John Kaiser: Demand for Large, Gem-quality Diamonds is Here to Stay

Gem Investing

Kaiser also discusses the companies he is watching in the diamond space.

The diamond market has suffered in the last few years, says John Kaiser of Kaiser Research in the video interview above. The western world is losing interest in the gems, while in the east India’s surprise decision to become a cashless society has rocked the industry.
So what’s an investor to do? According to Kaiser, there’s still hope for those who want to invest in the diamond market. He notes that Lucara Diamond’s (TSX:LUC) Karowe mine has been a bright point in recent years. Its AK6 kimberlite pipe has produced Type IIa diamonds, and according to Kaiser, they are “very, very large … there’s the 1,100-carat diamond that they found a year and a half ago.”
Kaiser believes companies that are able to produce Type IIa diamonds may be poised to do well in the future. As he explains, that’s because “there is demand for these large diamonds because the rich are not going to disappear. The rich are going to get richer and they are going to be interested in these types of diamonds, these larger diamonds. That market’s not going to go away.”
He adds, “the natural, real, large, gem-quality diamonds — there’s going to be demand for that.”
One diamond company he’s optimistic about is Tsodilo Resources (TSXV:TSD). “Tsodilo got hold of the BK16 pipe, which is similar to the AK6 pipe,” he says, noting that the company has demonstrated that some of the diamonds in the pipe are Type IIa. Tsodilo is planning to complete a bulk sample, and if the results are favorable, it will be “an obvious company … for Lucara to buy out.”
Watch the video interview above to hear more of Kaiser’s thoughts on Type IIa diamonds and the diamond market as a whole. You can also read the transcript below.

INN: Tsodilo Resources is one of your picks in the diamond space. Can you tell me what you like about that company?

JK: The diamond space has really suffered in the past few years because … rough diamond prices have declined. Now we have this additional problem in India where they’re trying to make it a cashless society and are eliminating all these higher denominations. India is where all the so-called Indian goods get shipped, the smaller diamonds. The Indians have figured out how to … profitably cut and polish the smaller diamonds, and they also get sold in India. However, India is a cash-based economy, and so all of a sudden they’re stuck with this stuff, they’re not able to really sell it. In North America we have this problem — I guess in much of the rest of the western world — the interest in diamond jewelry has sort of disappeared. People are — their discretionary spending goes into their iPhones and stuff like that, more into experiences and so on. So there is a problem with long-term demand for the smaller-sized diamonds.

Now, the really big story in the past few years has been Lucara’s Karowe deposit. Back in the 1970s when De Beers found the Orapa deposit — that’s a humongous, 300-million-tonne world-class diamond deposit that will still go for another 30 years — they found a number of other deposits in the area [that are] smaller [with] lower grades. [They thought,] “well, what do we need these for if we have Orapa?” A few years ago, Lucara got hold of the AK6 deposit and demonstrated that it was bigger and higher grade. But even better, it has these Type IIa diamonds, which are very, very large — there’s the 1,100-carat diamond that they found a year-and-a-half ago. There is demand for these large diamonds because the rich are not going to disappear, the rich are going to get richer, and they are going to be interested in these types of diamonds, these larger diamonds. That market’s not going to go away, and nobody’s going to be interested in the big synthetic diamonds. The natural, real, large, gem-quality diamonds — there’s going to be demand for that.

Tsodilo got hold of the BK16 pipe, which is similar to the AK6 [or] Karowe pipe. A little smaller, but the diamonds that were recovered before, they have now demonstrated that some of them are Type IIa. So there’s the potential for these big diamonds in there. They’ve also done delineation drilling to show that most of the work done in the past was with a heavily diluted part of the kimberlite. So the grade ended up lower than it actually is. They are now starting — they raised US$5 million to do a bulk sample, Lucara participated in the financing. They’ll probably even process it in their facility. If they demonstrate 20 carats per hundred tonnes of diamonds there with these high-value diamonds present, it’s an obvious company or project for Lucara to buy out and use its state-of-the-art recovery system, which has been designed not to crush these large diamonds when they do show up.

As an example, in Ashton’s Argyle mine, now owned by Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO) — there they never bothered recovering diamonds above 2 carats because they were too infrequent. So those just got crushed through the recovery system, it was a small diamond type of mine. Those types of small diamond deposits are no longer interesting — high-grade small diamonds? Forget it. The new space in diamonds is: do you have large, high-quality gem diamonds?

INN: That’s really good information. I know a lot of investors are a little hesitant about the diamond space because it’s so different than gold and silver, metals in general. Is there anything else investors should know about the space, or is it really just that focus on the larger diamonds?

JK: One of the problems that’s bothering the market a lot is funding. One of the best successes in the last while has been Peregrine Diamonds’ (TSX:PGD) Chidliak discovery, which is high-grade and decent quality. No evidence yet that there are these Type IIa super diamonds there, but they’ve spent probably $60 million on this project. They’ve got a PEA out which says that this thing should be priced at $150 million or so, and yet it’s trading at a $60-, $70-million valuation. So this has bummed out the market — here we have a fundamental success, and the company is having trouble getting any value from it. Now there is the Friedland factor at work, which … this project may be so good that there is no incentive to increase its price or anything like that. But that has bummed out a lot of people on diamond exploration.

That’s why focusing on these … lower-grade systems where you already know you have it, and you go in there and rethink it, do some bulk sampling — you have a chance of finding, or coming up with a result that you can do something with. The traditional cycle for diamonds is too long, you don’t know. Gold you get 100 meters of 10 grams and you know you’re off to the races. You intersect a pipe with a bunch of microdiamonds in it, and you spend another $10 million to know what the value of the diamonds is. With a gold deposit, you know the value right away. That’s the big thing people need to keep in mind with diamond exploration.

INN: Are there any jurisdictions where you tend to find larger diamonds, or are they just spread all over the place?

JK: This is where Canada has been disappointing in that they have not really yielded these large diamonds. The whole Ekati, Diavik — high-grade, good-quality diamonds, but they haven’t delivered these large diamonds that you get in Southern Africa, Botswana and South Africa. And I haven’t heard that the Russians from Siberia and so on are delivering these large diamonds. But you can start seeing the announcements — when they do recover a big diamond, it becomes a press release. So there is a bit of a fascination now with these big diamonds.

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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
John Kaiser owns shares of Tsodilo Resources and Peregrine Diamonds (TSX:PGD).

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