Paul Zimnisky currently creates and develops new exchange-traded
products as CEO of
. This past November, PureFunds launched three innovative ETFs,
PureFunds ISE Diamond/Gemstone ETF
(NYSEARCA:GEMS), the world's first ETF to exclusively invest in the
diamond and gemstone industry. Prior to PureFunds, Paul worked as a
buy-side equity analyst focused on the metals and mining space, and
as an ETF arbitrage trader.
Commodity HQ (cHQ):
What can you tell us about new diamond supply?
Paul Zimnisky (PZ):
As far as significant new production, the Grib project in Russia is
estimated to produce about 4 million carats annually with
production commencing towards the end of this year. Right now, the
project has an estimated mine life of about 20 years. Grib is owned
by the Russian oil major
But the largest new diamond project in the foreseeable future is
Canada's Northwest Territories Gahcho Kue mine, estimated to
produce 5 million carats annually for at least 15 years with
production expected to start in 2015. This project is a joint
Mountain Province Diamonds
) with a 51%/49% split, respectively.
Other projects of note are Russia's Botuobinskaya mine, expected to
begin production in 2015, and what would be Quebec's first diamond
mine, Renard, expected to commence operations in 2015-2016. Both
projects are estimated to produce between 1.5 million and 2.0
million carats annually. Botuobinskaya is owned by Russian
), and Renard is owned by Quebec-based
Its been 10 years since a new major diamond mine with an output of
at least 1 million carats annually commenced production. The last
example is the Diavik mine in Canada's Northwest Territories, which
began commercial production in 2003. The project's economic
open-pit depth has already been reached and has since been
converted to an underground mine with only about 7 years left of
production. The Diavik mine is owned by
Dominion Diamond Corp
), 60%/40% respectively.
Bottom line, there is not a lot of new production coming on online,
and existing mines are approaching depletion levels. Using Bain
& Company's 15 years of 6% annual growth in global diamond
demand number, there does not appear to be enough new supply coming
online in the coming years to offset new demand.
How big of an impact has the structural change of DeBeers had on
the diamond world?
Most people think that De Beers still has complete control of the
industry, but they don't. In the mid-1980s, De Beers controlled
almost 90% of global diamond supply and did in fact use this power
to control prices. But with new discoveries in the second half of
the 20th century in Russia, Australia, and Canada, it became very
difficult for De Beers to maintain control of supply as some of
these new industry players chose not to participate in the De Beers
By the early 2000s, De Beers gave up on the monopolistic model and
restructured the company to focus on branding the company, not the
whole industry. Today, De Beers controls less than 40% of global
diamond supply through its mines and distribution company. De Beers
is not even the world's largest diamond player in terms of carats
produced anymore; Russia's ALROSA is.
I would not go as far as saying that the industry is now
"fragmented," but on a relative basis, diamond prices are being
driven by supply/demand dynamics more than ever before.
How does the Popigai crater and other supply from Russia impact
It's funny how the Popigai crater headline got so much publicity
last year, but no one has heard any developments since. My
understanding is that there are diamonds there, but they are of
very low quality, so low quality that it's not even economic to
mine them. Generally speaking, diamonds fall into two categories,
gem-quality and industrial-quality. Diamond mines produce both
qualities of diamonds, but without gem-quality diamonds a mine is
not economic. Almost all industrial quality diamonds are more
economic to produce synthetically than via mining.
That said, Russia probably has the largest gem-quality diamond
reserve on the planet in the Sakha Republic. Sakha, also referred
to as Yakutia, is an autonomous republic in Northeast Russia,
bordering the Arctic Circle. Almost all of Russia's diamond
production is owned by the state diamond company ALROSA. ALROSA has
9 primary diamond mines, 10 alluvial mines, and 2 mines in
development. In 2012 ALROSA mined 26% of the world's diamond supply
(De Beers mined 22%). ALROSA has a very small publicly traded
free-stock float, which trades very thinly on the Moscow Exchange,
but for years Russia has expressed interest in selling a portion of
the company through an IPO. Most recently in May, ALROSA publicly
disclosed a planned share sale of up to 14% of the company in late
fall of this year.
How can investors make an allocation to diamonds?
Physical diamonds have traditionally been difficult to invest in
because they lack "fungibility," meaning they all have unique
characteristics - thus there is no futures exchange for diamonds.
So the expertise required to buy physical diamonds, combined with a
lack of pricing and liquidity, has really limited the number of
investors. That said, the very highest quality, rarest diamonds
have been a good investment, and I would say the returns can be
equated to that of rare art work or fine vintage sports cars.
As far as investing in engagement-ring-quality gems, these diamonds
are the industry's bread and butter, and I think the best way for
an investor to play this is via the stocks of the companies in the
industry. This is why last November at PureFunds, we launched the
PureFunds ISE Diamond/Gemstone ETF. The fund currently holds 26
stocks, 22 of which are traded outside of the US, representing all
aspects of the diamond and gemstone industry. We believe that as
the diamond supply/demand story plays out, these companies will
What are the benefits of holding diamonds and other gems in your
The rapidly growing middle class in Asia has adopted the tradition
of gifting diamond engagement rings. This is a brand new trend, and
a driver of significant new demand for the industry. So I think
when you look at this new demand driver with a forecast of minimal
new diamond supply, you get a really nice fundamental scenario that
is supportive of the industry.
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Editor's note: This article by Jared Cummans was originally