Special Report: After a long period of over-supply, a global diamond shortage may be on the way, says analyst Kieron Hodgson of London-based broker Panmure Gordon.

This top-rated analyst believes global diamond production will moderate this year before declining through until 2021.

“We see the potential for the market to briefly encounter a shortfall scenario, possibly as high as 25 million carats, equal to 16 per cent of the current global production base,” Hodgson says.

“We believe the foundations for higher prices are now being laid.”

His outlook is underpinned by comprehensive analysis which shows that production volumes will start to fall next year.

“Given the lack of commercial discoveries and the changing economics of diamond production, we believe global production rates will steadily reduce through to 2030,” Hodgson says.

“Our base case assumes a deficit of more than 15 million carats, equal to 10 per cent of current global production, and our bull case assumes a global deficit of over 25 million carats, equal to more than 16 per cent.”

However, Hodgson says he has “some concern for the pricing of smaller, lower-value goods, at least until 2021” and therefore he retains a preference for large, higher-value diamonds.

This strong outlook, particularly for high-quality gems, helps underpin Hodgson’s recommendation that investors buy shares in Lucapa Diamond Company (ASX:LOM).

Hodgson has a price target for Lucapa of 45c, well up on its current price of 19c, and says the company’s new Mothae mine in Lesotho “has the potential to become one of just a handful of globally-significant mines that consistently produces large, high-value diamonds”.

“Mothae is an asset that is going to deliver significant value to Lucapa shareholders,” Hodgson says.

The 78-carat large white diamond recovered from the Mothae mine. Pic: Lucapa
The 78-carat large white diamond recovered from the Mothae mine. Pic: Lucapa

“We believe the propensity for large, high-value diamonds to be recovered from Mothae, as well as the potential for a significant expansion of resources, can complement the existing Lulo production perfectly, creating a globally-significant producer of large, high-value diamonds.

“We apply a price target of 45c and believe the current market valuation materially undervalues the growth opportunities within the group’s portfolio of assets while offering investors a significant valuation re-rating opportunity given the incremental value that will be realised from the additional volumes at Mothae and the new diamond marketing initiative in Angola.”

Lucapa this week announced the recovery of a 55 carat top-colour diamond from Mothae, the fifth +50 carat diamond recovered to date from the new kimberlite mine, which is located within 5km of the Letseng mine operated by London-listed Gem Diamonds.


This story was developed in collaboration with Lucapa Diamonds, a Stockhead advertiser at the time of publishing.
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