19 June 2008

Diamond Mining Is Losing Its Shine

Buy Diamonds and Diamond Wedding Bands Now Before Prices Rise!

Diamonds may be forever. Diamond mining, maybe not.

With growth in diamond prices trailing far behind that of most commodities, some miners are turning their sights toward gold, iron ore, and phosphate instead of sparkle.

Flinders Diamonds, an Australian miner, recently reassessed its exploration areas and identified a target in western Australia for iron ore, prices of which have been soaring along with demand for steel. It changed its name to Flinders Mines Ltd. to reflect its exr panded focus. Its stocks soared upon the April announcement.

Last June, diamond miner Sierra Leone Diamond decided to change its name to African Minerals Ltd. to reflect its exploration of precious and base metals across the African continent. Bonaparte Diamond Mines of Australia just concluded a diamond joint venture in Namibia to focus instead on exploring a phosphate project there because "the economic return" from diamonds "doesn't warrant moving into the next phase," Michael Woodborne, the firm's managing director, said in a statement. Prices of phosphate, a key component in fertilizer, are up dramatically lately.

For miners, the opportunity, cost of investing time and shareholder money in diamonds is just part of the problem. On the demand side, diamond sales, at least in the U.S., have been struggling. Citing a sluggish U.S. market, which accounts for about 50% of the total, De Beers Group reported a 3.7% fall in revenue to $5.9 billion last year.

Compared to most commodities, diamond prices have been "extremely unexciting" over the past few years, says Charles Wyndham, founder of PolishedPrices.com, which keeps a wholesale diamond price index. This year, it is flat, and up 3.6% from a year earlier. Over the same time, S&P GSCI, a commodities benchmark, is up 37.6% and 73.5%, respectively.

The departure from diamond mining marks a reversal from several years ago. At least 60 new diamond-mining companies sprung up after diamond giant De Beers went private in 2001, estimates David Hargreaves, a mining and gemstone consultant to United Kingdombased broker Hoodless Brennan Ltd. Yet, some newcomers may be finding that diamond mining is a trying and costly endeavor. Even if you find a diamond mine, it may take seven to 10 years before it produces, Mr. Hargreaves says.

Diamond mining is viewed as the "worst kind of gambling," says Theo Botoulas, chief executive of BRC DiamondCore Ltd., a diamond miner in South Africa.

In January, Tahera Diamond Corp., a Canadian miner, ceased operations and filed for bankruptcy-courtprotection. "Not every diamond mine will be successful.lt's a very high-risk business," said Gareth Penny, De Beers's managing director.

Still, several players, like BRC, are keeping at it. They argue that long-term demand for diamonds world-wide is good, and prices of big, better-quality stones have risen rapidly. Instead of shunning the gem business, Canadian miner Aber Diamond Corp. took full ownership of Harry Winston Diamond Corp. and focused on high-end retail sales before it started trading under its new name on the New York Stock Exchange in November. The company reported a 10% increase in overall revenue for the first quarter because of strong sales growth in Asia and Europe, though its mining production fell 31%.

De Beers has said it expects demand from markets like China, India, the Middle East and Russia to grow. It has raised prices of rough diamonds by an average of 8.5% so far this year. De Beers has been aggressively investing in new mining projects, and it will bring four major projects into full production this year.

Rio Tinto PLC, which produced 16% of the world's rough diamonds by volume in 2007, estimates diamond prices to rise in response to "a sizable supply gap" this year and expects demand will outpace supply for the next decade. Meanwhile, Diapason Commodities Management, a U.K.-based company, is planning to launch a "diamond fund" soon, in the form of a listed investment firm whose portfolio will be polished diamonds.

"Mining is a long-term game," said Mr. Wyndham of PolishedPrices.com. "Those who are switching back and forth from one commodity to another usually won't succeed."

By: Carolyn Cui
Wall Street Journal