Matthew O'Keefe, vice president and senior analyst with Dundee Capital Markets, gives his views on investing in diamond as opposed to gold equities, and looks at two undervalued diamond producers and some developers to keep on your radar.
The first and most important difference between gold and diamond producers that investors should know is the respective drivers of prices: namely, diamonds are much more of a consumer product. Gold prices are largely driven by currency exchange rates and the safe haven/investment demand, whereas diamond prices are about supply and demand and global economic growth. Diamonds are a luxury good that people buy in a consumer-driven economy.
Furthermore, diamond deposits require "an order of magnitude" greater study than gold deposits in order to properly determine grade, so there tends to be higher risk on the exploration side, but once having properly defining the resource, it is generally pretty sound.
Concerning specific companies, O'Keefe identifies two undervalued miners in Dominion Diamonds and Lucara.
Dominon (Canada) is the established producer with two mines, and while shares have sold off quite a bit in the last six months, based largely on diamond price headwinds, he see an opportunity because Dominion is bringing on a high-grade pipe called Misery in 2016, and its Jay project will add 10 years to the mine life at Ekati and should solidify the longer-term sustainability of the company.
Lucara is a single asset producer in Botswana that doesn't produce a lot of diamonds, but it produces some of the highest-quality diamonds in the world. While small, its high margins insulate the company from price fluctuations in the greater diamond market.
Two more names to remember are Mountain Province Diamonds and Stornoway Diamond Corp. Stornoway's 100%-owned Renard project is in Québec, will be be a large-stone producer and is fully funded. MPD owns a 49% interest in the Gahcho Kué mine in the NWT. The fairly large mine is a joint venture with De Beers, the operator and 51% owner,s o investors who want the comfort of De Beers as a partner may tend to go for Mountain Province.
Click here for Matt O'Keefe's analysis.
Source: The Diamond Loupe and Streetwise Reports (Gold Report)