Gem prices recovery boosts diamond shares

Shares in diamond producers, which failed to join a mining sector rally last year as consumers shunned luxury, are set for a boost from a recovery in gem prices.

The diamond sector, a key supplier to the jewellery industry, was one of the hardest hit when consumers shied away from swanky purchases during the economic downturn. When prices of rough, or unpolished, diamonds dived in late 2008, stocks tracked the decline, but they have yet to fully react to output cutbacks by No 1 producer De Beers and others that have nurtured a rebound in gem prices.

"The rough diamond market is recovering and prices are close to where they were prior to the downturn; the diamond stocks haven't reflected this yet, trading relatively flat over the past six months," said Tyler Broda, an analyst at Canaccord Adams.

Investors seeking pure diamond exposure must look to mid- and smallcap stocks since the biggest producers are parts of diversified groups or unlisted like Russia's state-run Alrosa.

De Beers is 45 per cent owned by the Anglo American group while Rio Tinto and BHP Billiton also have diamond divisions.

Around three-quarters of the London-listed diamond companies underperformed the wider UK mining index in 2009, with a handful of firms, including Petra Diamonds and Gem Diamonds, seeing their value drop over the year. Analyst Des Kilalea at RBC Capital Markets said rough diamonds are not traded on futures exchanges, but prices probably tumbled about 60 per cent during the downturn and have already recovered close to the previous peaks hit in early 2008.

"I think definitely there is a much better outlook than we've had for quite some time," he said.

Christmas sales in the United States, which makes up about half of the diamond jewellery market, were better than expected and demand for rough, or unpolished, diamonds was still buoyant, De Beers said on Thursday.

Thanks to strong demand from Asia, analysts expect prices to be supported in the longer term, even after major producers restart idled operations.

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