×

Invest now? Diamond producers get thumbs up

Diamond prices had a terrible 2015, but reduced production and inventories coupled with increasing retail demand are helping to brighten prospects for the precious stones and the miners extracting them.

"Our highly conservative valuation approach highlights exceptional long-term value in the sector, barring a complete collapse in prices," said Kieron Hodgson, commodity and mining analyst at Panmure Gordon, in the firm's "Quarterly Carat" report released this week.

"Consequently, whilst acknowledging the risk of being early, we believe investors should take the opportunity to reappraise the sector."

The report issued a 'Buy' recommendation for shares in DiamondCorp, a South African producer, and upgraded U.K. based Firestone Diamonds from 'Hold' to 'Buy'.

Last year, prices declined due to overproduction and a fall in demand on the back of a global stock market slump. According to Panmure Gordon's report, rough diamond prices fell 15 percent over the course of 2015.

However, the firm expects the declines to be less pronounced this year, before returning to growth in 2017.

"We anticipate 2016 will see prices decline by just 5 percent, a notable improvement on 2015," the report said. He estimates that prices will rise by 4.5 percent next year and the year after.

One reason for the improvement is that DeBeers, a major diamond producer, reduced its production target from 31-33 million carats (Mcts) to 29Mcts.

An uncut diamond is selected from a collection of colorless and colored diamonds on a sorting table at DTC Botswana, a unit of De Beers, in Gaborone, Botswana,
Chris Ratcliffe I Bloomberg via Getty Images
An uncut diamond is selected from a collection of colorless and colored diamonds on a sorting table at DTC Botswana, a unit of De Beers, in Gaborone, Botswana,

Meanwhile, retail demand for diamonds in major markets improved significantly during the Christmas period.

"As inventory levels reduce and, importantly, Chinese retailers return following their own inventory reduction program, prices should remain well supported," said Hodgson.

A significant attraction of diamonds as a commodity play is that it doesn't rely on China for consumption. In fact, the U.S. accounts for almost 40 percent of global diamond consumption, according to the report. Diamond demand is also strong in India.

Panmure Gordon's paper reinforces the positive outlook expressed by consultants Bain & Company in their 2015 Global Diamond Industry report, released in December.

According to the report, diamond prices are expected to benefit in the next few years as recovering demand outstrips supply.

"The world rough-diamond demand in the next 15 years is forecast to grow at an average annual rate of about 3 percent to 4 percent, and the supply is projected to decline by 1 percent to 2 percent, causing the gap between supply and demand to widen starting in 2019," the report says.

Follow CNBC International on Twitter and Facebook.