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Gem Diamonds Enjoying Large-Stone Boom

CEO Clifford Elphick on Asian Demand, Rough Prices, and Why He’s Selling Diamonds in Israel

Nov 7, 2017 5:00 AM   By Joshua Freedman
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As a producer of large rough stones, Gem Diamonds relies on high-end consumer demand more than many companies in the industry do. Fortunately for the London-based miner, the recovery of the Asian market this year has ensured strong appetite for its high-value diamonds.

The Hong Kong Jewellery & Gem Fair in September “surprised everybody” in how positive it was for the big-stone market, company CEO Clifford Elphick (pictured) tells Rapaport News.

“It’s spilled into people replenishing their stocks. At the top end of the market, it looks good,” says the executive, who was in Israel last month for the inaugural viewing of the miner’s large rough at the Israel Diamond Exchange (IDE).

Demand for large polished goods has increased: the RapNet Diamond Index (RAPI™) for 3-carat polished diamonds rose 4.5% in the first 10 months of the year. Elphick hinted that this was partly due to a recovery in the Far East, which contains some of the most important consumer markets for higher-end diamonds.

Asian equation

“The US is still the key, but certainly China is increasingly important, especially in the larger stones,” Elphick explains. “It’s very interesting that financial analysts can’t help but be gloomy about China, [though].... Every month, year after year, China growth is 6.5% to 7%. Analysts always scramble for a reason, but say next month it will all fall off a cliff. I’m starting to disregard all these things.”

China’s gross domestic product increased 6.8% in the third quarter after growing 6.9% in the previous two, according to data provider Trading Economics. The world’s second-largest economy is comfortably on track to hit the government’s target of 6.5% growth for the year, news media quoted Chinese statistics chief Ning Jizhe as saying last month.

Hong Kong-based jewelers’ sales have also increased, as has their appetite for buying large polished diamonds. Chow Tai Fook spent $16.8 million on a green diamond at a Christie’s auction in May 2016, and splurged a record $71.2 million on a pink jewel at Sotheby’s in April this year.

This has all had a positive impact on the rough market and Gem Diamonds’ sales. In 2016, sales from the company’s Letšeng mine in Lesotho slumped 22%, while the group recorded losses of $144.1 million. This year, a shift to a more lucrative section of the mine resulted in higher production of 100-carat-plus diamonds. This, coupled with an improvement in large-stone demand, drove Letšeng sales up 19% in the third quarter.

Land of the profits?

It was this demand for large diamonds that brought Elphick to Israel, where the manufacturing sector specializes in cutting bigger goods and sending them on to trading or consumer markets.

Since the Letšeng mine opened in 2004, Gem Diamonds has exclusively sold its rough through tenders in Antwerp. However, Shai Schnitzer, chairman of IDE’s rough-diamond committee, “demonstrated to us very successfully that the nature of our goods is well-suited to Israeli manufacturers,” Elphick recalls.

“There are a number of very strong companies here who don’t travel to Antwerp, and it may work to do tenders here,” he says.

The company plans to hold four or five pilot viewings at the Israeli bourse, running until the middle of next year, and will continue to bring its diamonds to the Ramat Gan market eight times a year if the trial shows positive results. So far, indications are good: 50 companies signed up for the first viewing.

“We have a waiting list,” Elphick adds. “We didn’t realize it would be like this. It’s extremely encouraging.”

No alarm

Rough prices are growing. De Beers’ rough-price index — measuring like-for-like changes — increased 4% in the first half. Gem Diamonds’ July tender in Antwerp continued that trend, achieving an average price of $2,397 per carat — the highest the miner has seen since September 2015, according to its third-quarter trading update.

Yet Elphick is not raising the alarm about the impact of rising rough prices on midstream profitability, mainly because his company’s clients are generally faring better than those who deal in smaller stones. In addition, he says, because Gem Diamonds sells rough via tenders, rather than contract sales like De Beers and Alrosa hold, the company does not determine its own prices. Clients place their own bids on goods, instead of just choosing whether to accept or reject a stated price.

“We don’t round up diamantaires at the end of the barrel of a gun, take them into a room and force them to buy our rough,” the executive points out. “The prices are what the rough-diamond dealer wants to pay. We don’t set prices and ask people to pay those. I can’t comment on whether it’s a good price or a bad one.”

While he notes that customers’ inability to turn a profit filters back to the miners, he is optimistic about his client base. “We produce large, fine, top-quality rough. As I understand, there’s still good profitability for the industry in that area.”

Small change

In contrast, the company is working to sell its Ghaghoo mine in Botswana, which produces smaller goods, because prices for those diamonds have been sinking. A potential suitor is currently reviewing data on the asset with a view to buying it, and is making “good progress,” Elphick said.

That potential sale would leave Gem Diamonds as a one-mine company. This does not overly worry Elphick, who says the focus now is to increase Letšeng’s profitability. For instance, the company has been working with experts from the University of Johannesburg on technology to reduce diamond breakages by identifying precious stones in the kimberlite before they reach the crushers.

This would help preserve 100-carat-plus diamonds, the recovery of which fell from a peak of 11 in 2015 to just five in 2016, before increasing to six in the first nine of months of this year.

And getting involved in mergers and acquisitions is “not on our minds at the moment, but as a public company, you’re always in the market,” he adds. “We’re always looking at other opportunities, constantly. [But] there’s nothing that we’re actively considering.”

Image: Gem Diamonds
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Tags: Botswana, Chow Tai Fook, Christie’s, Clifford Elphick, Gem Diamonds, Hong Kong Jewellery & Gem Fair, Israel, Israel Diamond Exchange, Joshua Freedman, large diamonds, large rough, Lesotho, Letšeng, Ning Jizhe, RapNet Diamond Index, rough tenders, Shai Schnitzer, Sotheby’s, Trading Economics
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