Diamonds: The unassuming safe haven

The closure of the Argyle diamond mine saw a drastic drop in the global supply of pink diamonds, but Australian yellow and blue diamonds might be the next big investment. 

When the Rio Tinto’s Argyle diamond mine stopped operating November 2020, it took 90 per cent of the world’s pink diamond supply with it. 

Although its impacts were felt around the world, the closure itself was not a shock, according to diamond specialist Eric Kariuki.

“Rio Tinto is ASX-listed, and they announced how much is left,” Kariuki told Australian Resources & Investment. 

“We knew the closure was coming for a while so there’s been a lot of exploring over the years, but no other diamond mine has been found in Australia that can replace it.”

The Argyle mine wasn’t the only diamond deposit in the country, though it was the largest. 

Lucapa Diamond Company acquired the Merlin project in the Northern Territory back in May 2021. 

The NT has the second highest deposits of known diamond resources in Australia, according to the Territory Economic Reconstruction Commission’s final report in December 2020.

However, new diamond mines can take more than a decade to reach a consumer sale stage. And there’s no guarantee a mine will result in pink diamonds.

“If you do find a mine, it could be another five to seven years of construction before production can even begin, and then another decade before anything comes out of the ground,” Kariuki said. 

“And if Argyle is anything to go by, there’s a less-than-one-per-cent chance of any pink diamonds.”

Although prospects may sound dire, those keen to invest in coloured diamonds don’t need to worry too much. As always, pink diamonds are dominating, but the popularity and price of yellow diamonds is on the rise. If the Australian market continues to produce more, investors could see some strong returns.

“My job is to look at which diamonds will return the best investments for my clients and I’m watching the yellow diamonds very closely,” Kariuki said. “They’re still tracking at about 3.5 per cent.”

India Bore Diamond Holding’s Ellendale mine in Western Australia was once famous for its fancy yellow diamonds and with production slated to re-start before the end of 2022, the annual growth of yellow diamonds should see a steady increase. The fact any diamonds coming from Ellendale will be Australian diamonds will add confidence to this growth.

“People value Australian diamonds more than diamonds sourced from elsewhere,” Kariuki said. 

“Australian diamonds are good quality and are ethically sourced. Those two factors produce the right ingredients for a very good investment portfolio.”

Argyle held the monopoly on most coloured diamonds in Australia, including red, champagne and violet, but most of the intense yellow diamonds are found in South Africa. The deeper the hue of the diamond, the more valuable it is, and those who don’t want to wait for production at Ellendale to start up again could turn their attention there.

South African mines are also known for their blue diamonds. April 2022 saw the world’s largest blue diamond, the De Beers Cullinan Blue, sell for an astonishing $80 million.

The 15.1-carat diamond was unearthed in 2021 at South Africa’s Cullinan mine and the estimated sale price stood at $48 million. 

However, those not willing to fork out that much for a diamond shouldn’t be put off from investing. Diamond auctions rarely represent real market conditions, as few meet the rarity in colour and size that the De Beers example did. However, investors can nonetheless expect to see prices rise for the blue gems.

“This sets a precedent for what will come next,” Kariuki said. “As an investor, I see the results of this and I know I have a limited window to collect as many (blue diamonds) as I can before the new carat price filters through the market.”

The Argyle diamond mine in Western Australia.

Natural blue diamonds can only be found in a handful of mines in the world, and only a few are discovered each year. The rarity of blue diamonds makes them a striking investment.

Formed beneath the earth’s surface over billions of years, blue diamonds are not colour-treated, instead attaining their hues from traces of boron in their carbon composition. These blue gems can be found in a variety of colours, from faint blue to fancy vivid blue. The De Beers Cullinan Blue is a fancy vivid blue diamond

Blue diamonds could be found at Argyle when it was still in operation; however, it has been said that for every 25 million carats of diamonds extracted, only a single blue diamond is found. With Australia one of only three countries where blue diamonds can be found, the price fetched for the De Beers Cullinan Blue is less of a surprise.

“A sale like this creates a new trend for that colour diamond,” Kariuki said.

Kariuki encouraged investing in diamonds due to their safety and security. As geopolitical disruptions continue to affect the global economic landscape, investors want to put their money into something that won’t move.

This type of thinking was especially evident during the global financial crisis (GFC), as prices of pink and blue diamonds remained steady. These fancy-coloured diamonds are an alternative asset that are stable performers in a market downturn and are attractive investments to diversify a portfolio.

It is unclear when, if ever, the retail prices of diamonds will decrease. Demand for diamond jewellery rose 21 per cent globally in 2021, well above pre-pandemic levels, with no sign of stopping. The Russia–Ukraine conflict has also made the market more volatile, especially after sanctions were placed on a Russian company that supplies 30 per cent of the world’s diamonds. 

With these sanctions in place, the origin of diamonds is becoming more important, and investors are seeking to ensure their acquisitions are coming from ethically sourced places. 

Investors want safety and security, and they don’t want their money to sit in the bank collecting dust. Diamonds are a growth asset and can do well when sold into a secondary market.

While the world might have lost a staple of the diamond mining industry when Argyle closed, investment opportunities are steady. Diamonds are inflation-proof, physical assets that are good choices for those keen to keep a hold of their investments instead of rows of stocks on a computer screen. 

These small gems can hold big opportunities for those who want them.  

This feature appeared in the June issue of Australian Resources & Investment.

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Making sense of the world around us

As the year unfolds and the world learns how to live with COVID, BHP chief executive officer Mike Henry examined opportunities for the resources industry in the face of ever-changing global events.  

Mike Henry provided a clear-eyed assessment of the state of resources sector at the Australian Financial Review Business Summit in March. 

“People are trying to make sense of what’s going on in the world around us,” the BHP chief executive officer told the audience.

“People realise that we’re potentially at quite a defining point in history, and they’re needing to make big choices or some are trying to keep their head above water.”

That uncertainty, according to Henry, can be viewed in a positive light by the industry and even entire nations.

“Others see this as an opportunity to make choices about how they shape their companies,” he said. “That’s certainly the attitude that we’ve adopted that sits behind some of the moves that we’ve made. 

“Same thing applies for the nation. Choices we make as a nation as to how we shape the economy for the decades to come are going to be quite critical.”

BHP chief executive officer Mike Henry.

When Henry spoke with Chanticleer columnist James Thomson on March 8, Russia’s invasion of Ukraine had entered its 12th day and sent shockwaves through the global commodities market. 

As countries and jurisdictions banded together to impose sanctions on Russia, the ripple effect on commodities was stark, with the likes of nickel, copper and coal all reaching record high prices.

“You look at liquefied natural gas (LNG), for example,” Henry said. “A couple of years ago, it was sitting at $US2 per million British thermal units (BTU). Earlier today, it was sitting at $US84.

“We’ve seen hundreds of per cent price increases for a range of commodities, which is going to have spill-over effects on inflation, potentially on global growth – we’re forecasting possibly a 0.5 per cent lower global growth over the course of the next year than we were previously anticipating.

“And that’s a combination of the impacts of Russia–Ukraine, but also China coming up with a slightly more positive or aggressive growth target than some were anticipating.”

In the face of increasingly severe weather events in Australia – the latest of which was devastating floods in Queensland and New South Wales – and with pandemic and COVID-related labour constraints in the background, the market was already unstable. 

Adding geopolitical crises and the most significant military action in Europe since World War II means companies are now being tested on a new level.

According to Henry, businesses that can wisely manage cost pressures will be best placed amid the uncertainty.

“Markets overall were more volatile heading into the Russia–Ukraine conflict, certainly on the supply side of things,” he said.

“We’re seeing exacerbated supply-side shocks, be it from conflict; we’ve had weather challenges here in Australia, particularly on the east coast; COVID (has had an impact), of course, which continues to disrupt supply chains and supply of some commodities.

“All of these are leading to greater volatility and the key is how companies position themselves to contain inflation, so that’s been a big area of focus for us – ensuring that costs don’t run away from us.

“But also ensuring that you have greater leverage in those commodities that do have that upside skewing as the world navigates some of the challenges that lie ahead.”

Future-facing commodities

While Australia’s present day resources sector remains dominated by what could be called “traditional” resources – coal, gold, iron ore, etc – a changing industry landscape is paving the way for mining’s new frontier.

So-called ‘future-facing commodities’ such as copper, nickel and potash will grow in importance as the world moves towards renewable energy and into new areas of mining.

“To frame it up, the world’s going to need probably about two times as much copper over the next 30 years, 34 times as much nickel, even two times as much steel to support the energy transition,” Henry said. 

Those needs, however, do not necessarily spell the end of Australia’s traditional resources.

“Two times as much steel means more iron ore and more coking coal,” Henry said. “There’s a huge opportunity for Australia in that.

“As the world seeks to meet that need for more commodities, it’s going to be doing so with resources that tend to be smaller, deeper, more complex, lower grade. 

“And so the implication of that is that for two times more copper, you’re actually going to need more than two times as much mining.”

While Australia has considerable reserves of future-facing commodities that can be mined in the future, Henry said considerable work would be required to take advantage of those resources.

“Capitalising on this opportunity is going to be nowhere near as easy as it was to capitalise on the opportunity in iron ore and coal,” he said. 

“Not that that was easy, but we had both geographic and geological advantages in iron ore and coal. 

“We were closest to big markets. We had deposits that were relatively close to surface and close to tidewater. That’s not the case in copper, nickel and some of the other metals.

“We’ve got less of an advantage over other nations in those metals, so we’re going to have to work two or three times as hard to unlock this opportunity, which comes back to skills, innovation, productivity. 

“All of these are going to have to be areas of focus if we’re to continue on this great trend … of the resources sector contributing to the prosperity that we’ve seen in Australia over the past four or five decades.”

BHP’s Nickel West operation in Western Australia.

BHP, for its part, has a number of new commodities in the pipeline with various operations in Australia.

“You’ll find examples like that, but I don’t think we should start from the perspective that all processing should happen onshore here,” Henry said. “There’ll be times when there’s better returns for that processing to occur overseas.

“But the more Australian is able to do to put the settings in place, that makes it possible to invest economically in processing here because it helps to diversify the economy.”

Globally speaking, it’s no secret Australia has fared better than many countries over the past two-plus years, and the resources industry has been a huge driver of that sustained value. 

While Henry is aware of the importance today’s resource sector has played in that strong pandemic response, he is also cognisant of the fact untapped opportunities remain.

“The resources sector remains very important, (but there’s) still lots of opportunity to be pursued there,” he said. “If you look at the future for Australia on a multi-decade horizon, it is going to be important that we’re investing in developing new businesses, new sectors.

“And given that we’re such an export-oriented trading nation, we’re going to have to have the ability to access expert markets.

“But we will all need to lean into supporting small- to medium-sized businesses develop new products, new services that can be be leveraged here in Australia, but also overseas.”  

This feature appeared in the April issue of Australian Resources & Investment.