De Beers Market Share to Rebound to 40% with Canada’s Gahcho Kué Diamonds

July 8, 2014
By Paul Zimnisky


De Beers’ share of the rough diamond market has been in steady decline since the late 1980’s.  Still perceived as a monopoly by many outside of the industry, for years De Beers had control of over 80% of the worlds rough diamonds in a ploy to corner the market and dictate prices.  However, a series of events over the last 25 years has taken De Beers’ market share down from ~80% in 1989 to ~35% today.


A De Beers haul truck in Namibia
 Image source: De Beers Group 

After the fall of the Soviet Union in 1991, Russia the largest diamond producing country in the world, began selling its diamonds outside of De Beers.  Five years later, perhaps the most important diamond mine in the world at the time, Australia’s Argyle mine, terminated its supply relationship with De Beers in a maneuver for independence.  Over the next 10 years, the emergence of world–class diamond discoveries in Canada’s Northwest Territories further eroded De Beers market share.  

This new competition coinciding with anti-monopolistic legal action taken against De Beers in the U.S. and European Union further pressured De Beers to surrender its price fixing scheme, restructure the company, and give up approximately 45% of its market share (see chart below).


Chart of De Beers market share with annotations, 1987 to 2018
Source: Paul Zimnisky

For the time being, it appears that De Beers' market share has bottomed out with the advent of Canada’s Gahcho Kué mine set to commence production in the second half of 2016 or early 2017.  

Gahcho Kué is the world's most anticipated new diamond mine, estimated to produce approximately 5 million carats annually which would make it the 7th largest diamond mine in the world in terms of value produced, and 11th in the world in terms of carats produced, using 2014 estimates. 

De Beers owns 51% of Gahcho Kué, and Canadian-based Mountain Province Diamonds (TSX: MPV) holds the other 49%.  Using current estimates, the addition of Gahcho Kué production to De Beers mine portfolio would raise De Beers market share to 40% by 2018.


Areal view of the Snap Lake mine in the Canada’s Northwest Territories; 
the Gahcho Kué mine will be ~90 kilometers east of Snap Lake
Image source: De Beers Group

Gahcho Kué’s land and water permits are in final review stage and are expected to be approved by year-end.  The project’s mine build cost is slated to be C$858 million which will most likely be raised by De Beers and Mt. Province via debt financing and equity; a definitive financing plan is expected in the next 6 months.  
  

Chart of global diamond production in carats, 2004-2014
Source: Paul Zimnisky, methodology for estimates available here

New global demand for diamonds is primarily coming out of China where the current generation is the first to adopt the Western tradition of giving diamond engagement rings. The number of urban Chinese brides being given a diamond engagement ring has increased from less than 1% to greater than 50% over the last 20 years; half of China’s population of 1.3 billion is considered urban. 

This boost in new demand for diamonds is forecast to outpace new supply. Russia’s Grib mine, which commenced production last month, will be the first new non-alluvial diamond mine to produce more than one million carats per year since Canada’s Diavik mine commenced production back in 2003. 

Including Gahcho Kué, there are only 3 diamond development projects in the world with production profiles that exceed one million carats annually.  


Rough octahedral diamonds in Mirny Russia
Image source: ALROSA

In addition to Gahcho Kué, the only other large scale mines in development are Russia’s Botuobinskaya mine, expected to begin production next year, and the recently financed Renard mine, which will be the Canadian province of Quebec’s first diamond mine, expected to commence operations in 2017. Botuobinskaya is owned by Russian-based ALROSA (RTS: ALRS), and Renard is owned by Canadian-based Stornoway Diamonds (TSX: SWY).

With little grassroots diamond exploration, its likely that the future diamond supply picture is not going to change anytime soon. North Arrow minerals (TSX-V: NAR), prospecting for economic deposits in Canada’s arctic, and Botswana Diamonds (LSE: BOD), exploring in Africa with Russian joint-venture partner ALROSA, are two of the few commercial diamond explorers in the world today.


Chart of rough diamond prices, 2004-2014
Source: Paul Zimnisky, methodology for estimates available here

Global diamond production is estimated to be 130.3 million carats in 2014, which would be down 0.7% from 2013.  The total value of 2014 production is estimated to be $12.9 billion, which would be up 2.7% from 2013.  These figures represent a decrease in global diamond production volume, but an increase in the price of rough diamonds in 2014.

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De Beers is 85% owned by Anglo American plc (LSE: AAL) and 15% owned by the Government of the Republic of Botswana. At the time of writing the author held a long position in Stornoway Diamond Corp, North Arrow Minerals, Lucara Diamond Corp, and a short position in Dominion Diamond Corp.



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