dazzling diamonds: the business case for investing in diamonds
TRANSCRIPT
Diamond Market TrendsPortrait of the Diamond Industry
OpportunityCapturing Investment Momentum
InvestingIn Diamond Companies
AGENDA
Recent Diamond Market
• Structurally industry has settled
• Limited M&A activity
• 2015 was a tough year for diamond producers
• Rough diamond demand fell away significantly
• US$16bn rough diamond supply fell to US$13bn
• Differing views as to exactly why correction took place
• High rough prices
• Overhang of polished
• Middle market choked; no margins; reduced liquidity and bank finance
• Decline in polished diamond demand from emerging markets, particularly China and India
• Major producers suffered circa 30% drop in sales
• 15-20% drop in market rough prices
• Production curtailed, some mines on C&MNote: Tier 2 = RT, DDC & Catoca combined; Tier 3 = Petra, Gem, active new minesSource: Author’s research, public information
Key Rough Suppliers - SalesUS$bn
0
1
2
3
4
5
6
7
2007 2008 2009 2010 2011 2012 2013 2014 2015
De Beers
Tier 3
Tier 2
Alrosa
Price IndexRough Diamonds
• Pricing trend is upwards
• However volatility in market pricing is clear to see
• Prices fell 15-20% in 2015
• Creates instability and challenges for the trade
• Fragmented supply with differing sales models
• Increase in tenders and auction sales
• De Beers dropped prices -7% in January; raised prices +2-3% in April
• Rest of year predicted to remain stable
Diamond Price IndexIndex Jan. 2001 = 100
Rough Polished
Linear (Rough)
Source: DDA Trading, May 2016
Improving Diamond Performance
• 2016 has seen a much stronger H1 as restocking takes place
• “Normal” volumes being sold into the trade
• Jan-May 2016 DB & Alrosa sold $4bn+ into market (FY2015 $7.5bn)
• Jan-April 2016 +18% vs 2015; -13% vs 2014
• Fragile recovery, but a recovery
• DB adjusted prices 7% in Jan, but +2-3% in April
• Potential roadblock ahead H2 as fresh polished comes from factories
• No major pull of new polished demand
• All eyes on JCK show in Las Vegas
• India considered the bright hope for mid-term growth
0
2000
4000
6000
8000
De Beers - Annual SalesUS$m
2011 2012 2013 2014 2015
De Beers - Sight-by-Sight SalesUS$m
0
200
400
600
800
10 1 2 3 4
2015 2016
Source: Author’s research, public information
2016 Diamonds Dazzle the World
• Certainly not all bad news in the trade
• Strong demand for exceptional large stones and fancy colours
• Record prices achieved
• Public and media interest creating a significant halo effect
© Christie’s
Constellation813CTS, $63m+
Oppenheimer Blue14.62CTS, $58m
Lesedi La Rona1109CTS, $???m
ConsumerDemand
• Global DJ retail sales -2% (US$79bn)
• US market a bright spot; record US$39bn diamond jewellery sales
• Non-US markets saw decline in local currencies, further impacted by strong US dollar
• India remains a big hope for the industry
• China growth success story on hold for now
• New efforts to invigorate the market underway
-20%
-10%
0%
10% US+5%
China-1%
India-9% Japan
-13%
M. East/Gulf-3%
Diamond Jewellery Demand by MarketPerformance 2015 vs 2014, based on US$
US45%
Rest of the world19%
Gulf8%
Japan4%
India7%
China(incl. Hong Kong and Macau)
17%
Global Sales2015 – by value
Source: De Beers Group - Market Insight Report, April 2016; Figures based on US$ at Polished Wholesale Prices
SupplyLandscape
• Widely projected peak in supply by 2021
• Followed by gradual supply decline
• Ageing mines will close
• Argyle - 20mcts p.a. scheduled to close by 2020
• Recent large Zimbabwe production has reduced significantly
• Limited new mine potential
• Exploration budgets/activity have been reduced
• Few new discoveries reported - Angola
• Very long-lead time to production
• Not all discoveries will lead to production
Rough Diamond - Supply2008 – 2030 (base scenario)
Millions of carats
Note: Smaller players are Dominion Diamond, BHP Billiton for 2008-2012, Petra Diamonds, Gem Diamonds and CatocaSource: Bain & Company – The Global Diamond Industry 2015
Forecast
2009 2011 2013 2029F
180
150
120
90
60
30
0
2023F 2025F 2027F2015E 2017F 2021F
New mines
Other mines
Smaller players
Rio Tinto
De Beers
ALROSA
2019F
Supply demand gapThe Opportunity
• Demand will continue to grow, despite bumps in the road
• Middle-class development in China & India alone will drive significant demand growth
• In next 15 years, China (200+m) & India (100+m) new middle-class households
• On top of this - mature, robust markets such as the US will continue to perform
• Not all diamond development projects will come into production
• Potential for significant price growth
• Need to capture the imagination of the Millennials and beyond
• BUT there are clear threats……
Rough Diamond - Supply and Demand2000 – 2030 (2015 prices)
+/- 2bncts known reserves
2001 2007 2011 2015E 2019F 2023F 2027F 2030F
Low demand
Base demand
Base Production
Stable Production
$ billions
16 years’ productionat current levels
Source: Bain & Company – The Global Diamond Industry 2015
Supply demand gapThe Opportunity
• Lab-grown diamonds are here and growing
• Swarovski has launched recently a Lab-created diamond jewellery brand
• Not a current threat to larger diamonds
• Lack of generic advertising has hurt natural diamonds
• DPA formed by 7 leading producers to maintain consumer confidence and drive future demand
• Launch of first marketing campaign at JCK in June
• Targeting Millennials to regain lost ground
• Need to position for future 2-tier retail environment
• US - Recycling Diamonds – De Beers/IIDV
Supply demand gapRisks
Investingin the Diamond Industry 1/2
• Mining stocks and indices have had a torrid time
• Diamond industry is not immune
• Producer performance has not been as good as expected, with one notable exception
• Exploration funding has been difficult
• Market has strengthened in 2016
• Better results expected across the board
• Despite market and price volatility diamonds have outperformed other commodities
• Opaque trade changing
• Both 2 main producers are becoming increasingly transparent
• Price growth should drive company values
Indices EvolutionAs of January 2012 — 100 = January 2010
Price Indices for Diamonds and Other Commodities100 = January 2010
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
- Rough price - Polished price - Gold Price - Commodity Price (non-fuel) - Metals
Source: Author’s research, Google Finance, Indexmundi, S&P, DDA Trading
0%
50%
100%
150%
200%
250%
300%
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
S&P GlobalMining
Rio Tinto share price
S&P/TSX Capped Diversities Metals & Mining
AlrosaShare Price
S&P 500
Investingin the Diamond Industry 2/2
• Consolidation opportunities across the pipeline
• Highest profit pool in mining and rough sales
• Investment-grade diamonds strong
• Explorers – high risk; long-lead time to production
• Consider geographic logic – Africa, Canada
• Upstream investment by retail - Tiffany
• Limited options; possible IPOs (De Beers, Rio Tinto Diamonds)
Industry Player ConsolidationA view – producers, current
10,000
10,000
M Cap (US$)
Annual RevenueUS$m
1,000
100
10
10 100 1,0000
Diamcor
DiamondCorp
Rockwell
Transhex
Firestone
Gem
Rio Tinto Diamonds
Dominion
Lucara
Mountain Province
Alrosa
De Beers
Petra
Kimberley
Lucapa
Source: Author’s research, public information
Profit Pools2015
Mining/Rough Sales Trading/Cutting/Jewellery Retail
18 – 22%
0 – 5%
4 – 11%
0
10
20
30
CONCLUSION
Big growth opportunity is coming
Supply-Demand gap coming next decade
US & Emerging Markets
Rough price growth
Threats will need to be mitigatedLab-grown Diamonds
Liquidity issues
Recycling Diamonds
Work underway to recapture growth initiative
Diamond Producers Association
Consumer Confidence programmes
Consolidation opportunities existUpstream
Retail
Compelling investment case
INDUSTRY FUNDAMENTALS REMAIN STRONG