple. The funding crunch means explorers are discovering it tougher to discover, whereas producers proceed to battle worth compression.

But when you share a way of optimism that ‘diamond earnings have troughed’, as Jefferies analysts just lately acknowledged, then shopping for a stake within the business has not been this low-cost for a really very long time.