A sparkle returns to the hunt for the elusive rainbow-coloured rock. In fact, diamonds have never been so sexy.
De Beers is being squeezed for supplies from more than one direction. Renegade Russian mines have side-stepped the system for some time.
Diamonds, as sultry songster Shirley Bassey reminded us in the James Bond movie, are for ever. God showed a sense of humour by ensuring that these most glamorous of minerals can only be found in the most remote and inhospitable places on earth. From the Canadian Arctic to the furthermost reaches of Australia, new discoveries have set the pulses of speculators racing. Some of the world's richest men, including George Soros and Kerry Packer, have joined in the hunt.
Diamonds have never been more sexy. Sales of rough-cut sparklers are running at US$8 billion a year. By the time they are cut, polished, and reverently placed in ritzy store windows, the annual retail trade is worth over US$60 billion. Diamond prices have climbed 15% this year, pushed up by record demand from US baby boomers. Luxury store Tiffany's of New York turned in a 70% jump in second-quarter revenue, and profits nearly doubled to US$40 million, as the well heeled snapped up diamond rings and gem-encrusted jewellery.
Now the unthinkable is happening. De Beers, the gorilla of the industry, which handles two thirds of world sales, is beginning to run out of diamonds. The South African group has reported that its stocks fell from almost US$4 billion worth to US$2.7 billion in the first half of the year. De Beers began to stockpile diamonds in 1934, when the great depression slashed world demand. Its Central Selling Organisation has controlled supply ever since, and virtually set world prices. That monopoly position is now unraveling. And its exploration teams have had no luck prospecting. So the company has no choice but to buy existing production wherever they can find it. Recently De Beers acquired its first Canadian asset Winspear Diamonds, which is developing an underground mine expected to account for 10% of the global market by 2010. Currently, it is stalking a glittering prize "down under".
Australia is the world's largest diamond producer by volume, accounting for more than 20% of the 110 million carats mined last year (a carat is 20 milligrams). Virtually all of that comes from the Argyle mine in the barren Kimberley region of Western Australia, some 2,200 kilometres north of the capital of Perth. Arglye is 60% owned by Anglo-Australian mining giant Rio Tinto and 40% by Ashton Mining. Argyle mines nearly 27 million carats of mainly low-grade diamonds a year, spiced by a range of coloured stones, including the greatly sought-after "pinks". The Argyle partners boldly broke away from the De Beers cartel in 1996. They have been selling direct to the diamond-cutting trade in Antwerp, with considerable success.
In August, De Beers launched a hostile US$1.62 cents a share takeover bid for Ashton. Rio Tinto has since topped that with an offer of US$1.85, valuing the target at US$400 million. The local stock market has sat back to enjoy a battle royal, and Ashton shares have jumped to over A$2 each. The most keenly interested party is the Malaysian Mining Corp, which holds 49.9% of the Australian company. The Malaysians plan to hang on to a 10% stake, and sell the rest to the highest bidder. They have shrewdly offered a key 19.9% block to both of the takeover opponents to spur them on.
There is a lot at stake, and De Beers cannot afford to lose. It will almost certainly up the ante. Earlier this year, its 30% associate, Anglo American, got a bloody nose when Rio Tinto knocked it out of a US$2.2 billion bidding battle for the Australian North iron ore concern. Both Anglo and De Beers want to diversify out of South Africa to reduce exposure to the "African discount" applied to that troubled continent. Concern over the chaos in neighbouring Zimbabwe is just the latest incentive to acquire more offshore assets.
De Beers, which trebled its profits to US$877 million in the first six months of this year, claims it no longer wishes to monopolise the world diamond trade. Nevertheless, its takeover bid is all about becoming able to market Ashton's 40% share of the Argyle diamonds through its own system of selling exclusively to 125 "sight holders". These are selected diamond merchants from around the world, who assemble 10 times a year in London and have the right to bid for the "goods", as they are known in the arcane trade.
De Beers is being squeezed for supplies from more than one direction. Renegade Russian mines have been side-stepping their system for some time, and other sources are drying up. Managing director Gary Ralfe says his group is supporting the UN-backed policy of reputable companies refusing to buy so called "blood diamonds" - illicit gems traded to help fund terrible wars in Angola, Sierra Leone, and the Republic of the Congo. Stopping the traffic is easier said than done. The anonymity of a parcel of diamonds, and the difficulty of establishing provenance, is one of their attractions. But that may be slowly changing.
After nearly a hundred years of valuing diamonds by how many carats they weigh, the industry is moving towards pricing precious stones on the basis of their appearance. The "look" of a diamond when assessed by experts embraces scintillation, or the amount of sparkle when it is moved, as well as "fire", which refers to the flashing rainbow colours.
The De Beers Millennium issue of 2000 exquisite diamonds was the first ever to be "branded", with the famous name etched into each stone. Even though a computer microscope is needed to see the mark, the prestige and security of the brand, is said to add 15% to the value of a stone. BHP is expected to follow suit by marking diamonds from its Canadian Ekati mine with a tiny polar bear. In another departure, certificates on the details of the diamond cut will be issued with the most valuable diamonds by professional bodies like the American Gem Society. The carat weight of a diamond will remain the standard valuation, but the trend is to avoid paying over the odds for gems that have been cut solely to maximise the number of carats.
Australia is a safe haven for investors keen on diamond areas well away from the turmoil in Africa. The rock-low level of the Australian dollar is another attraction. The Kimberley area is expected to become a major focus of world exploration, with some hopefuls searching for the legendary lost Ark - a diamoniferous Kimberlite "pipe" found 20 years ago, the location of which was somehow lost in the vast outback.
The dazzle of diamonds has seduced some hard-headed investors. George Soros used his Quantum Dolphin fund to take an 18% stake in Striker Resources, probably the premier explorer in Australia. The company has so far found over 13,000 stones, including individual specimens of up to 10 carats - good, but not good enough to establish a mine. Striker managing director Clayton Dodd says the company is nearly there. He has just taken delivery of a new separation plant that will quadruple the ability to recover larger stones up to 50 carats which, until now, have been missed or broken up in processing. The contraption, built by engineers Bateman's in South Africa, had to be shipped to Darwin. From there it was loaded on barges for a 30-hour voyage to Kalumburu in the North Kimberley, and then trucked 150 kilometres over a questionable road to the Striker site. That may convey some idea of the difficulties involved in drilling for diamonds. Add the fact that torrential rains make work impossible for almost six months of the year, and you get the picture.
On the other side of the country, media baron Kerry Packer has taken an option over a company called Cluff Resources. Cluff is exploring in New South Wales, and so far it has found commercial quantities of rubies. That was good news for Packer. However, as speculators big and small agree - diamonds are trumps.