London Private-Equity Firm Bets on African Diamond Mine

Rough Diamonds
De Beers is betting that increased sales in the world’s two largest markets will counter weakness in India, where volatility buying power. Source: De Beers via Bloomberg

Private-equity manager Philip Manduca is so convinced of the inflation-beating value of diamonds that he shrugged off reports of an alleged army uprising to buy part of a mine in Lesotho.

“We want diamonds,” Manduca, chief executive officer of Titanium Capital, said in an interview in London. “And the way you get stones at the lowest value point is to go to source.”

Titanium last month announced it was investing about 2.65 million pounds ($4.3 million) for 29 percent of Paragon Diamonds Ltd., which is digging a mine in Lesotho. The southern African mountain kingdom is the home of the Letseng mine where Gem Diamonds Ltd. unearthed a 603-carat gem in 2006, the largest discovered this century.

Rough-diamond prices have climbed 75 percent in the past five years as the U.S. recovered from the financial crisis and Chinese demand increased, according to data compiled by WWW International Diamond Consultants Ltd. Manduca, who says he’s switched his focus from gold to diamonds, sees the gems as a hedge against a range of global economic scenarios.

“If there’s escalating inflation out there diamond prices will do well,” said Manduca. “If there’s continued monetary debasement out there, diamond prices do well. If there’s sustained or increased global conflagration, diamond prices do well. I’m not sure there are too many cases where diamonds do not do well.”

Seeking Investors

Manduca is seeking investors to help fund the development of the Lemphane mine, which is scheduled to start production next year. He isn’t concerned by an alleged army coup in Lesotho last month, which left the former British protectorate embroiled in a political crisis.

“There’s always going to be some political movement,” Manduca said. “There’s a shuffling of the deck, there’s no danger of civil war.”

Lesotho’s coalition partners have agreed to hold elections earlier than scheduled in 2017 in an attempt to ease the political crisis. Lesotho was also urged to lift its suspension of parliament, following a meeting of the region’s leaders in the South African capital, Pretoria, yesterday,

Gem prices have jumped about 14 percent in 2014, according to data compiled by WWW International, as production at some of the world’s biggest mines declines with the depletion of more accessible stones near the surface. De Beers’s output from Botswana, the location of its biggest mines Jwaneng and Orapa, dropped to 22.7 million carats last year from 33.6 million carats in 2007, according to the unit of Anglo American Plc.

Global Output

Global output of 128 million carats in 2012 was 27 percent lower than in 2006, according to Bain & Co., which projects rough diamond demand to climb to $26 billion by 2023 from about $15 billion in 2012.

Gem Diamonds has climbed more than 40 percent in London trading this year after the value of the stones it mined increased 58 percent. Firestone Diamonds Plc and Lucara Diamond Corp. are developing the Liqhobong and Mothae mines respectively in Lesotho, an enclave within the borders of South Africa.

“We are very focused at this time on hard assets, and particularly the diamond sector,” said Manduca, who declined to disclose Titanium’s other interests or how much the firm managed. “We’re fully focused on the diamond story. Diamonds are better than gold, and gold is better than paper.”

Diamond Distributor

Rough diamond prices have increased about 10 percent in the last 12 months, compared with a 5.9 percent gain in gold. The precious metal has climbed 22 percent in the past five years, less than a third of the advance in gems.

Manduca said Paragon will also distribute stones and plans to form a joint venture with a diamond retailer. Gems from its mine will also be part of a fund to give investors direct exposure to diamonds, he said.

“The big investment play in diamonds is that paper currencies are getting significantly debased almost universally,” said Manduca. “There is not another non-paper currency with which you can move your entire wealth in your pocket external to government or banking system adversity.”

Previous diamond funds have struggled. Diamond Circle Capital Plc, the first publicly listed fund to invest in the stones, was liquidated in 2012 after slumping as the financial crisis reduced investor appetite for gems each worth more than $1 million. The first diamond investment trust, set up by Thomson McKinnon Securities Inc. in the 1980s, was wound up after a decline in the market.

Investment Asset

Manduca’s view of gems as an investment asset jars with the outlook of De Beers, the biggest diamond company, which promotes the stones as an emotional purchase rather than a commodity. Still, Manduca sees investment inflows driving the prices of polished stones.

“Diamond prices are rising and will continue to do so for the foreseeable future, not least as demand increases and supply diminishes,” said Manduca. “It’s going to be a strong rise, exacerbated by an increasing investment and currency premium.”

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