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Support Services: Sorting and Sales

Support Services: Sorting and Sales

Over the past few weeks, we have looked at a number of companies that exist to provide support services to miners, manufacturers, and other businesses in the diamond industry. These third-party providers provide expertise that allows other businesses to focus on their main objectives. They can often achieve certain tasks at a much lower cost than if done in house. In my final article for this series, I want to look at rough sorting, valuation, and sales, which have quickly become high-demand services for miners, as more and more diamond mines are being developed by single asset miners.

Before De Beers’ market share of rough diamond sales began to decline in the early 2000s, the organization employed several hundred people in their sorting facilities in London. Once De Beers’ market share began to decline, other producers were forced to develop these skills in-house. It is a challenging project to establish such an operation, and train the many different people who are needed to sort, value, and later sell rough diamonds to the market. The miners in Russia, Africa, Australia, and Canada had to source and train local people to do this work. These skills are essential for diamond miners, because that is where the value of the produced diamonds is first assessed. There are probably only a few dozen people in the world today who are qualified to establish such an operation.

The industry has changed even further in the past few years, as the major producers, often controlled by much larger mining conglomerates, have shown less interest in operating small mines. As a result, there are nearly a dozen diamond mines currently operated by companies that sell less than $250 million worth of diamonds per year. Companies in this position often find that they must sub-contract a great deal of the work to outsiders, and often have only a small team that they employ directly. Rough sorting, valuation, and sales are central to these mines’ success, and many have discovered the efficacy of outsourcing these services. Publicly traded companies, as most of them are, must be able to show their board and shareholders that they are maximizing the value of their diamonds, which is easier for them to achieve if they use the proven expertise of outside agencies.

The rough sorting and valuation process is both a science and an art. Valuing a rough diamond requires an expert who can look at the stone, and assess the numerous potential outcomes from polishing it. The expert must assign probabilities to the potential polished stone, and place a value for each based on his or her expectation of the polished outcome. Each polished outcome must be assigned a price, and the rough price is reverse engineered from the polished value. If you ask 15 different diamond valuators to estimate the polished outcome from a rough diamond, you will likely get 15 different answers. The skill in providing this service comes from being as accurate and consistent as possible, and having access to up-to-date polished pricing.

There are a few companies in the market who offer rough valuation. For most, their principal clients are the governments in diamond-producing countries. Most producer nations require an independent third party Government Diamond Valuator (GDV) to assign a value to any rough that is to be sold outside the country. In a few countries, the rough diamonds produced in a country must also be sold within the country, and the valuator can assist the government to establish an appropriate selling price. Governments in most diamond-producing countries charge miners royalty fees for extracting the country’s mineral resources. These royalties are a percentage of the value of the extracted goods. In some of these countries, the GDV assess the value of the extracted goods to determine the royalty payment. In others, royalties are paid based on the actual selling price of the diamonds. In this case, the GDV establishes a value to allow governments to keep miners in check, and to compare the values to actual sales, to ensure that the country is getting the full value of the sold goods.

A few companies offer contract rough diamond sorting. They are located all over the world, including India, China, Sri Lanka, UAE, Pakistan, and Vietnam, to name a few. Many of the workers at these organizations have diamond polishing backgrounds, and may have worked for companies that have downsized or left the industry. When a miner works with a contract sorting house, it is usually necessary that there still be some in-house diamond people who can work together with the sorting team to establish rough samples and assortment guidelines for them to follow. Every diamond production is different in terms of how it needs to be sorted, and the contractors will often follow the sorting guidelines of a sample sort once established. They will generally charge a rate based on the total diamond volume provided, and the producer can easily compare the cost of sorting this way compared to establishing their own operation.

On the selling side, tender houses have emerged as an option to allow small producers to sell their sorted diamonds to the rough market. Tenders have proven to be a very effective tool to help small (and large) producers to maximize the value of their sales. These companies mitigate many of the challenges for an in-house diamond sales team by providing a physical location to conduct sales, a software platform that rough diamond buyers interact with and submit bids, and all the administrative requirements of running a sale, including customer bookings, invoicing, and collections. Perhaps most importantly, the tender houses have relationships with rough buyers in the market, and can network with them to make sure that sales are well attended, which is a key ingredient to achieving a strong result.

In a very limited number of cases, some of the tender houses provide the complete range of services - diamond sorting, assortment for sale, pricing and valuation, tendering and administration - all under one roof. In this case, the miner actually doesn’t have to have a single diamond valuator, sorter or salesperson on the payroll. They focus solely on mining the diamonds, and the tender houses take care of everything else from the point after diamonds are extracted and washed. There are only a couple of companies who currently offer this type of service, which is appropriate given the number of small to medium-size diamond miners.

The diamond industry has continued to adapt to its challenges over the past couple of decades. Like in so many other industries, outsourcing has become an ideal way to attract the top skills and services of experts without having to develop them internally. The expertise of so many supporting service companies brings great efficiencies to the diamond industry. Without them, it could not continue to operate.

    The views expressed here are solely those of the author in his private capacity. No one should act upon any opinion or information in this website without consulting a professional qualified adviser.

 

 

 August 2017 Market Report
Mercury Polished Diamond Prices: Polished Prices C...

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