RBCCM forecasts positive Diamond fundamentals despite credit crunch

LONDON, RBC Capital Markets, the corporate and investment banking arm of Royal Bank of Canada (RY on TSX and NYSE), has published a research report that concludes that despite the worsening global economic climate, the fundamentals for diamonds remain positive.

Des Kilalea, Analyst, Global Mining Research at RBC Capital Markets commented:

"While the world economy lumbers through one of its worst periods in modern history, with central banks reducing interest rates to stave off recession, diamond prices remain surprisingly firm.

"While the possibility of recession in the US might put the upward move under threat, the long-term prognosis is good, with supply of rough gems likely to fall short of forecast demand pushing prices well above inflation rates.

"The major beneficiaries will be producers of better quality and large gems. Here prices are likely to rise at well above inflation rates simply because the stones are in very short supply.

"Investors are placing a premium on current producers over explorers. The result is that companies looking to fund exploration campaigns will find fund-raising difficult and expensive in the short term until risk aversion among investors dies down. This is likely to encourage increasing consolidation in the junior diamond sector.

"The area offering the greatest potential to capture additional margins is in better quality rough diamonds of the type produced by some junior miners listed in London and Canada. But Government intervention, be it in the form of higher taxes and royalties, increased ownership, or pressure to beneficiate in the host country, is increasing. All listed companies will have to adapt to this."

These and other topics will be discussed at RBC Capital Markets' second annual Diamond Conference "A Jewel of an Opportunity" on Thursday 15 May 2008 at HM Tower of London.

The conference brings together the senior management of the world's leading diamond corporations, from exploration to mining to polishing and retailing. Speakers include: De Beers, Rio Tinto, Harry Winstons Diamond Corporation and Apollo Diamond (producer of synthetic diamonds).

The conference contents will be available via audio-only webcast from Friday 16 May via RBC Capital Markets' website at http://www.rbccm.com/

Andesine Aggravation

The recent saga of the gemstone andesine illustrates the complexities of gemstone enhancement and disclosure.

Andesine is a reddish-orange feldspar that's been in the market for five years. It's sometimes called sunstone because its chemical composition is similar to that gemstone's. Stuart Robertson, research director for Gemworld International, Glenview, Ill., says it was first seen at the gem shows in Tucson, Ariz., in 2003, but didn't draw attention until 2005, when quantities started to increase. Color and clarity were remarkably consistent, raising questions about origin and enhancement. Some have answers to those questions. Some of the answers raise more questions.

"It's from Tibet, natural and unenhanced," says Jackie Li, owner of the Tibetan Sunstone Mine, whose Web site, Tibetansun.com, details the story of andesine's origin. Missing from that story: any images of an actual mine or rough gems.

Congo has been identified as another source of andesine. Online gem merchant Thaigem.com says it first purchased Tibetan sunstone in East Africa, where it was identified as Congolese. And Dr. Laurent Sikirdji, of Gemfrance.com, says his andesine—which he calls natural and unenhanced—is from Congo. But no one has seen a Congolese andesine mine or any Congolese rough. Sikirdji admits that his Congolese andesine is purchased in Thailand.

Jewelry Television had been selling andesine as natural and unenhanced. "We were assured that the color was natural by all our suppliers," says JTV cofounder Jerry Sisk.

Late last year JTV found a source for andesine in Mongolia. Sisk describes what happened next: "Our man in the field saw the rough coming out of the ground (all yellow) and was given the 'recipe' for heating the material."

JTV has sent samples of treated and untreated andesine rough to Dr. James Shigley at the Gemological Institute of America, Dr. George Rossman at California Institute of Technology, and Dr. John Emmett at Crystal Chemistry in Brush Prairie, Wash., all renowned experts in gemstone enhancements. Sisk is determined to find the mechanism behind the color, and he wants to know how to identify treatments. It may take several months before any conclusions are reached.

"The only comment that I would make," says Sisk, "concerns our prior purchases, which we cannot attribute to China or Mongolia. We actually have documentation on a number of our acquisitions stating Congo as the source of the gems. Once again, we were relying on our vendors, but took the position that we will find the source(s) and inform our viewers. We released that information within a very short time frame once it was verified."

Sisk notes that JTV has not directly purchased any gemstones from the Mongolia site. "We will, of course, start negotiations with the mine owners to procure a steady supply of material for our viewers," he says. "Any gemstones from the mines in northern China and southern Mongolia will be disclosed properly and noted on our invoices."

Sisk adds, "When we first started selling red and green andesine-labradorite, we did send samples to the labs as part of our standard operating procedure. The reports came back as natural color. Our vendors also assured us that the color was natural. That is how we represented it to our customers."

Sisk says demand for fine-quality red and green andesine-labradorite is putting pressure on the supply side, boosting prices on his recent purchases, and making it difficult to get enough fine-quality gems to meet demand, particularly in larger sizes. "The prices are higher than they were a year ago, and we cannot purchase the quantities we need to supply the consumer," says Sisk. "Clean, unzoned green andesine-labradorite is nearly nonexistent.We have extremely limited supplies of the green material and do not see any improvement in availability in the near future."