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Ethical Investing, Lesson 4: All That Glitters

|Includes:DDC, Rio Tinto plc (RIO)

Lorelei Lee's diary entry for April 17, 1925 reads, in part, "…I thought I had almost one of everything until I saw a diamond tiara." Eighty-six years after the gold-digging heroine of Gentlemen Prefer Blondes got her hands on that diamond tiara (and plenty of other expensive jewelry), the trade is still roaring. Despite lack of regulation in some countries and the controversy surrounding conflict minerals, we simply don't want to stop buying diamonds. Wealthy Chinese consumers in particular are snapping up high-end jewelry in large volumes.

 

Is it possible for the ethical investor to profit from the roaring trade in diamonds without supporting conflict minerals? Yes. In fact, it is easy.

 

Diamonds are not just found in Africa - the world's third largest diamond producer is Canada, where safe working conditions and fair wages are the rule, not the exception. A number of publicly traded companies have mining operations in Canada, giving ethical investors several options. (De Beers, owned by Anglo American Plc., is excluded due to the company's history. I have also excluded pure retailers such as Blue Nile and Tiffany & Co.*)

 

The Newbies

 

I'm keeping an eye on Olivut Resources Ltd. (TSXV: OLV.V), a newer company with mines in Canada and South America. Olivut's HOAM Project operates in a previously unexplored region of Canada's Northwestern Territories, and has already discovered 23 kimberlite pipes (i.e. lava from underground volcanoes that carries diamonds to the surface). It's also a female-friendly company - two of Olivut's five directors, including the CEO, are women.

 

With a market cap of $38 million, Olivut is still one of the little guys (or girls). This is a development-stage company with no revenue to support the valuation. However, at $1.20 per share, the stock represents a call on future discoveries.

 

Also worth watching is Stornoway Diamond Corp. (Toronto: SWY.TO), which has mining and exploration projects dotting northern Canada. Stornoway is a little more established than Olivut, with a market cap of $177 million, and is also run by two women. Stornoway does have nearly $25 million in cash, which it continues to burn off. As with Olivut, the $1.49 share price represents a call on future production.

 

Both companies are small, and in their early stages. Therefore, they are highly speculative companies in which to invest.

 

The Jeweler to the Stars

 

Fabled New York jeweler Harry Winston is owned by Harry Winston Diamond Corporation (NYSE: HWD), which jointly owns Canada's huge Diavik Diamond Mine with Rio Tinto Plc. The company retails diamonds under the Harry Winston brand, and also sells rough diamonds to the global market. 

 

Harry Winston is a more established business, with a $1 billion market cap. The trailing P/E is rather high at 50, but the forward P/E is only 11.7. The company has a manageable $357 million in debt to $140 million in cash. The stock price of $12.00 will set you back less than Harry Winston jewelry, and appears to be a reasonable value. I also like the fact that insiders own 26% of the stock.

 

The Big Guy

 

Harry Winston's partner in Diavik, Rio Tinto Plc (NYSE: RIO), has mining sites all over the world. Rio Tinto mines diamonds, gold, silver, copper, iron, salt, aluminum, and industrial metals on every continent except Antarctica. 

 

Rio Tinto is cheap - P/E is 6.6, and the company trades for 4.2 times its EV. The company has plenty of cash, and debt is manageable. At a price of $54, the dividend yield is 2%.

 

The Verdict

 

Investing in diamonds is not risk-free, and I don't recommend dedicating more than 1-2% of a portfolio to them. However, the explosion of demand for diamond jewelry in Asia (you know…China) can bring tidy profits to investors. Rio Tinto is the value stock in this group, but diamonds are a very small portion of its business. Harry Winston would be the choice for more pure consumer luxury play.

 

*Full disclosure: I am a satisfied Tiffany & Co. customer.

Stocks: RIO, DDC