Richard Collocott, CEO of Namakwa Diamonds commented: “This has been an important week for Namakwa and Storm Mountain Diamonds to move the sale of the Lesotho’s KAO production from South Africa to Antwerp. Antwerp remains, in our opinion, the most important trading centre for rough diamonds and despite challenging market conditions we are pleased to have achieved solid prices.”

Fusion Alternatives CEO, Adam Schulman said, “We had a very busy week and there was positive feedback on the presentation of the KAO goods; we look forward to building on this success at our next tender in June.”

CEO of Storm Mountain Diamonds Keith Whitelock, who was also present for the opening of the tender, said “The KAO mine in Lesotho represents one of Africa’s most exciting prospects for the future”.

Arik Sela, I. Hennig’s Managing Director summarizes: “We were very pleased with the strong interest shown in viewing the KAO production, and were proud to host representatives from the world’s most prominent Diamantaires.”

The next Fusion Tender of KAO production will be from the 15 – 21 June, 2012 in Antwerp.

Further details will be posted at www.fusionalternatives.com

About Us

Fusion Alternatives is a forward-thinking and innovative company providing strategic services to the diamond, jewellery and affiliated industries. Fusion Alternatives is the leading specialist in operating international diamond tenders.

Founded in 1890, I. Hennig & Co. Ltd is the world’s oldest and largest international diamond broking and consulting group. We operate offices and facilities in 8 diamond centres across 4 continents.

Hennig represents the largest group of DTC Sightholders in their dealings with the DTC, the principal rough diamond distribution arm of De Beers Group.

Contact:
Adam Schulman
CEO
Fusion Alternatives Ltd
Tel UK: +44 20 7183 0244
Tel USA: +1 646 484 9972 ext 1
Email: adam@fusionalternatives.com

Arik Sela
Managing Director
I.Hennig & Co. Ltd.
Tel: +44 20 7404 5761
Email: arik@ihennig.com

The KAO diamond mine in Lesotho is the fourth largest individual kimberlite pipe in South Africa and Lesotho (and the only one mining at or near surface). Operated by Storm Mountain Diamonds and its leading hard-rock mining team, with a proven track record in the construction and development of Lesotho’s leading kimberlite pipes, the KAO mine presents a 189Mt kimberlite resource of c.12.8m carats. The Kao mine is expected to produce in excess of 200,000 carats per year, making it the largest producer of diamonds in Lesotho.

The KAO rough diamond production will be offered by tender in Antwerp via Fusion Alternatives, with the first tender taking place from 7th to 10th May 2012. Initial expectations are that approximately 15,000+ carats will be offered at the first tender.

The KAO production will be marketed to the world’s leading diamantaires and will be conducted by sealed tender in the Antwerp offices of I. Hennig & Co. Antwerp is the diamond industry’s primary business centre for rough and polished diamond trading.

Fusion Alternatives CEO, Adam Schulman said, “We are delighted to have been chosen by SMD as their preferred tender house, and we see this as a further endorsement of our professionalism and high levels of service to the diamond industry.”

I. Hennig & Co Managing Director Arik Sela said, “The Kao production caters to the current requirements of consumer markets and to a wide range of diamond traders and manufacturers, irrespective of scale.”

Namakwa Diamonds (majority shareholder in SMD) CEO Richard Collocott said: “We are excited that we are finally able to enter into this arrangement with Fusion Alternatives. With KAO poised to become the largest producer of diamonds in Lesotho in the next 12 months,
it is appropriate that we move the marketing of these diamonds to Antwerp and we look forward to building the Kao brand with the I. Hennig & Co stable.”

Companies interested in participating in this tender should email tenders@fusionalternatives.com, or call +44 20 7183 0244.

About Us
Fusion Alternatives (www.fusionalternatives.com) is a forward-thinking and innovative company providing strategic services to the diamond, jewellery and affiliated industries. Fusion Alternatives is the leading specialist in operating international Diamond Tenders.

Founded in 1890, I. Hennig & Co. Ltd (www.ihennig.com) is the world’s oldest and largest international diamond broking and consulting group. We operate offices and facilities in 8 Diamond centres across 4 continents.

Hennig represents the largest group of DTC Sightholders in their dealings with the DTC, the principal rough diamond distribution arm of De Beers Group.

PRESS RELEASE
Working together, Hennig and Fusion have the ability to offer turnkey projects which include diamond valuing, assorting, tendering, and client selection.

Contact:
Arik Sela
Managing Director
I.Hennig & Co. Ltd.
Tel: +44 20 7404 5761
Email: arik@ihennig.com

Adam Schulman
CEO
Fusion Alternatives Ltd
Tel UK: +44 20 7183 0244
Tel USA: +1 646 484 9972 ext 1
Email: adam@fusionalternatives.com

The intention to sell its diamond assets by these two mining conglomerates is more driven by their attempt to streamline their assets by investing in large long-life mine assets as opposed to being driven by a negative outlook for the diamond industry. The respective diamond businesses of Rio Tinto and BHP Billiton are both profitable and considerable in their own right being valued at $2b and $2.5 respectively, however this pails in comparison to the overall earnings and value of both these mining conglomerates and hence the decision to divest from these assets.

The most fundamental consequence of the sale of these world-class diamond mine assets for the diamond industry is that it has the potential to alter the dynamics of the supply-side of the diamond pipeline. Although some of the potential suitors to purchase these assets may come from within the diamonds industry by entities such as Harry Winston and Alrosa, interestingly circumstances currently point to a higher probability of the potential suitor coming from outside of the industry specifically from the Private Equity world. This would mark a significant change to the nature of the traditionally closely-held supply-side of the global diamond market.

Two private equity companies, KKR & Co. and Apollo Global Management LLC, have reportedly been in talks with BHP Billiton to buy its diamond assets. Notwithstanding the fact that these two firms may be organizing an investment consortium including major players from within the diamond industry, the mere notion that large private equity firms are interested in making a significant play on diamonds is a story unto itself. This not only supports the positive underlying fundamentals of the global diamond market but gives further momentum for the emergence of diamonds as a robust alternative investment asset.

Elements of the lending and financing activities within Indian diamond trading markets have been traditionally dubious with debt levels and financing cycles reaching dangerous levels over the past few years. This has in part has been attributed to the ‘round-tripping’ of diamonds. The practice of round-tripping involves diamond firms exporting diamonds and then re-importing the same diamonds from overseas affiliates in order to fictitiously shore up balance sheets and increase turnover in order to procure additional bank financing. With a spate of high profile bankruptcies and frauds within both the global and domestic diamond industries the Indian government took swift action by imposing the two percent import duty that became effective immediately.

Although this move may bode well for the large Indian diamond manufacturers it significantly reduces the attractiveness of diamond trading activities in India and goes to the very heart of India’s competitive advantage of having assured liquidity levels. With other traditional diamond trading markets facing their own challenges of late, this presents a window of opportunity for Dubai to emerge as a top-tier international diamond-trading hub. Notwithstanding the favourable legislative environment and state-of-the-art physical infrastructure, Dubai’s close geographic proximity to the Indian diamond centers of Mumbai and Surat make it easy for Indian diamond firms to set-up trading affiliates in Dubai and redirect their trading activities through Dubai.

The shift in trading activity through Dubai should also spur increased diamond investment activity in the gulf as the higher trading volumes should increase awareness in broader markets, firm up liquidity levels and increase price transparency. The other point of differentiation of the Dubai diamond market is that it is formerly under the auspices of the Dubai Multi Commodities Centre (DMCC) allowing diamonds to be more closely marketed and branded as a tradable and investable commodity alongside other commodities such as gold.

Unlike the overall traditional diamond trading markets, the uncertain macro-economic environment is actually driving demand in the investment diamond market which is only being stoked by talks of military strikes on Iran and the consequential inflationary fallout. There has been a clear increase in demand for very high-end investment diamonds from the Gulf states which has a strong tradition of investing in diamonds and there have even been recent reports of private equity deals in New York where the form of payment has been in diamonds.

A further demand driver for investment diamonds has been the volatility in the gold and precious metals markets over the last few months. Gold has fallen below the $1,700 price barrier for the first time in six weeks with some more bearish analysts predicting that the correction in gold prices could cause it to approach the $1,500 per ounce level. This has many within the alternative investment space baffled and causing a renewed interest in other tangible alternative investment asset classes.

Considering that investment diamond prices are down around ten percent on the level they were at six months ago while the overall medium-to-longer term projections point to an annual price growth rate of 12-14 percent, we expect an increase in buying activity in the investment diamond markets as savvy players try to take advantage of good valued buying opportunities.

The major rough diamond suppliers reduced their prices in January in line with market expectations sending a clear message of cautiousness throughout the diamond pipeline. Now the markets are looking to China as it enters into the crucial Chinese New Year as a source of positive momentum leading into Valentines Day.

Despite the immediate-term jitteriness in the market, the underlying fundamentals remains very strong with demand expected to continue to outstrip supply into the medium term. This mis-match between the short-term negative sentiment and longer term positive outlook makes the diamond market ripe for speculators looking to make a play on diamond price movements. Whilst speculative trading does not cause much concern unto itself and is part and parcel of the global diamond trading markets, it is when the speculative activity extends beyond the scope of traditional diamond trading markets that it starts to become concerning.

As diamonds become more attractive to the broader alternative investment market the propensity for unscrupulous speculative activity with the potential to skew prices becomes more prominent. Although the levels of speculative buying from sources outside the traditional diamond is still within healthy levels, we do view this as a real risk as diamonds become more accepted by the broader financial community and included in more and more investment mandates. The key to managing this risk is understanding the complex dynamics of diamond trading markets by actually being active on the market itself and keeping ones finger on the pulse.

We expect investment diamond prices to remain stable during February, with dealers to take direction from the demand and trading activity at the upcoming International Jewellery Show being held in Hong Kong later this month. Our overall outlook for 2012 remains positive being spurred by steady demand from emerging markets and demand outstripping supply.

The rise in investment diamonds is even more impressive when put into the bleak context of the overall state of the financial markets during 2011. Global equities declined around seven percent whereas the overall commodities market fell 13 percent during 2011. Although there were some individual commodities that did post solid rises such as Brent crude up 17 percent and unleaded gas up 15 percent, investment diamonds still outperformed. Even gold increased only 10 percent in 2011.

The significant rise in diamond prices during 2011 was underpinned by considerable increase in demand led by China and the Far East while diamond production levels remained flat. This dynamic is set to continue into the medium-term and is set to support diamond prices going forward. At the very upper end of the diamond market, demand remains very strong supporting the record price levels being fetched on the international auction market for special and magnificent diamonds.

Diamond market fundamentals remain very robust with the upward price trend expected to continue through 2012 underpinned by demand outstripping supply. The major risk to rising diamond prices is further macro-economic turbulence in traditional diamond consuming markets such as the United States, however the strong demand from emerging diamond markets such as China is set to offset this risk. Our models point to continued price increase in investment diamonds with a projected rise of 10-15 percent in 2012.

Notwithstanding any drastic movements in financial market during the last week of the year, one will be hard pressed to find similar returns on other investment assets classes. Global equities are currently down ten percent and overall commodities market is also ten percent down on the beginning of the year. Gold is the only other investment asset posting double-digit price increases, currently up 15 percent, however this is still well below the 20 percent return on investment diamonds.

The significant rise in diamond prices during 2011 was underpinned by considerable increase in demand led by China and the Far East while diamond production levels remained flat. This dynamic is set to continue into the medium-term. At the very upper end of the diamond market, demand remains very strong supporting the record price levels being fetched on the international auction market for special and magnificent diamonds.

Diamond market fundamentals remain very robust with the upward price trend expected to continue through 2012 underpinned by demand outstripping supply. The major risk to rising diamond prices is further macro-economic turbulence in traditional diamond consuming markets such as the United States, however the strong demand from emerging diamond markets such as China is set to offset this risk. Our models point to continued price increase in investment diamonds with a projected rise of 10-15 percent in 2012.

Last week’s sale of the spectacular pear-shaped fancy vivid yellow diamond of VVS1 clarity and weighing 110.03 carats set a world auction record for a yellow diamond when it sold for $12.4 million. Other special diamonds including a 38.88 carat cushion-shaped diamond of top colour and clarity fetched extremely strong prices and the overall auction mustered a very strong sell-through of 82 percent as did the Christie’s Magnificent Jewel sale also held last week in Geneva. Commenting on the auction results, David Bennett, Chairman of Sotheby’s jewellery department in Europe and the Middle East, noted that the “strong sell-through rates are a reflection of the continued strength and resilience of the international jewellery market.” Comments like this are great for headlines in the press but is this really the case?

Despite the perceived glamour associated with diamonds, the international diamond market is actually very intricate and complex comprising numerous sectors and subsectors, each of which not necessarily acting in line with each other. The investment diamond market is but a fraction of the overall diamond market and can be broadly classified as comprising of ‘vanilla’ investment diamonds and special and unique diamonds such as those that reach the international auction market. The sub-market for special and unique diamonds is very small and controlled by a handful of participants who easily dictate the sentiment and prevailing prices. The high concentration of power coupled with it being a very illiquid market make this very specialized and niche sub-sector a market unto itself and not necessarily representative of the broader investment diamond market.

As diamonds emerge as a solid alternative investment asset class there is the propensity for a tremendous amount of misinformation out there giving a skewed perspective of what is actually going on in the investment diamond market. Any prudent investment into the diamond market must be accompanied by a thorough and specialized understanding of the workings of the global investment diamond market in its entirety.

This is all well and good and bodes well for the industry, however when one looks at the current state of the diamond industry from a broader macro perspective one is left to ponder whether an investment play on diamonds at the moment is essentially a bet on the continued macro-economic strength of China or whether the underlying fundamentals of the diamond industry have more depth, and if so, what is the next frontier for spurring continued demand for diamonds.

It is clear that diamond demand is highly correlated to macro-economic measures such as GDP per capita and levels of disposable income. However the capacity of a given emerging geographic market to maintain a sustainable level of strong demand growth for diamonds goes beyond macro-economics and into the psychological, social and cultural dimensions of effective marketing on the one-hand and the propensity of the consuming market to spend on luxury lifestyle items on the other.

Taking these factors into consideration, South America as a whole and particularly Brazil, is being earmarked as a robust emerging diamond consuming market. With the largest and fastest growing economy in Latin America it seems like Brazil has learnt important economic lessons from its own recent history as well as those of its neighbors and has implemented relevant economic strategies and policies that should ensure continued economic stability going forward. Moreover, Brazil has the requisite ‘mind-set’ necessary to uptake increased diamond purchases. As a commodity-based and resource rich economy that has its own diamond production, there is already an appreciation for diamonds by the Brazilian financial sector. Furthermore, the extraverted and open cultural norms should make the diamond story an easy sell to the increasingly affluent middle-class consumers who already have a strong affinity to gemstone jewellery.

Notwithstanding other strong emerging diamond consuming markets such as India and Turkey about which plenty has been written about, other smaller emerging economies also show good prospects for strong demand growth for diamonds. Although very much niche markets, Central Asian countries such as Kazakhstan and Turkmenistan, which are some of the fastest growing economies in the world today, are untapped diamond markets with a heightened desirability for tangible assets.

Although it is clear that China is the most potent emerging diamond consuming market we do see considerable demand coming from tertiary emerging markets into the medium term underpinning the strong fundamentals of the global diamond industry which should continue to support the upward diamond price trends into the medium term.