Diamonds are for sovereign wealth? Don't bank on it

De Beers woos safe-haven investors

By Tom Burgis in Johannesburg

Financial Times

15th May 2009

De Beers has launched a global campaign to convince investors that diamonds are an alternative to gold as a safe-haven investment.

The move is a sign of the pressure on the world's biggest diamond miner to find new markets following the collapse of traditional sales.

Stephen Lussier, De Beers' executive director for corporate affairs, told the Financial Times the group had been approached in the past two months by "half-a-dozen" brokers linked to sovereign wealth funds and wealthy individuals. He refused to identify them but said talks were in early stages.

But analysts and investors said that the closed nature of the diamond market made them a much less attractive option than gold.

Chaim Even-Zohar, an industry expert who runs Tacy, an Israeli diamond consultancy, said De Beers, which is weighed down by $3.6bn of bank debt, has been scouting for new sources of sales because of a collapse in demand which is expected to force the company to cut production by 40 per cent this year.

"De Beers are leaving no stone unturned to find buyers," he said.

The privately-held company, whose biggest shareholders are mining giant Anglo American, the government of Botswana and South Africa's Oppenheimer family, had sales last year of $6.89bn.

One emerging markets fund manager, who invests in commodities, said: "When you have people asking questions about gold's intrinsic value, it's difficult to see a bankable case for diamonds as a store of value."

Brock Salier, mining analyst at Ambrian, a London-based resources investment bank, said the uncertainty that has gripped equity and currency markets had sparked demand for "hundreds of millions of dollars of something they can stick in a vault", such as diamonds. An anonymous private buyer at a Geneva auction this week paid a record $9.5m for a rare blue stone from Petra Diamonds' Cullinan mine in South Africa.

But Mr Salier added that diamonds represent a much riskier investment than gold. Unlike the yellow metal the stones, traded through auctions and private tenders, have no public market price and there is no instrument investors can use to hedge against fluctuations.

One Johannesburg mining executive suggested De Beers was targeting Saudi Arabia, which is in the process of creating what could be the world's biggest sovereign wealth fund.

But De Beers said Gareth Penny, its chief executive, had not had any meetings with the Saudis during a recent visit to the Gulf, "nor are we aware that anyone has made a presentation to them on our ideas".

State-backed funds in oil-rich Middle Eastern nations and Asian exporters flush with foreign exchange cash have been investing huge sums in western assets in recent years but have suffered losses of late, notably in US financial stocks.

"They've been so badly burned in equities they are likely to look further afield into holding resources and buying resource companies," said Nigel Rendell, senior emerging market strategist at RBC Capital Markets.

"China has been stockpiling commodities. I wouldn't be surprised if other sovereign wealth funds are doing the same."

But he added: "Diamonds are of limited interest to a lot of people because of the difficulty in buying and ­selling. Gold remains the ultimate hedge."

Copyright The Financial Times Limited 2009