With Diamonds, Even the Haystack Is Hard to Find

Ever searched for that needle in a haystack? It's child's play compared to finding diamonds. Diamond making is a miraculous recipe involving carbon, heat, pressure (no pressure no diamonds), and careful cooling. Screw up one ingredient and you get coal. With diamonds, even the haystack is hard to find!

1 carat per 250 tons
Gem-quality diamonds don't come easy, and it's not like experts haven't had plenty of time to make discoveries. The youngest diamond deposits are 900 million years old. Before zeroing in on the diamonds, exploration types look for indicator rocks called kimberlite. As a rule of thumb, about 1 of 100 kimberlite pipes is diamondiferous.

Four countries hoarding diamonds
Throughout the twentieth century, De Beers touched 80% of the world's diamond supply. While their market share isn't quite that high today, the De Beers name is still synonymous with diamonds. Anglo American (NASDAQOTH: AAUKY), a $30 billion mining conglomerate with assets in over ten countries owns 85% of De Beers.

Jwaneng or "a place of small stones" is the most valuable diamond mine in the world. Debswana is a 50/50 partnership (dating back to 1978) between De Beers and the government of Botswana. Together, they own Jwaneng, and keep a tight grip on diamond production and trade throughout the country. Jwaneng is a pretty big deal in Botswana. At 8 million carats per year, it accounts for about 30% of GDP.

Argyle (Australia) and Diavik (Canada) are also included among the world's largest diamond mines; both are owned by Rio Tinto (RIO 2.25%). In 2013, Diavik and Argyle are expected to account for roughly 13% of total supply, 17 million of 130 million carats. Alrosa is Russia's equivalent of De Beers and rounds out the list of largest diamond companies. These three, Alrosa, De Beers, and Rio Tinto, dominate the upstream diamond business.

Insider trading?
The trading network for diamonds is well established (and concentrated). Before diamonds find their way onto fingers, wrists, teeth, and drill bits they work their way through Belgium and India. Few places are more experienced at grading, cutting and trading diamonds than Antwerp and Surat. Speaking of quality, roughly 80% of mined production is "bort," low-quality diamonds used for industrial purposes. As the hardest known material, bort is great for polishing, grinding, and wearing other hard things away.

India's diamond history dates back over 3,000 years, but Antwerp is at the center of today's wholesale diamond trade. It's estimated that half of the rough diamond supply passes through Antwerp each year. Most rough diamonds they don't get their hands on go through Surat and the Diamond Trading Company (DTC), a subsidiary of De Beers.

The 0.01%
Industrial-grade diamonds are a commodity; gem-quality diamonds are not a commodity. Commodities tend to be unified by quality, price, and size. Investment grade diamonds (gem quality) are just 2% of total production, and all are unique in size, quality, and price. The upstream business is risky and capital-intensive, yet the largest profit margins are made at the retail level (downstream).

Colorful and large diamonds are so special they are given names, taken on travel tours (before auction), and filmed by the media. Earlier this month, a 59 carat stone by the name of Pink Dream sold at a Sotheby's auction for $83 million.

Source: BBC

Guess that's all $83 million gets you these days. The stone pictured (excuse me, Pink Dream) crushed Graff Pink's previous record of $46 million. Rio Tinto's Argyle mine produces 90% of the world's pink and fancy red diamonds. When all goes well, Rio Tinto sells them for at least $1 million per carat -- only 0.01% of real diamonds have color. On the upstream end, price per carat can be as low as $30. Hong Kong and the U.S. are still hungry for diamonds; they consume more than half the supply.

Is it really real?
There are a number of conflicts associated with diamonds and mining. Every diamond produced in Canada is laser inscribed with a unique identification number so retailers can feel confident selling diamonds they know are conflict-free.

High-pressure high-temperature (HPHT) and chemical vapor deposition (CVD) are two methods for growing diamonds. Most commercially available synthetic diamonds are yellow (or have colors), but they are not the 0.01%.

Eureka! World's newest diamond discovery
Until the 1990's, Canada wasn't even a spot on the diamond production map. Kimberlite discoveries around Ekati are the reason investors and explorers got excited about the Northwest Territories. Dominion Diamond Corp (NYSE: DDC) purchased 80% of the Ekati mine in April 2013 for $553 million. To date, the Ekati has produced more than 40 million carats. In partnership with Rio Tinto, Dominion also owns 40% of the Diavik. Since operations began in 2003, the Diavik mine has ramped up to a current rate of 8 million carats per year. Both mines are expected to operate from current reserves through 2019.

One diamond deposit is worth mentioning, the Gahcho Kué Project, located in Canada's Northwest Territories. De Beers owns 51% and a small-cap exploration firm by the name of Mountain Province (NYSEMKT: MDM) owns the remaining portion of the world's newest and richest diamond deposit. In investor presentations, they estimate the in ground value to be worth $20 billion. Upon achieving commercial production of six million carats (2020 or later), De Beers thinks Gahcho Kue could be the second lowest cost mine in their group , right after Jwaneng.