Recent forecasts suggest that the diamond market will continue to grow throughout 2017, and for savvy investors there could be opportunities to profit.
Diamond mine production by carat volume is expected to increase 11.5 percent year-on-year, and many major companies are building out large operations this year. While some investors are interested in these bigger mining companies, diamond juniors are also worth looking at.
Pinpointing great diamond juniors can be challenging, but there are a few important indicators that can be used to gauge investment options. Understanding what to look for in a diamond junior can help derisk major investment choices.
In a 2015 presentation, Anthony George, former senior vice president at Lucara Diamond (TSX:LUC) and current vice president of project execution at Victoria Gold (TSXV:VIT), highlighted several factors that led to early successes Lucara, now a diamond producer with major discoveries under its belt. Without further ado, here are the factors he mentioned:
- A well-defined resource: “Everything else hangs off that,” said George. “If you don’t have a good resource, something that’s robust and well understood, then you’re not going to be able to get an operation running in the future.”
- Funding: Cash is obviously a key requirement, especially for juniors. But according to George, there’s more to gaining funding than having a good project. “It’s important that you have the solid technical solution, the solid resource and the ability to go out and talk to people convincingly,” he said. “You have to understand the fundamentals of what the investment people are looking for.” He also pointed out that it’s important for companies not to underestimate the working capital they need, noting that costs don’t end after a mine is built.
- A strong EPCM partner: “I really want to emphasize partnership, it is extremely important,” said George of finding a good engineering, procurement and construction management (EPCM) partner. “It’s not and us and them, I’ve seen it on so many projects where blame is put on the EPCM partner. At the end of the day it’s your mine, you’re the owner, you cannot abdicate your responsibility. Choose your EPCM partner well.”
- The right team: On a similar note, recruiting the right people is key to gaining an understanding of a project’s ore, the characteristics of its process plant and more, said George. “Your metallurgical model can be based on some assumptions when it comes to the resource stage,” he noted, “but it’s really important to have a feedback loop on the mine site.” Ongoing communication between the right team can result in ”a much better prediction of where your revenue’s coming from and also how you can change [the] mine plan” to generate a better return.
- Social license to operate: “You have to ensure that what you’re doing fits into the local communities and that you are accepted as part of the local community, the regional community, the country as a whole,” George noted. He also pointed to environmental compliance as key.
- Knowledge of ore: George stated that there are a number of factors to look at in terms of a project’s ore — for instance, information on ore crushability is a necessary precursor to undertaking process plant design. An understanding of waste crushability is also important as inevitably some waste material will also make its way into the plant. Furthermore, diamonds have different characteristics, and “all of that’s got to be fully understood so that it gets built into the diamond process plant.”
- Sales organization: According to George, this point is particularly important for diamond miners. As an example, he said that when Lucara first started putting its diamonds on the market, the values it received for them weren’t as expected “because the diamantaires didn’t know how [the] diamonds would cut.” However, once a couple of sales had taken place, allowing the industry to get used to the product, the company “saw [its] dollar per carat rise to the predicted levels, and then beyond that as well.”
While some of George’s points are common considerations for investors looking to determine whether a company has what it takes to succeed, a number are more unique to diamond companies. They may be useful criteria for investors to look at when evaluating diamond juniors, particularly in today’s markets.
This is an updated version of an article first published by the Investing News Network in 2015.
Securities Disclosure: I, Sivansh Padhy, hold no direct investment interest in any company mentioned in this article.