Shine bright like a diamond 💎💎

Welcome to Alternate Universe!

In today’s edition:

• Diversifying with diamonds 💎

• Job opportunities at recently funded European startups 👇

• The Grape decline - the future of wine consumption🍷

The Crux 🔴

I recently visited the lovely city of Antwerp in Belgium. Apart from the delicious chocolate and fries (sorry Dutch people😅), I noticed loads of diamond shops.

After a quick search, I realized I was in the Diamantkwartier, the biggest diamond district in the world.

One search led to another, and here we are again.

Rabbit hole time.

🐰🕳️⌚

Chemistry ⚗️

In high school chemistry, we learned that diamonds are just another form of carbon.

Diamonds are an allotrope of carbon, meaning they are a structurally different form of the same element. Carbon itself has other allotropes such as graphite, graphene, and buckminsterfullerene.

Yep - that’s a real allotrope, named after Buckminster Fuller.

Very creative there, Buck. 👏

So, why are diamonds prized while graphite is not?

Diamonds have a unique crystal structure that gives them exceptional hardness, brilliance, and optical qualities. These properties make them highly sought after for both jewelry and industrial applications like cutting and drilling.

Interestingly, only about 20% of mined diamonds are suitable for jewelry-grade use. Investment diamonds represent a small segment of this 20%—large gemstones with specific characteristics, purchased for long-term holding rather than for wearing.

Not all diamonds are created equal.

The 4C framework determines gem quality and price:

1. Clarity: Measures the stone's purity. Fewer blemishes mean higher value.

2. Carat: Measures weight. One carat equals 200 mg. The price per carat increases with carat weight since larger diamonds are rarer and more desirable. This increase is not linear; for example, a 0.99-carat diamond is much cheaper than a 1.01-carat diamond.

3. Cut: Refers to how well the diamond has been shaped and faceted, one of the most important factors in determining its beauty and brilliance.

4. Color: Natural diamonds can have a light yellow tint. White diamonds receive the highest grading and are the most valuable in jewelry.

Market 💹

Russia and Botswana are the major diamond mining countries.

However, mining is merely the beginning of a complex value chain with multiple players and varied profit margins.

1. Exploration & Mining

   After identifying kimberlite-rich areas through mapping, the mining process begins. This can involve various techniques, including open-pit, underground, or marine mining. Significant capital expenditures are required to finance these operations.

2. Cutting & Polishing

   Transforming a rough stone into a gem involves artisanal tools and techniques. Traditionally, the main diamond-cutting centers have been New York, Antwerp, and Tel Aviv. India, Thailand, and China have recently experienced a boom in this industry.

3. Distribution & Retail

   Once diamonds are polished, they are distributed to wholesalers, manufacturers, and retailers. These entities sell the diamonds to consumers through various channels such as jewelry stores, online platforms, and auctions.

A crucial part of the value chain is served by diamond exchanges (or bourses). They act as marketplaces where rough and polished diamonds are traded between buyers and sellers, facilitating transactions and ensuring liquidity. Over 80% of the world’s diamond supply is traded in Antwerp exchanges. 🤯

Issues😓

Diamonds are synonymous with one name - DeBeers.

The story of how one company cornered the market is fascinating.

Cecil Rhodes was a businessman who grew up in the English countryside. In 1871, he was sent to South Africa to assist his brother, Herbert on the family’s cotton farm. After that business failed, he quickly became captivated by the diamond rush in Kimberley.

Rhodes soon realized that the diamond industry was highly fragmented and competitive. Numerous small operators meant that the market was chaotic and diamond prices were volatile.

Rhodes's keen business acumen led him to see the potential for consolidating these scattered mining claims. He strategically acquired claims, often using loans and reinvesting profits to purchase even more land. His ambition extended beyond mere ownership; he envisioned a monopoly that could stabilize the market and control diamond prices.

In 1888, Rhodes achieved a significant milestone by merging his claims with those of Barney Barnato, another prominent figure in the diamond industry. This merger formed the De Beers Consolidated Mines, named after the De Beers brothers, who had originally owned a farm where diamonds were discovered.

At its peak, the company controlled over 80% of the world's diamond supply and tightly regulated diamond prices.

DeBeers still sells its diamonds through 'sights' held in London, where invited sight holders, primarily diamond polishers from key cities like New York, Tel Aviv, and Antwerp, purchase packages.

Sightholders have little autonomy and can be excluded at DeBeers' discretion. Notable incidents, such as the Israeli Incident in the 1970s, underscored DeBeers' authority. In response to Israeli sightholders hoarding diamonds to inflate prices, DeBeers implemented bans to prevent market manipulation.

Despite its historical dominance, DeBeers' grip on the market has weakened, with its market share estimated at 27% as of 2021.

The diamond industry faces multiple challenges, including the issue of blood diamonds, which are mined in war zones and sold to finance conflicts and terrorism. Child labor is also prevalent, with over 1 million children estimated to work in the industry.

Diamond mining is also detrimental to the environment since it leads to deforestation, soil erosion, and ecosystem destruction. The extraction process often involves the use of ammonia, which contaminates lake beds and is toxic to fish.

Due to these issues, there is growing interest in synthetic diamonds, which are grown in labs and mimic natural diamonds. These lab-grown diamonds present a more ethical and environmentally friendly alternative to traditionally mined diamonds.

Investment Implications 🤑

Can diamonds be an investment?

The obvious option to get exposure to this asset class is through investment in actual diamonds. This has a few drawbacks including illiquidity and storage costs. The suggested minimum quality criteria for investment diamonds are:

Weight: >1 carat

Cut: Round brilliant

Colour: from D to F

Clarity: from IF or LC (Loupe Clean) to VVS2

Proportions, symmetry, polishing: Very Good or Excellent

Fluorescence: None or Slight/Faint

Certification: GIA, HRD, IGI

The guidelines above are for white diamonds.

Natural fancy-coloured diamonds offer yet another alternative investment opportunity.

Coloured diamonds are some of the rarest natural gemstones in the world. Their rarity has only been enhanced with the closure of the Argyle diamond mine in 2020, after 37 years in operation. The Australian mine was the source of over 90% of all pink diamonds ever discovered.

Two questions come to mind.

1. How have diamonds performed?

   Diamond prices are highly volatile and performance is dependent on the multiple criteria shown above.

   Accurate and open-source pricing data for diamonds is also hard to come by. Using a composite index of different carats, a 2013 study showed a modest growth of 40% over 10 years (2002-2012).

2. What role do they play a role in an investor’s portfolio?

   Diamonds are seen as a potential safe haven in times of crisis and a valuable portfolio diversifier. In reality, diamonds have only acted as a weak hedge and a weak safe haven against stock market downturns and currency risk associated with the US dollar. Other precious metals like gold have had a better investment performance. In global stock and currency portfolios, however, 1.0-carat fine diamonds enhanced portfolio performance to a meaningful degree.

A more liquid way to get exposure to diamonds is through investment in diamond mining stocks such as Gem Diamonds or Lucara. Research however concluded that such stocks do not represent a valid alternative to physical diamonds. Returns on diamond equities were not driven by diamond prices but rather by local market stock indices.

A US firm aims to offer another liquid alternative to diamond investing. Diamond Standard, offers multiple products including a fund open to accredited investors and physical diamond coins & bars.

For adventurous investors, there are even more exotic options to gain exposure to diamonds. One tentative approach is to invest in indirect beneficiaries of a diamond bull market. Natural targets would be stocks of mining equipment companies and other technology providers.

A quick look at investor reports for some major equipment providers, however, quickly dispels any excitement. Older annual reports from Sandvik, a Swedish engineering group, show that diamonds account for around 2% of their revenues.

On the other hand, companies such as Sarine Technologies, whose main business focuses on the diamond industry, may present a more targeted option.

Want to geek out on other annual reports?

Here’s a collection of links to indirect beneficiaries’ reports.

On the private side, there are a few innovative companies - most notably, Diamond Foundry in the US which has raised over $200m in funding (therefore out of scope for retail investors). They are producing single crystal diamond wafers to solve thermal challenges facing AI chips.

Interested in lab-grown diamond companies? Lusix is doing that through its proprietary tech which uses solar energy.

Dig Deeper ⛏️

Pun most definitely intended 🤪

• Bain Diamond Report

• Do Diamond Stocks Shine Brighter than Diamonds?

• DeBeers Insight Report 2022

• Could diamonds become an investor’s best friend?

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

1. Indie Campers 🇵🇹 The global RV rental platform has raised a €35m funding round. Positions across multiple departments (link)

2. Culture AI 🇬🇧 Human risk management platform closed a €9.1m Series A round. Engineering roles available (link)

3. Onego Bio 🇫🇮 The egg alternative startup has raised €14m. Recruiting a food scientist (link)

4. Leya 🇸🇪 Legaltech startup has closed a $25m Series A. Hiring in engineering and finance (link)

5. 44.01 🇬🇧 The English company has closed a $37m Series A to grow its tech which eliminates CO2 by turning it into rock. Hiring engineers and an IT specialist (link)

6. Again 🇩🇰 $43m raised from Google and HV Capital to convert CO₂ into valuable chemicals. Multiple R&D roles (link)

Interestingness📔 

• Wine consumption is going down. The rise of non-alcoholic beverages and cocktails is attracting younger consumers, who find wine's traditional image less appealing. Pernod Ricard recently divested its wine assets to focus on its spirits portfolio, aligning with broader industry trends. (link)

• The first Ethereum ETFs were launched yesterday with a strong performance. Despite the large inflows, Bitcoin ETFs launched this Jan, still hold the record. (link)

• Ken Griffin, the billionaire hedge fund manager and founder of Citadel, recently paid $44.6m for a Stegosaurus skeleton, making it the most valuable fossil to ever sell at auction. 🤯🤯 (link)

• Blackrock-linked firm is under investigation after it ‘mistakenly’ put a massive short on 12 million Donald Tump shares (DJT), the day before the assassination attempt (link)

• Last week’s massive international IT outage, has hit Crowdstike’s stock (link)

• KKR’s mid-year report (link)

• What Game Theory Reveals About Life, The Universe, and Everything (link)

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.