Everyone is talking about gold and silver these days, but nobody talks about diamonds. Let's have a little peek inside this sector.
There are many types of diamonds in different colors and different grades. The higher the grade, the more precious the gem is. Aside from being pretty, diamonds can also be used in industrial applications (see Figure 1).
|Figure 1: Diamonds in Industrial Applications|
The year 2012 marks a major inflection point in the diamond market. From 2012 onward we will start to see diamond prices surge as the supply/demand gap starts to widen. Demand will keep growing while supply will diminish.
Let's take a look at the demand part of the equation. The largest diamond market is to be found in the developed world, as Asian/emerging markets only have a 10%-30% stake in this market (see Figure 2). As emerging markets start to develop their industries, demand is going to keep growing in countries like China and India, while we won't have any new and significant discoveries. In fact, when looking at the supply part of the equation, we haven't had any Tier 1 discoveries in over 17 years. Tier 1 discoveries are very large and very high grade discoveries.
As a result, we will get a huge supply and demand gap in the near future, starting from 2015 (see Chart 1).
|Chart 1: Production - Demand Curve Diamonds|
This supply/demand gap will spark diamond prices, and we can already see a recovery in diamond prices (see Chart 2). Consulting firms forecast a 3% to 10% price growth per annum in rough diamonds for the coming years due to demand from China and India.
So how do we play the positive fundamentals in the diamond market? We go after one of the biggest potential diamond resources in the world, and that can be found at Olivut Resources (OLVRF.PK). To give a comparison, producing diamond mines like Gem Diamonds (GMDMY.PK), Petra Diamonds Limited (PDMDF.PK), and Harry Winston Diamond Corporation (HWD) have market caps between $250 million and $1 billion, but we will see that Olivut Resources has a much larger potential than that.
In a recent interview with Pierre Lassonde, who owns 18% of Olivut Resources, we were reminded of the recent developments at Olivut Resources. Olivut Resources is a development stage exploration company, which primarily holds a 100% share in the HOAM project in Canada, which is a huge kimberlite deposit. The value of this deposit could control the top end of the diamond market. Pierre Lassonde talks about a possible 100 times increase in the share price because the site could contain an in situ value of $20 billion and a net present value of $2 billion. The market capitalization of the company is currently just $36 million. When this company really delivers on its promise to find a large diamond deposit, investors will be flowing into this gem as it will hold one of the largest deposits of diamonds in the world.
Based on extremely positive indicator mineral chemistry, geophysics, and drill results to date, management believes that there is a high probability that economic kimberlite pipes remain to be discovered in the project area. Drilling (a 10-hole drilling program) has continued as we speak during the summer of 2012 and will be concluded in a week. We will have results by the end of 2012. Investors can speculate on these pending results at a bottoming price level in the company's share price (see Chart 3).
On Sept. 18, 2012, the Russian press came out with news about the "secret" crater that sits below the Popigai Astroblem in Siberia. This crater is supposed to contain a vast supply of "impact" diamonds (for industrial use) and could overturn the entire gem market. This crater has been known about since 1970, however, and seems unlikely to be commercially viable. The site is located in a remote place without any infrastructure, and there are the economic implications. "There are production cost-effectiveness issues," leading Sobolev scientist Nikolai Tuchkov admitted. "It is quite remote from any population center," he observed. I would advise investors to take advantage of this speculative news to buy the dip.
What's very positive is that Olivut tends to follow the diamond price. I say "positive" because the diamond price has been in an uptrend in the last few months (see Chart 2), so Olivut Resources should trend up as well. Olivut Resources had $2.7 million in working capital as of Jan. 31, 2012, and has invested $4 million to date in the HOAM project.
Investing in development stage companies is a risky endeavor. Many risks -- including funding risk, exploration risk, and market risk -- can have a negative impact on the share price of the company. As I mentioned before, the company had around $2.7 million in working capital as of January 2012 and will need to get funded in order to continue its exploration program, feasibility study, and construction. Exploration results later this year could have significant impact on the share price. News stories like the Russian "impact" diamond discovery can have a significant impact on the diamond price, and therefore have an adverse effect on the company.
Disclosure: I am long OLVRF.PK.