"Rough Market: A Q&A with Paul Zimnisky," Part of the AWDC Webinar Series (Transcript)
As part of the Antwerp World Diamond Centre’s (AWDC) Webinar Series, on April 29, 2020 at 3pm Central European Standard Time, Paul took an hour of questions on the rough diamond market. Hosted by Christopher Gemerchak, of the AWDC’s The Diamond Loupe, a leading diamond industry news medium. Below is a transcript of the event.
Christopher Gemerchak: Good afternoon everyone. I would like to welcome you all to the Antwerp World Diamond Centre Webinar series, where we address real-life business issues to guide us through these very difficult times. Many of us have been forced to stay home, but we believe it is important to stay connected, and stay engaged, and that is why we have set up these webinars to keep the dialog going.
For those of you that do not know me, my name is Christopher Gemerchak, I am the editor of The Diamond Loupe and I work in the communications and public relations department at the AWDC. Our special guest today is a well-known and highly-respected diamond industry analyst and consultant, Mr. Paul Zimnisky, who will be talking about the rough diamond market and answering your questions. Hello Paul, and welcome to the AWDC webinar.
Paul Zimnisky: Hi Christopher, thanks for having me.
Christopher Gemerchak: Paul, I understand you are at home, but perhaps you can tell our listeners where that is and where you are coming to us from?
Paul Zimnisky: Yeah, so I’m in New Jersey, which is just outside of New York City.
Christopher Gemerchak: Has it been pretty rough going there or are you guys pretty nicely sheltered in place?
Paul Zimnisky: I think it's definitely a different situation in the city versus the suburbs. So, I think everybody is pretty much going through the same thing, but it is defiantly more extreme circumstances in the more highly population concentrated areas.
Christopher Gemerchak: Okay, before we get started, I would like to explain to our listeners how this webinar is going to work. We are going to start with several questions for Mr. Zimnisky, during which time you, in the audience, will have the opportunity to formulate your own questions. If you have a question you would like us to discuss, please submit it in the Q&A box at the bottom of the Zoom screen. We will do our best to get to as many as possible in the time that we have, but we are going to limit this event to one hour at the maximum.
One final point of business, please note that a lot of what Paul says today will be based on observations, opinions, estimates and forecasts. What he says is strictly meant for informational purposes and should not be considered investment or business advice. Consult your investment professional or business advisor before making any such decisions. Please read his full disclosure on the second page of the slide presentation that you received in the mail, and feel free to reach out to him directly if you have any questions about that.
Okay then, let’s just jump right into it. There are several key issues that deserve our attention today, as they concern things happening on the ground right now. The first is the pending ban on rough diamond imports to India, which is expected to go into effect on May 15, but, in reality, is already in effect as India is still on lockdown. This has not only stopped Indian companies from operating, but it has also brought almost the entire industry to a standstill, as over 90 percent of global diamond cutting takes place in India. It has been argued that this will end up benefitting Indian manufacturers, who are already sitting on billions in inventory. Paul, do you agree with the decision? And do you think it should only be limited to one month as proposed, or should it be extended longer?
Paul Zimnisky: Yeah, that’s a good question. I guess first off, of course, the miners probably wouldn’t like that. It would likely further stress some of the independents that are already in a very difficult financial situation. And I’m not sure how that would work with the contract buyers but I believe it would be a voluntary ban.
But look, I think it’s a question of will it actually restore profitability to manufacturers that were already struggling before any of this even happened? I think what it ultimately comes down to: is it about profitability or is it about a power struggle? And if it's about profitability then maybe it’s not that bad of an idea. Maybe the manufacturers are thinking we don’t need all of these miners, and maybe the miners are thinking we don’t need all of these manufacturers. But, the more participants in the industry the better, I look at it as the more players you have in the industry, the more advocates you have for the product –everyone in the diamond industry wants the diamond business to do well. So I look at it from an aligning of interests standpoint and the less advocates and the less participants you have for the industry the less advocates you have for diamonds as a product.
But ultimately, I think the miners need the rest of the supply chain to be profitable for longer-term sustainability. And If this is a sacrifice that will accomplish that, maybe the cost to the miners is worth it, assuming they can make it through this with an additional strain on liquidity. But I think that’s the question, is it a measure that will restore profitability to the midstream longer-term? And I think thats a difficult question that I don’t think anybody really knows the answer to, its nuanced and multivariate.
But I think, the one thing I know is that the miners undoubtedly want their clients to be profitable –so I think everybody’s on the same page with that.
And I think this concept extends to retail to, I think part of the challenge of lab diamonds for the natural industry is that retailers are in a way incentivized to carry lab diamonds because the profit margins appear more favorable, at least for the time being. If natural was much more profitable for retailers to carry, there probably wouldn’t be facing the same threat of lab diamonds taking case space. That’s another way you can look at this as well.
Christopher Gemerchak: Alright, you mention a power struggle, some think that’s what might be at stake. For instance, Chaim Even-Zohar wrote an article and recently participated in a webinar with the GJEPC, where he said the coronavirus should serve as a “turning point” for the manufacturers. He effectively was encouraging Indian manufacturers to unite and use their leverage as a monopoly power to earn higher margins. Now, anyone who knows Chaim knows he is no fan of De Beers, but he says the cutters should not be concerned with the miners, "they have been profiting long enough,” he said.
So, I want to ask you, Paul, while the major miners are in a position to play along with this scenario for a while and reduce the volume of supply in a weak market, what might it mean for the small scale artisanal and junior miners - and with them, the millions of people that depend on the diamond industry? Won’t they be the ones who will ultimately suffer?
Paul Zimnisky: Yeah, I think the stress would be greatest on the independents that are already in a difficult financial situation. I think that’s definitely the case.
Christopher Gemerchak: In that webinar as well, Mr. Evan-Zohar asserted that if retail demand falls by 33 percent this year, there would be no more need for a supply of rough diamonds for the rest of the year. Could you envision a scenario like this?
Paul Zimnisky: That’s I guess a pretty extreme take. I don’t think anybody knows how this is going to play out or how long retailers are going to remain closed for or how long the supply chain is going to remain closed for. And you can definitely have extreme assumptions in both directions, but I guess at this point I don’t see a situation where the industry would be able to continue to operate without any new supply coming through. So, I don’t think we’re at that point yet.
Christopher Gemerchak: The pandemic seems to have exposed in the harshest light the fragility of supply chains and reliance on a single country to provide certain goods and services. Do you think the global industry should consider de-risking India’s near monopoly on manufacturing and explore cutting and polishing in multiple locations and different countries?
Paul Zimnisky: Yeah, I think that’s an interesting question, it's come up in the past. I think the global nature of the diamond industry is a strength in itself. You have mining in Africa, Russia, Canada, Australia, manufacturing in India, you have trade centers all around the world and retailers selling the end product in the U.S., China, Europe, Japan, the Middle East. So, you have all of these advocates for diamonds and for the larger industry. And I think that’s a strength. That said, I think the concept of globalization, and this applies to all industries not just diamonds, but I think its surely going to be tested by what we are going through. But, I think globalization will ultimately win out longer-term as the benefits outweigh the consequences.
And then looking at diamonds specifically again, and the midstream, I don’t know how much of this is ultimately in the industry's control. India is the manufacturing power center because of the workforce, the very skilled workforce, all of the experience that comes with that, and all of the infrastructure. I guess in theory that can be replicated in other parts of the world, but most of the attempts to do that have had limited success.
Christopher Gemerchak: Could you envision a permanent disruption in the way the supply chain currently works? Where cutters are manufacturing according to demand rather than supply?
Paul Zimnisky: When I think about this I think the permanent disruption in the diamond industry –which has been going on even before the pandemic situation, is a consolidation at all segments of the industry. We are seeing it upstream with the miners, we have been seeing it for years now in the midstream and definitely also seeing it downstream, with the closure of independent jewelers and now with the largest natural diamond jeweler, Tiffany, being acquired by the largest luxury conglomerate LVMH. Going forward, the industry will consist of larger, more commercial, businesses with bigger balance sheets that realize economies of scale, but at the end of the day the industry will probably be smaller in that regard, which means less advocates for diamonds, which is probably not a good thing.
It's of my opinion that end-consumer demand is what ultimately saves all segments of the industry. When demand is good, look at 2010/2011, all of the new demand out of China, all of the new store openings and the buying of stock to stock stores, the whole pipeline did very well. The manufacturing industry was highly profitable, miners did well, rough prices were high. The focus of the industry needs to be driving end consumer demand in my opinion.
You look at a moratorium of rough imports into India, yeah I guess that will reduce supply in the midstream, but the inventory is just going to sit with the miners instead of the midstream in that situation. So, longer-term I don’t really see that fixing anything or boosting the industry. What always boosts the industry is strong end-consumer demand. And historically, this industry has boosted demand with successful marketing and branding campaigns. I think marketing and branding and building consumer demand in new markets, I think that’s the real answer here. Industry leaders are still doing this, the DPA (Diamond Producers Association) is doing a good job here, but I think it needs to be done on a larger scale. Double or triple of what’s currently being spent now to get back to the levels of the heyday. But then the question becomes, who should pay for all of this? Is it just the miners, the major miners, or should this be split somewhat between all of the industry participants?
Christopher Gemerchak: Paul, continuing, the first question submitted from our audience. Do you think the import ban in India will benefit the entire Indian industry, or just the players who did not behave responsibly and did not manage their pipeline properly?
Paul Zimnisky: Yeah, I think that’s the key question here, it’s the ultimate question with regards to all of this. I guess in my opinion it will probably help the already profitable players become more profitable, and help the struggling players the least. I think when you look at what’s going on here, I almost see it as a version of stimulus of sorts. And, if you look at the result of stimulus measures historically, that’s typically how it often goes.
Look at how government stimulus globally is working on a much larger macro scale right now, I think this is a really interesting proxy. The government is currently spending at the greatest scale of stimulus in history, and the largest companies that were already going to survive this are getting the biggest boost: the Apple’s, Google’s, the Amazon’s, Google is up again huge today, a lot of these stocks are back to all-time highs already, and the companies that are hanging on for life, the small businesses, restaurants, specialty retailers, many of these smaller companies won’t make it through. So when you see how situations like this unfold, it tends to help the strong players the most unfortunately.
Christopher Gemerchak: Okay, I am going to jump to another question from our audience submissions. We have several questions on the board about pricing, the first one asks what is the bottom for pricing when tenders are yielding prices that are -25 percent for Petra and some of the Canadian mines are facing bankruptcy? How far can rough prices fall?
Paul Zimnisky: That’s a really tough question. Right now, when you look at the extreme deep discounts that some rough is trading at, I think is it important to remember that the market is very, very thin and there is not a lot of trading activity. And I think if you do need to sell into this market, for whatever the reason may be, you are probably going to take a haircut. But I don’t necessarily see that as a proxy for where rough would be trading if the supply chain was back open. So, I think you just kind of have to look at that as a market within a very thin market at the moment.
Audience poll number 1:
Who should take responsibility for increasing marketing spend?
A. The mining community via Diamond Producers Association -40%
B. The majors: De Beers & ALROSA -15%
C. The midstream traders and manufacturers -5%
D. Large retailers & retail groups -26%
E. Diamond-producing countries (Botswana, Russia, Canada, Angola, etc.) -14%
Christopher Gemerchak: We are going to take a look at our poll results…
So, people are looking mainly to the Diamond Producers Association and the mining community pooling their resources to up the marketing spend in the industry. Do you think that would be fair?
Paul Zimnisky: I think that has historically tended to be the opinion, I think it’s because historically De Beers has been the primary source of marketing to the industry, so I think that remains the expectation. But at the end of the day, the industry is structured differently now, it’s more fragmented, it’s no longer a monopoly, so I think it’s also reasonable to expect some change to come with regards to the marketing structure as well. At the end of the day, if you ask who should be funding marketing, I would say it’s as simple as anyone that wants the industry to survive or anyone that has skin in the game. I think everybody has to do their part.
Christopher Gemerchak: We are going to move on to some of the issues around the miners. In 2019, several mining companies in particular were hit by low prices for small goods, and a couple ended up delisting from certain international equity exchanges. In March and April, the mining sector essentially had to shut down production as governments implemented a lockdown to halt the spread of the virus. Now, several of them have gone on care and maintenance “until the market improves”; this includes Firestone, who will shut down for at least a year, Stornoway, its Renard mine, Petra’s Williamson mine in Tanzania and now Dominion’s Ekati mine. Do you think all of these mines, whose goods also compete most directly with rough lab-grown diamonds, still have a long-term future, or will they remain permanently vulnerable?
Paul Zimnisky: So, I think most mines that are still operating profitably have pretty good product mixes. Many of the newer producers, yes, they do have a lot of smaller, lower-quality goods, but I think when you look at the product mix by value, most of the goods that drive the revenue for these companies are nicer goods. But I agree that smaller, lower-quality goods are the most susceptible to losing market share to synthetics.
When you bring this up, it reminds me what ALROSA is doing with the marketing of fluoresce stones to younger consumers, marketing it as a product to wear in nightclubs given that they glow under a black light. I think that’s an interesting initiative and I think it’s the way the industry should be thinking –a creative mindset in that regard. And there is an added bonus because most natural diamonds fluoresce blue, while most man-made diamonds fluoresce orange or green, so you can maybe look at fluorescence as potentially another attribute that the natural diamond industry can use to differentiate its product from man-made.
But I think it’s this kind of creative thinking that the industry needs to survive and flourish in my opinion.
Christopher Gemerchak: About surviving and flourishing, this is another question from our audience. Mr. Rapaport said when he came to Antwerp that the rough diamond industry could be non-existent in a few years. Do you think this pandemic can lead to that as demand will be reduced for diamonds and the miners won’t mine diamonds if they are not economical?
Paul Zimnisky: Yeah, again, I think that’s a pretty extreme case, but I think the economics are the key, where do prices need to be for mining companies to be profitable? That’s the ultimate question. And, again, to drive demand, that’s what needed to drive prices, and its marketing campaigns. I think De Beers has enough skin in the game, ALROSA and the Russian’s have enough skin in the game, where I think they are going to do what they need to do to continue driving demand for their product. And, historically it’s been a resilient industry in that regard. So that’s the way that I’m looking at that right now.
Christopher Gemerchak: To go back to some of the miners and their difficulties, Kieron Hodgson, an analyst at investment bank Panmure Gordon, recently said the struggles of these mining companies have less to do with low prices and more to do with too much debt financing. What is your view?
Paul Zimnisky: You know, I actually think it has to do with prices, in a general sense at least. A lot of these miners, especially the ones that just commenced production in recent years, they were based on economic studies done in 2012, 2013, 2014, rough prices were a lot higher. Some of these mines were being squeezed before the pandemic because rough prices have been in a downtrend since 2011.
As far as liquidity goes, yes, it’s very expensive to build a diamond mine, especially in say the Canadian arctic, for example, it’s a billion dollars-plus, so typically you have to borrow funds to the build the mine. With that comes interest and principle payments that must be met. So, if you can’t sell diamonds right now you don’t have the cash flow to pay expenses. So, I think some of these companies can last a few weeks or a few months without cash flow, but every leveraged company has a limit in this regard. So, balance sheets are obviously being tested right now. It’s an uncomfortable situation to be in if you are leveraged right now and can’t operate your business due to all the restrictions. And this goes for all industries and business, it’s not just diamond miners.
Christopher Gemerchak: So we are talking about the mines again, you said the ones with the good product mixes will probably in the long-run be okay, but if rough prices remain low for an extended period of time, it be difficult for these mines to reopen altogether, at least as they are currently structured. Should we expect to see takeovers? I’m thinking particularly of Rio Tinto, which has been identified as a company with the capacity to expand its portfolio, whose Argyle mine is about to close. It shares the Diavik mine with Dominion Diamond Mines, who has filed for insolvency protection, and has a stake in the Orion South Diamond Project – which is massive, with a projected 38-year life span – but is still years away.
Do you think we will see further consolidation in the mining sector?
Paul Zimnisky: There is always speculation with regard to acquisition in this industry. Most recently we saw Dominion Diamond got bought out for $1.2 billion a few years back by a private company, The Washington Companies. I think that wasn’t the expected or anticipated acquirer if there was going to be a deal in the industry. So, I think that caught some people by surprise. But, look, when you look at the majors, or the ones with the balance sheets and the capital to do an acquisition, these companies need very, very, large world-class projects or it doesn’t realty make sense because it doesn’t move the needle for them. And, I think when you look at the world-class mines, they are mostly held by De Beers and ALROSA and then you look at, as you mentioned Diavik, it's definitely a world-class mine but it is approaching another phase of the mine life, the original mine plan is approaching the end, so the dynamics of an asset like that changes.
So, Rio Tinto is looking at a new project in Canada, the Star-Orion South project in Saskatchewan. I mean that mine has the potential to be, again, world-class in size and I think that’s why they are looking at it. So, when you look at acquisition in the industry, the problem is there is actually a lack of large enough assets that are young enough to make sense for one of these majors to go and do a deal.
Christopher Gemerchak: That was one of the questions that just came in. So, looking longer-term, what do you think the supply/demand situation will look like? There has been very little exploration, so the question is where will the future production of natural diamonds come from?
Paul Zimnisky: I think the best way to look at this is lower prices typically lead to less supply in a market and vice versa, higher prices lead to more supply due to operating economics, so there is always kind of a natural hedge built-in in that way if you will. And, this is the case with most commodities, you are seeing that with oil right now too, you are going to see a lot of oil supply come off globally in the coming quarters and years. So, I think that is the way to look at it. There is supply that may not be economic at current prices but if we see prices rise there are deposits that probably would make sense to put into production.
Then, you talk about the multiyear trend of supply and natural diamond production declining that we are probably going to see throughout this whole decade, and that helps. Definitely, supply coming of should support prices at least near-term.
But, at the end of the day, when I analyze this industry, I always would rather see demand drive prices rather than supply reductions. But reduced supply should certainly help support prices shorter-term and if there is a demand boost in the future that would likely be the catalyst that will drive prices higher longer-term. That is kind of what we saw coming out of 2008/2009, supply dried up and the new demand out of China drove diamond prices to an all-time high in the first half of 2011. Remember, diamonds were actually one of the fastest commodities to recover post-global financial crisis, I believe diamonds outperformed stocks, gold, oil, copper, in those first few years.
So, supply reductions help, but you need incremental demand to really drive prices higher in my opinion. I have recently talked with some of the Chinese jewelers, and they said they still plan to open new stores this year despite everything going on. Chow Tai Fook last year opened a record number of new stores, mostly in the smaller tier cities, but there is defiantly a trend of incremental new store openings in the Greater China market even with everything we are going through and that is the kind of demand growth that keeps me optimistic about the industry.
Audience poll number 2:
What is currently the biggest threat to the health of the rough diamond market?
A. Midstream profitability -28%
B. Lab-grown diamonds -6%
C. Oversupply of rough & high polished inventory -40%
D. Lack of liquidity -20%
E. Reputational damage from bad actors and bank defaults -6%
Christopher Gemerchak: Thanks Paul. We have the results of the second poll now. The biggest threat to the health of the rough diamond market? Over 40 percent say “oversupply of rough and high polished inventory.” Any thoughts?
Paul Zimnisky: Yeah, in the same theme, at the end of the day, end-consumer demand is what drives profitability through all segments of the industry, and again, you look at what we were talking about earlier, with regard to the midstream industry in India and the implications of a forced supply restriction there, and I think shorter-term that could help, but I think it’s only a short-term fix. We need profitability to return to all segments of the industry because end-consumer demand is strong enough to justify that.
Christopher Gemerchak: So you were talking about how lower production...so ALROSA was already planning for lower production and Rio Tinto is obviously slowing down, De Beers recently reduced its 2020 guidance by about 20 percent and is now projecting output of around 25 to 27 million carats. So, you are expecting global rough diamond supply to fall anywhere between 10 and 20 percent. Could you explain some of the consequences of lower production?
Paul Zimnisky: I think the main takeaway there is you have less advocates pushing the product. When you have multiple mining companies that all have skin in the game and all have incentive for the diamond industry to do well, you have many players on your side. I think a bigger, more robust industry with many players is actually a good thing in that you have all of these players pushing the product and pushing for success of the industry as a whole. So, I think that is the way I look at it.
And, again, I want to see supply increase because demand is increasing, I don’t want to see supply coming off because demand is coming off. That’s obviously the wrong direction we want to see the industry going.
Christopher Gemerchak: Thinking about pricing, not only in terms of the majors, but in terms of the tender system…collating a few of the questions on our board, could the system of rough tenders not lead to exaggerated price hikes and disturb prices by unrealistic means with overreaction in prices –and how would you compare this with a regular market structure which used to be in place decades before the tenders really took off, particularly in Antwerp?
Paul Zimnisky: With the tender system, you get a greater reflection of whatever the supply and demand is at the current moment, so you are going to get more volatility and I think that’s more akin to the way a lot of other commodities, or assets in general, trade. I think this industry has been a little bit different given that you have the long-term contract structure and you have, what is probably still an oligopoly, the top two or three main players represent almost three-quarters of the supply. So, the industry has been different in that regard historically. But, the tender system I think is actually more reflective of whatever the market is at a current time. I think there is valuable data and information that the tender system brings because of that.
Christopher Gemerchak: Looking further down the line, if supply really starts to wain and prices remain lower, could we actually start to see shortages of supply and might lab-grown diamonds really step in and fill that void?
Paul Zimnisky: Yeah, that’s a possibility. I think you get into the question of what is driving lab-diamond demand? Is it consumers associating lab-diamonds with the way that natural diamonds were historically perceived, the same thing at a lower price point? Or going forward, will consumers perceive it as two completely different products? –which is what I think will ultimately happen. Again, I think is it ultimately a demand question. If the industry can drive proper demand you will see new supply that is either in an asset that hasn’t been developed yet or an asset that has been temporarily suspended –kind of come back to life if higher prices justify it.
But it's likely going to be demand that drives prices higher and if that happens that's probably going to result in more supply. And, it takes time, to bring a new diamond mine online could take ten years plus, right? So, there is defiantly a lag effect, but I think over time, if you see higher prices you are going to see more supply come online. And we are kind of seeing the opposite effect now, where lower prices are actually resulting in supply coming off.
Christopher Gemerchak: We have several questions on the question and answer board here. So, this is about financing for traders and manufacturers. Over the past few years some of the mid-tier traders and manufacturers are struggling to secure financing with fewer banks interested in providing financing to the diamond industry…will the banks continue to pull out of industry financing? A follow up on this and more a question from the Indian perspective: many are asking why given the current situation, the miners wouldn't sell the rough on credit rather than ask the manufacturers for cash up front, given that manufacturers are getting paid down the road for their polished goods? Finally, if the banks come forward with an influx of financing could this artificially inflate the prices of rough as we witnessed in 2011 when the market significantly overpaid and only the miners benefitted?
Paul Zimnisky: I think you did a good job of putting those together. My opinion is kind of yes and yes…I like the idea of miners potentially offering credit to their clients, I like the idea of aligning interests, which is why I find that appealing. Historically, yes, when there is too much credit we definitely have seen inflation of excess inventory and an inflation in rough prices, probably most notable in the midstream segment, so that’s definitely something the industry has historically seen. And, yes, I think there is less credit availability to the midstream these days, I don’t think anybody is going to debate that. But, I think it has less to do with a stigma associated with the diamond industry and has more to do with profitability and the balance sheets and the way that some of these businesses are run. And I think as, hopefully, profitability returns to the manufacturing segment, and hopefully that’s because end-consumer demand is driving that, I think you will see credit return. Banks want to lend money and they want to lend money in situations where they are comfortable lending money and I think as the business picture improves, I think you definitely will see more banks offering financing to this industry.
Christopher Gemerchak: We have been talking about how to perhaps get consumer demand rolling again, but if consumer demand does not recover as quickly as many hope –the majority of our listeners from our webinar last week believed the market would normalize by September this year, if not December of next year, either a little bit of optimism or a little bit of pessimism– this will cause demand in the polishing centers to fall as well. Who is going to lose out the most? Is it the mid-tier miners, the smaller polishing units, the consumers? What do you think?
Paul Zimnisky: I would say it will probably affect the weakest players across segments in the industry rather than one particular segment of the industry, if that makes sense. Unfortunately, we are probably in a survival of the fittest situation.
That said, I am pretty optimistic, I think we could actually be setting up for a pretty good H2 and we could have a good holiday season with pent-up demand, and you could even look at it as the diamond industry might even benefit on a relative basis as “material luxury” might actually regain some market share from “experiential luxury,” like travel, concerts, sporting events, given the circumstances. Also, on the slide handout, I think its page 6, I expand on these views a little bit. But we are starting to see some green shoots.
Louis Vuitton the world’s largest luxury conglomerate, it said it’s seeing significant improvement is sales growth in Mainland China since the stores reopened. It said it started to see figures became positive in mid-March and saw that continue into April, in some cases sales growth year-over-year has been plus fifty percent. Chow Tai Fook, the Greater China jeweler, they said they expect the market in the Mainland to “normalize” in calendar Q4; and again, some of these companies are still planning to open net new stores this year. So there are some positive things you can look at, and hopefully what we are seeing right now in China is going to be a preview of what we will see in the rest of the world as the global economy begins to reopen.
Christopher Gemerchak: As you know De Beers held their own webinar today, and they were talking quite a bit about brands as you have mentioned. Do you agree with De Beers that brands are the key to the future of the diamond recovery?
Paul Zimnisky: Yeah, I agree that consumers definitely want brands, and that’s across the luxury segment, not just diamonds. And I think when you look at recent years, the jewelers that have done the best, it’s the Tiffany’s and the Cartier’s, the Bulgari’s, its the companies that have a very strong brand that resonates globally, definitely resonates with some of these emerging economies in particular, and I think one thing these large brands are doing is they are not shy about spending money on marketing and branding –they have really spent a lot of money on that– and I think there is a direct correlation with the amount of money they are spending and the success of the campaigns around building that brand. But I think in recent years, branded diamond jewelry has definitely outperformed.
Audience poll number 3:
What is going to be needed to pull the industry out of the crisis?
A. More robust marketing campaign by industry/Diamond Producers Association -50%
B. An increase of brand marketing -9%
C. Development of provenance tools for “mine to market” transparency -8%
D. Reduction of rough supply -33%
Christopher Gemerchak: So, we have the results of our third and final poll. The question was “what is going to be needed to pull the industry out of the crisis?” And a robust 50 percent said a “more robust marketing campaign by industry/Diamond Producers Association.” So, again, you said earlier, that is typically what people expect to see and I think people are hoping that will happen.
Paul Zimnisky: I think that’s good to hear. I think that everybody is on the same page. What gets me most excited about the future of the industry is, again, when I see money being spent on marketing and branding. You look at the emergence of the DPA in recent years, and you look at category marketing remerging after almost a ten-year hiatus, it doesn’t happen overnight, I think these are campaign that resonate over years. Its kind of a multi-year-in-the-making process, but because of that, these large category campaigns resonate with generations of consumers and that’s definitely the way this industry needs to be looking. The only thing I would add is budgets need to be increased, maybe two or three times, just to get back to where the industry was from a marketing budget in the heyday. But, I think the industry is heading in the right direction but it is going to require some patience. But, I think there is more to come out of organizations like the DPA.
Christopher Gemerchak: We have just about hit the limit of our time. We’re going to take one more question and then call it a day. The question is this, if I were to come to you as an investor, what type of diamond company would you advise me to put my money in: one of the major miners, a niche producer with upside, a retail luxury group?
Paul Zimnisky: Ha, that’s a loaded question. I’m definitely not going to give stock investment advice. I think you look at…again, we’ve had a trend of diamond prices that have been flat to down over most of the last ten years and I think anyone that is left at this point probably has a viable asset…
Christopher Gemerchak: The mining stocks have been brutalized over the past year, so…
Paul Zimnisky: They have, for the last two, three years. I think we have a situation, like we were talking before, with regard to leverage and balance sheets, so I think the companies that don’t have the burden of a big debt position are probably a little bit more appealing now because of that, but then you look at a more levered company, they probably have more potential upside as well, if we were to see a more rapid market rebound.
Christopher Gemerchak: Okay, so I had to try to pin you down somewhere there, ha.
We have time for one more. People are asking about provenance and transparency efforts. There have been, as you know, several initiatives throughout the industry to create tools for tracing the provenance of rough diamonds to up the transparency in terms of what the consumers demand. Do you think consumers are demanding the kind of transparency that we expect they are, do you see these initiatives as being useful in the long-term and might they actually be essential? From the industry perspective we believe they are essential; the question is do the consumers feel that way as well and are we on the right track with that?
Paul Zimnisky: I think some consumers are going to see that aspect as essential, some are going to be more interested in price and affordability. So, of course it’s going to depend on the consumer, but for the natural diamond industry, I think that the whole idea of provenance is the lowest hanging fruit, I think it’s such a great way to build the appeal of a natural diamond –where it came from. With some of these initiatives they are even talking about adding details of who drove the truck at the mine that carried the ore, then, who then who sorted it…and the more detail you build around the story, the more interesting it becomes. People have a piece of jewelry and they want to talk about it with their friends, and it’s a lot more interesting if you can include these details. This is definitely the right direction to be headed, and as you said, there are multiple initiatives in place and that is a sign that the industry really is acknowledging how important this is.
Christopher Gemerchak: Alright, thank you Paul. That is going to do it for us today. I would like to thank all of our participants for joining us and thank you for your questions. We apologize as we simply did not have nearly enough time to get to all of the questions –there were several dozen that came in.
Paul, I would like to thank you very much for you time and your insight. It was great having you give your perspective on where we are at now and where we should be going, because everyone needs to be talking in these difficult times.
That concludes our session. Have a good week and stay safe.
Disclosure: At the time of the webinar Paul Zimnisky held a long position in Lucara Diamond Corp and North Arrow Minerals Inc. Please read full disclosure below.