cHQ: How does the Popigai crater and other supply from Russia impact diamond prices?
PZ: It’s funny how the Popigai crater headline got so much publicity last year, but no one has heard any developments since. My understanding is that there are diamonds there, but they are of very low quality, so low quality that it’s not even economic to mine them. Generally speaking, diamonds fall into two categories, gem-quality and industrial-quality. Diamond mines produce both qualities of diamonds, but without gem-quality diamonds a mine is not economic. Almost all industrial quality diamonds are more economic to produce synthetically than via mining.
That said, Russia probably has the largest gem-quality diamond reserve on the planet in the Sakha Republic. Sakha, also referred to as Yakutia, is an autonomous republic in Northeast Russia, bordering the Arctic Circle. Almost all of Russia’s diamond production is owned by the state diamond company Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS). ALROSA has 9 primary diamond mines, 10 alluvial mines, and 2 mines in development. In 2012 Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS) mined 26% of the world’s diamond supply (De Beers mined 22%). Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS) has a very small publicly traded free-stock float, which trades very thinly on the Moscow Exchange, but for years Russia has expressed interest in selling a portion of the company through an IPO. Most recently in May, Aktsionernaya kompaniya ALROSA ZAO (MCX:ALRS) publicly disclosed a planned share sale of up to 14% of the company in late fall of this year.
cHQ: How can investors make an allocation to diamonds?
PZ: Physical diamonds have traditionally been difficult to invest in because they lack “fungibility,” meaning they all have unique characteristics – thus there is no futures exchange for diamonds. So the expertise required to buy physical diamonds, combined with a lack of pricing and liquidity, has really limited the number of investors. That said, the very highest quality, rarest diamonds have been a good investment, and I would say the returns can be equated to that of rare art work or fine vintage sports cars.
As far as investing in engagement-ring-quality gems, these diamonds are the industry’s bread and butter, and I think the best way for an investor to play this is via the stocks of the companies in the industry. This is why last November at PureFunds, we launched the PureFunds ISE Diamond/Gemstone ETF (GEMS). The fund currently holds 26 stocks, 22 of which are traded outside of the U.S., representing all aspects of the diamond and gemstone industry. We believe that as the diamond supply/demand story plays out, these companies will benefit.
cHQ: What are the benefits of holding diamonds and other gems in your portfolio?
PZ: The rapidly growing middle-class in Asia has adopted the tradition of gifting diamond engagement rings. This is a brand new trend, and a driver of significant new demand for the industry. So I think when you look at this new demand driver with a forecast of minimal new diamond supply, you get a really nice fundamental scenario that is supportive of the industry.
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Disclosure: No positions at time of writing.
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