The Synthetic Diamond Business Offers Investment Opportunities

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Includes: CTDT, SCIO
by: Tedra DeSue

Summary

The synthetic diamond business offers many investment opportunities.

Diamonds are not just a girl's best friend; manufacturers are using the synthetic products in industrial applications.

As the synthetic diamond business grows, the man-made business slips.

Diamond mining companies are a major supplier of rough diamonds. However, change is coming, with the influx of synthetic diamonds. Not only are large diamond mining companies seeing the potential of the synthetic diamond market, other companies that mine diamonds also are creating a vast potential for investors to get on the growing market.

Synthetic diamonds are usually priced cheaper than regular diamonds. Retailers can sell man-made gems at discounts of 30 percent to 40 percent, according to Bloomberg. The news magazine noted that one of the issues that has come up with synthetic diamonds is that makers of them have gotten very good over the years; they cannot be distinguished from the real thing. While the market is still small for synthetic diamonds, its growth has some diamond miners anxious.

Growth of the business

The global synthetic diamond market was valued at $15.7 billion in 2014 and is anticipated to reach $28.8 billion by 2023, expanding at a significant compound annual growth rate or CAGR between 2015 and 2023, according to a group called Transparency Market Research.

Lab-grown diamonds are expected to grow in production as mined diamonds fall, according to growth consulting firm Frost and Sullivan. It found that the production of gem-quality, lab-grown diamond is expected to grow to two million carats by 2018 from 360,000 carats last year.

Large-cap companies have more resources to make a difference in the synthetic diamond market. However, I found some of the smaller players are just as dedicated, making them good alternatives for investments for those who have the stomach to swallow the risks.

Small players making a difference

When I reviewed this market, I found that these diamonds are not just used in jewelry. They are also being used in industrial applications. This is the market that many of the smaller players are tapping. For example, a private company called Element Six is using the sedated diamonds in radiation detection devices. This can be used in hospitals for some of their medical devices. Also, they are using the synthetic diamonds for homeland security applications.

Scio Diamond Technology (OTCPK:SCIO) is one of the microcap companies that makes synthetic diamonds. Its market cap is around $20 million. It creates diamonds for jewelry and for industrial applications. It uses a patent-protected CVD process to produce its lab-grown diamonds. Like most companies that produce synthetic diamonds, the company produces its products where hard diamonds are used to cut, polish, mill and grind.

The company has extended a credit facility with Platinum Capital Partners, LP and it has signed a memo of understanding with Renaissance Diamonds Inc. for a joint venture to develop its products.

It scored an appearance on Time Warner News in January where officials discussed its CVD process. For this company, investors should know that its financials are not the strongest. It has limited funds in the treasury and mounting short-term debt.

Then there is Centaurus Technologies (OTCPK:CTDT), which has a patented technology that enables the production of synthetic diamonds.

With a market cap of around $40 million, this microcap stock has some advantages that make it worth some attention from investors.

For example, in November of last year, the company acquired new milling and crushing technology. The company notes that the technology will help it in its research and development benchmarks in milling, mining and other applications and processes. The company expects to generate $3 million in revenue from the new milling and crushing technology's acquisition in the first year of rollout after initial launch. The estimated delivery of the first units is this year.

Investors should recognize that this pink sheet is still in the development phase. Goldman Research noted that the company needs to demonstrate it can consistently and profitably mass produce artificial diamonds for industrial use. Furthermore, the company's time to become profitable could be impacted by other companies in the space; or simply said…competition.

Investing in diamonds

As noted by Diamonds.net, the traditional diamond trade needs to recognize lab-grown stones are a part of the market. After all, the industry stands to benefit from their growth as synthetics could serve as an effective and affordable entry point for younger consumers, who are eventually likely to upgrade to a natural, more expensive stone.

"The emergences of large format stores accompanied by a variety of collections under one roof are some of the factors influencing the rise in demand for diamonds. Some vendors are also introducing low-cost diamond jewelry for price-conscious customers," says a market player.

Diamond industry representatives are debating whether these syndicated stones market is a "game changer" in how colorless diamonds are sourced and priced.

As with any emerging market, I advise you take careful advice from a financial planner before taking the leap. Many of these companies are very small, not even trading on the major markets.

For those who do, be prepared to see these stocks trading at a premium to larger players in the space.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.