Diamond deal will test the gem business

In Africa, O'Keeffe was instrumental in creating and then selling Mozambique coal developer Riversdale to Rio Tinto in 2011 for US$3.7 billion only for the project to prove too difficult, costing Rio Tinto $3.5 billion in write-offs, and then chief executive, Tom Albanese, his job.In Canada, he helped Champion Iron acquire the Bloom Lake iron ore mine from Cliffs Natural Resources for $10.5 million in 2016 when iron ore was trading at $40 a tonne on its way to $225/t five years later, turning Champion into a business valued today at $2 billion.Diamonds might turn out to be Act 3 in O'Keeffe's spectacularly successful career but it could also be his biggest challenge because natural diamonds have not been under so much pressure since they were created in a volcano billions of years ago.Diamond market squeezedThe squeeze on diamonds is coming from two directions. Demand is flat thanks to a weak global economy and supply is rising with the growing shift to laboratory-grown diamonds (LGDs) which are indistinguishable from natural gems, cheaper for consumers and immensely more profitable for jewellers.O'Keeffe's diamond play is through Australian listed Burgundy Diamond Mines which was planning to buy Rio Tinto's original diamond discovery in Australia, the Ellendale project, but shifted focus to Canada where its has struck a deal to buy one of that country's original diamond mines, Ekati.Once an asset of Dominion Diamond Corporation, Ekati was acquired by Arctic Canadian Diamond Company two years ago and is now the principal asset of Burgundy which paid $136 million for the mine located 300 kilometres north-east of Yellowknife in the Northwest Territories.Burgundy completed a $150 million fund raising at the end of last month when the company's chief executive and former Rio Tinto Diamonds boss Kim Truter said the Ekati acquisition would turn Burgundy into "one of the largest listed diamond companies in the world". If all goes well, Burgundy could find that it has bought into the industry at a low point in the market and is well placed to ride a recovery in diamond demand, but it will have to deal with the reality of a substantial fall in prices over the past 12-months.According to the RapNet Diamond Index of Rapaport, a diamond price-tracking and research service, the price of one carat gems fell by 23.9% in the 12-months to July 1. Three carat stones were down 15.8% while the smallest gems (0.3 carats) faded by 2.3%.Fluctuations in diamond prices are a routine feature of the market for a product driven largely by consumer confidence which is being buffeted today by high interest rates, economic uncertainty and ongoing criticism of conspicuous consumption in China.Lab grownBut the challenge of a predictable, economy-linked, downturn in diamond demand which saw industry leader, De Beers, report a 32% decline in year-on-year sales last month, and London-listed Petra Diamonds postpone its June sale, is being magnified by the increasing popularity of lab grown diamonds (LGDs).Until a few weeks ago LGDs were marketed as affordable adornments pitched somewhere between cheap costume jewellery and the real thing extracted from a mine, cut, polished and sold with touch of glamour -- and a high price.That changed when De Beers, the long-term guardian of the diamond business, ratcheted up the marketing of products made by its LGD business, Lightbox.Without prior notice, and to the annoyance of the diamond trade, Lightbox entered the "engagement and bridal sector", arguably the premier market for diamonds and easily its most profitable.For De Beers, which is under pressure in Botswana, its major source of mined diamonds, the step into a new and more expensive gem category is a perfectly natural move in a process which started five years ago.Back then, as some of the world's biggest diamond mines such as Argyle in Australia came to the end of their lives, it became clear that LGDs were the future of the gem industry because the synthetic product has become easier and cheaper to make with no concern about declining supply.Jewellers were initially slow to accept LGDs but consumer demand for a product which not only looks like the real thing but is recognised as a diamond by the US Federal Trade Commission has led to greater acceptance.O'Keeffe and Truter at Burgundy will undoubtedly understand the way the diamond market is changing under the influence of LGDs and will have a plan to ensure Ekati gems are marketed as a cut above anything coming out of a laboratory.But whether they will be able to withstand what looks to be a seismic shift in consumer taste, and the latest move by De Beers, will make Burgundy a company to watch as a test case for the future of diamonds.

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