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Diamond sector still rated a cut above the rest

Last updated: 02:18 23 Jan 2015 AEDT, First published: 03:18 23 Jan 2015 AEDT

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Diamonds have again been tipped to outshine an otherwise gloomy mining sector in 2015.

Prices in most base metals, as well as iron ore and coal have declined in January, adding to last year’s falls.

This has knocked investment in commodities as an asset class.

Shares in nearly all mining equities, with the notable exception of precious metal companies, are down this month. 

Given the uncertain outlook for the mining community, South African broker Investec’s preferred exposure is to the diamond market.

The broker has downgraded forward earnings of most commodity producers as a result of the price declines, but the exceptions are  precious stone producers, Petra Diamonds (LON:PDL) and emerald, ruby and sapphire miner Gemfields (LON:GEM).

Petra is the standout mid-cap miner , according to Investec analyst Marc Elliot, and is on the cusp of returning cash to shareholders.

Gemfields, meanwhile, is one of the most exciting stories in the mining sector today, he says.

In broad terms, Elliot says the diamond industry has been under-invested for a number of years and now faces rapidly rising demand from China and India due to growth in the urbanised middle classes.

“Compelling fundamentals should result in upward price pressure for rough diamonds,” he adds.

When it comes to gold, Investec’s mining team says the precious metal presents a conundrum for investors.

A strengthening US dollar, it says, and the prospects of higher interest rates in the US present significant challenges to the medium term investment case.

However, a multitude of global political risks has seen more investors turning to the safe-haven asset, boosting its price in the short term.

 “Of the London listed gold equities, our preferred stock is Acacia Mining,” said Investec analyst Hunter Hillcoat.

“2014 was more than just a name change for the company formerly known as African Barrick, with Acacia being justifiably re-rated by the market

“It is now a company that offers the potential for meaningful growth at attractive costs.”

Elsewhere, Investec expects a further fall in the price of copper.

Supply has continued to outstrip demand and prices fell to six year lows at below US$6,000 a tonne last week.

Still, the broker says a further modest deterioration in supply/demand is likely.

This, it says, limits the upside potential of blue chip Antofagasta (LON:ANTO).

It still rates Central Asia Metals (LON:CAML) as a ‘buy’, nonetheless, as it ramps up production.


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