January 20, 2013 (TSR) – A girl’s best friend? How about an investor’s best friend? In a note on Friday, analysts at Nomura got excited about the diamond sector, saying it’s time for investors to take a look at the sector given that those coveted jewels aren’t exactly falling from the sky.
The analysts explain that after an overshoot in rough diamond prices in 2011, the market returned back to equilibrium in 2012. Unless the global economy gets better, those prices are likely to remain near these levels in 2013. However, they said, after this correction the downside looks limited.
One big reason? Diamond shortfalls are ongoing and not likely to end soon, with not many diamond exploration projects out there, said Nomura. Funding for exploration via the equity market has been nearly nonexistent since the crisis of 2008, making it look pretty good for the longer-term supply/demand dynamic for miners.
From 2015 on, they expect demand to outstrip supply and say that should lead to enhanced margins for robust producers and kick off a new exploration cycle for those sparkly stones. Near term, Rio Tinto has a lower-carat value Argyle mine, which Nomura says matches potential Asian demand.
As for stocks, they say a “refocused” De Beers (85% owned by Anglo American, which they initiated at a buy with a price target of 160 pence and Harry Winston (soon to be Dominion Diamond), initiated at a buy at 19 Canadian dollars. Gem Diamonds should be avoided as it is reviewing its growth strategy, said Nomura, which initiated on the company with a reduce rating.