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Dazzling diamonds: the business case for investing in diamonds

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Information about Dazzling diamonds: the business case for investing in diamonds

Published on June 2, 2016

Author: JamesAHCampbell1

Source: slideshare.net

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1. James Campbell June 2, 2016 Dazzling DIAMONDS

2. Diamond Market Trends Portrait of the Diamond Industry Opportunity Capturing Investment Momentum Investing In Diamond Companies AGENDA

3. Portrait of the Diamond Industry I. MARKET TRENDS

4. Recent Diamond Market • Structurally industry has settled • Limited M&A activity • 2015 was a tough year for diamond producers • Rough diamond demand fell away significantly • US$16bn rough diamond supply fell to US$13bn • Differing views as to exactly why correction took place • High rough prices • Overhang of polished • Middle market choked; no margins; reduced liquidity and bank finance • Decline in polished diamond demand from emerging markets, particularly China and India • Major producers suffered circa 30% drop in sales • 15-20% drop in market rough prices • Production curtailed, some mines on C&MNote: Tier 2 = RT, DDC & Catoca combined; Tier 3 = Petra, Gem, active new mines Source: Author’s research, public information Key Rough Suppliers - Sales US$bn 0 1 2 3 4 5 6 7 2007 2008 2009 2010 2011 2012 2013 2014 2015 De Beers Tier 3 Tier 2 Alrosa

5. Price Index Rough Diamonds • Pricing trend is upwards • However volatility in market pricing is clear to see • Prices fell 15-20% in 2015 • Creates instability and challenges for the trade • Fragmented supply with differing sales models • Increase in tenders and auction sales • De Beers dropped prices -7% in January; raised prices +2-3% in April • Rest of year predicted to remain stable Diamond Price Index Index Jan. 2001 = 100 Rough Polished Linear (Rough) Source: DDA Trading, May 2016

6. Improving Diamond Performance • 2016 has seen a much stronger H1 as restocking takes place • “Normal” volumes being sold into the trade • Jan-May 2016 DB & Alrosa sold $4bn+ into market (FY2015 $7.5bn) • Jan-April 2016 +18% vs 2015; -13% vs 2014 • Fragile recovery, but a recovery • DB adjusted prices 7% in Jan, but +2-3% in April • Potential roadblock ahead H2 as fresh polished comes from factories • No major pull of new polished demand • All eyes on JCK show in Las Vegas • India considered the bright hope for mid-term growth 0 2000 4000 6000 8000 De Beers - Annual Sales US$m 2011 2012 2013 2014 2015 De Beers - Sight-by-Sight Sales US$m 0 200 400 600 800 10 1 2 3 4 2015   2016 Source: Author’s research, public information

7. 2016 Diamonds Dazzle the World • Certainly not all bad news in the trade • Strong demand for exceptional large stones and fancy colours • Record prices achieved • Public and media interest creating a significant halo effect © Christie’s Constellation 813CTS, $63m+ Oppenheimer Blue 14.62CTS, $58m Lesedi La Rona 1109CTS, $???m

8. Consumer Demand • Global DJ retail sales -2% (US$79bn) • US market a bright spot; record US$39bn diamond jewellery sales • Non-US markets saw decline in local currencies, further impacted by strong US dollar • India remains a big hope for the industry • China growth success story on hold for now • New efforts to invigorate the market underway -20% -10% 0% 10% US +5% China -1% India -9% Japan -13% M. East/Gulf -3% Diamond Jewellery Demand by Market Performance 2015 vs 2014, based on US$ US 45% Rest of the world 19% Gulf 8% Japan 4% India 7% China (incl. Hong Kong and Macau) 17% Global Sales 2015 – by value Source: De Beers Group - Market Insight Report, April 2016; Figures based on US$ at Polished Wholesale Prices

9. Supply Landscape • Widely projected peak in supply by 2021 • Followed by gradual supply decline • Ageing mines will close • Argyle - 20mcts p.a. scheduled to close by 2020 • Recent large Zimbabwe production has reduced significantly • Limited new mine potential • Exploration budgets/activity have been reduced • Few new discoveries reported - Angola • Very long-lead time to production • Not all discoveries will lead to production Rough Diamond - Supply 2008 – 2030 (base scenario) Millions of carats Note: Smaller players are Dominion Diamond, BHP Billiton for 2008-2012, Petra Diamonds, Gem Diamonds and Catoca Source: Bain & Company – The Global Diamond Industry 2015 Forecast 2009 2011 2013 2029F 180 150 120 90 60 30 0 2023F 2025F 2027F2015E 2017F 2021F New mines Other mines Smaller players Rio Tinto De Beers ALROSA 2019F

10. Capturing Investment Momentum II. OPPORTUNITY

11. Supply demand gap The Opportunity • Demand will continue to grow, despite bumps in the road • Middle-class development in China & India alone will drive significant demand growth • In next 15 years, China (200+m) & India (100+m) new middle-class households • On top of this - mature, robust markets such as the US will continue to perform • Not all diamond development projects will come into production • Potential for significant price growth • Need to capture the imagination of the Millennials and beyond • BUT there are clear threats…… Rough Diamond - Supply and Demand 2000 – 2030 (2015 prices) +/- 2bncts known reserves 2001 2007 2011 2015E 2019F 2023F 2027F 2030F Low demand Base demand Base Production Stable Production $ billions 16 years’ production at current levels Source: Bain & Company – The Global Diamond Industry 2015

12. Supply demand gap The Opportunity • Lab-grown diamonds are here and growing • Swarovski has launched recently a Lab-created diamond jewellery brand • Not a current threat to larger diamonds • Lack of generic advertising has hurt natural diamonds • DPA formed by 7 leading producers to maintain consumer confidence and drive future demand • Launch of first marketing campaign at JCK in June • Targeting Millennials to regain lost ground • Need to position for future 2-tier retail environment • US - Recycling Diamonds – De Beers/IIDV Supply demand gap Risks

13. In Diamond Companies III. INVESTING

14. Investing in the Diamond Industry 1/2 • Mining stocks and indices have had a torrid time • Diamond industry is not immune • Producer performance has not been as good as expected, with one notable exception • Exploration funding has been difficult • Market has strengthened in 2016 • Better results expected across the board • Despite market and price volatility diamonds have outperformed other commodities • Opaque trade changing • Both 2 main producers are becoming increasingly transparent • Price growth should drive company values Indices Evolution As of January 2012 — 100 = January 2010 Price Indices for Diamonds and Other Commodities 100 = January 2010 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 - Rough price - Polished price - Gold Price - Commodity Price (non-fuel) - Metals Source: Author’s research, Google Finance, Indexmundi, S&P, DDA Trading 0% 50% 100% 150% 200% 250% 300% Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 S&P Global Mining Rio Tinto share price S&P/TSX Capped Diversities Metals & Mining Alrosa Share Price S&P 500

15. Investing in the Diamond Industry 2/2 • Consolidation opportunities across the pipeline • Highest profit pool in mining and rough sales • Investment-grade diamonds strong • Explorers – high risk; long-lead time to production • Consider geographic logic – Africa, Canada • Upstream investment by retail - Tiffany • Limited options; possible IPOs (De Beers, Rio Tinto Diamonds) Industry Player Consolidation A view – producers, current 10,000 10,000 M Cap (US$) Annual Revenue US$m 1,000 100 10 10 100 1,0000 Diamcor DiamondCorp Rockwell Transhex Firestone Gem Rio Tinto Diamonds Dominion Lucara Mountain Province Alrosa De Beers Petra Kimberley Lucapa Source: Author’s research, public information Profit Pools 2015 Mining/Rough Sales Trading/Cutting/Jewellery Retail 18 – 22% 0 – 5% 4 – 11% 0 10 20 30

16. CONCLUSION Big growth opportunity is coming Supply-Demand gap coming next decade US & Emerging Markets Rough price growth Threats will need to be mitigated Lab-grown Diamonds Liquidity issues Recycling Diamonds Work underway to recapture growth initiative Diamond Producers Association Consumer Confidence programmes Consolidation opportunities exist Upstream Retail Compelling investment case INDUSTRY FUNDAMENTALS REMAIN STRONG

17. Plant workers at Saxendrift Hill Complex James Campbell Jamesc@rockwelldiamonds.com

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