GEMD

PDL

KDD

NAD

Slowdown in luxury goods should not dent high-quality diamond businesses

by Dan Coatsworth

Up to two thirds of the market valuation has been wiped off diamond producers and explorers in the past year amid weaker diamond prices and concerns over a slowdown in luxury goods sales. This has created value opportunities, according to RBC Capital Markets analyst Des Kilalea who says Gem Diamonds (GEMD) and Petra Diamonds (PDL:AIM) have been oversold. Buy these companies on their ability to produce large high-quality stones, respected management and strong balance sheets.

The price of small, low-quality diamonds has been falling because of slowing jewellery demand. Better quality diamonds could be next to fall, warns Kilalea, despite the assumption that wealthy individuals in Russia and the Middle East will prop up this end of the market. However, producers with quality assets should fight the weaker market conditions. Kilalea reckons supply of gem-quality diamonds will not meet demand over the next three to five years, giving support to higher prices.

Institutional selling pulled down Petra Diamonds from 154.5p in December 2007 to 74.3p last month. Saudi investor Saab took the opportunity to increase its stake and has been buying stock over the past few weeks, currently holding 35.5% of the company. Saab does not have to make a full bid as Petra is a Bermuda-registered business and so exempt from takeover rules on holdings over 30%. Its trading helped push the stock up 57% to 116.5p. Petra has considerable growth potential in revamping several ex-De Beers mines and exploration in Angola.

Gem Diamonds has had mixed success but its value lies in the Letseng mine, responsible for some of the world’s biggest diamonds. RBC forecasts Letseng to produce 100,000 carats of high-quality diamonds this year compared with 73,000 carats in 2007.

Full-year results due next month from producer-to-marketing group Namakwa Diamonds (NAD) may disappoint on cost issues, warns Kilalea. Shares in small-scale producer Kopane Diamond Developments (KDD:AIM) hit an all-time low on Monday (1 September) at 6.8p. It has been hit by market concerns over financing a mine in Lesotho and negative sentiment towards small Aim mining stocks.

Shares says: Gem and Petra offer considerable upside potential from expanding solid assets

Buy Gem, Petra

Hold Namakwa

Avoid Kopane