2020 PDAC Technical Program The Business of Diamonds: From Rock to Ring - Paul Zimnisky

Prospectors & Developers Association of Canada International
Convention, Trade Show & Investors Exchange

                                                          2020 PDAC Technical Program
                                                   The Business of Diamonds: From Rock to Ring
                                                                           Paul Zimnisky, CFA
                                                                   Global Diamond Supply and Demand
                                                               Metro Toronto Convention Centre, Toronto, Canada
                                                                                March 2, 2020

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The views expressed in this presentation are strictly that of Paul Zimnisky and are
based on research, analysis, observations, estimates, forecasts, and opinions. Paul
Zimnisky has made every effort to ensure the accuracy of information provided,
however, accuracy cannot be guaranteed. Information in this presentation is
strictly for informational purposes and should not be considered investment
advice. Consult your investment professional before making any investment
decisions. Paul Zimnisky does not accept culpability for losses and/ or damages
arising from the use of content in this presentation.

Disclosure: At the time of the presentation Paul Zimnisky held a long position in
Lucara Diamond Corp, Mountain Province Diamonds Inc, North Arrow Minerals Inc.

Third party use of content in this presentation is only permitted with the
permission of Paul Zimnisky. © 2020 Paul Zimnisky

Contact: +1-917-806-4555, paul@paulzimnisky.com

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Coronavirus Update
◇ As of late-February
      ◇ Greater China represents approximately 15% of global diamond jewelry consumption and Hong Kong is
            one of the industry’s most important B2B trade hubs
      ◇ Major jewelers in Greater China have closed as many as 75% of stores through January and February;
            remaining stores mostly operating on modified schedule with reduced hours
      ◇ The Hong Kong International Diamond, Gem & Pearl Show, originally scheduled for March has been
            postponed until May; the show is typically considered the global diamond trade’s first major event of the
            calendar year
      ◇ Approximately 40% of global business-to-business polished diamond demand originates in Greater China
      ◇ Becoming more of a global concern as of late-February, notable outbreaks identified in South Korea,
            Japan, Italy and Iran
      ◇ Appears the economic impact of the COVID-19 will be more severe than that of SARS, however, for
            context, during the SARS outbreak in 2002-03, the industry took about a quarter to recover
      ◇ As of February 20, De Beers does not plan to cut 2020 production guidance due to virus
      ◇ LVMH in late-January: “If (the outbreak) lasts a couple of months, or two and a half months, then it won't
            be that bad (on the business)”; LVMH generates >25% of its revenue from Greater China

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Industry Review
◇ Last Decade
       ◇ Constrained diamond production following Global Financial Crisis
       ◇ Surge in new consumer diamond demand in China in early-decade
       ◇ Rough and polished price all-time high in H1 2011
       ◇ Industry supply indigestion and Greater China demand slowdown in 2015
       ◇ New mines and mid-stream deleveraging oversupply market in 2018/19
       ◇ New competition from economically produced man-made diamonds
       ◇ The return of “category” diamond marketing by end-decade

◇ 12 month review
      ◇ De Beers and ALROSA strategically curtail supply to market
      ◇ U.S./China trade negotiations and Hong Kong protests impact industry
      ◇ LVMH acquisition of Tiffany (which only sells natural diamonds)
      ◇ New Diamond Producers Association campaign: “3 Billion Years In The Making”
      ◇ Signs of some price recovery in late-2019/early-2020
      ◇ Relatively positive holiday season in U.S. but disappointing Chinese New Year

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Notable Dislocations in Price By Category
◇ Small-size rough diamonds (15% in 2018
    ◇ Weakness due to:
           ◇ New supply hitting market in mid-2017
           ◇ Advanced processing technology, e.g. XRT, resulting in higher recoveries
           ◇ Tighter credit conditions for manufacturers in India, especially those specializing in smaller stones
           ◇ Ramp-up in production of small gem-quality man-made diamonds
    ◇ Rebound due to:
           ◇ Major miners supporting the market and manufacturer’s buying low-priced rough to keep factories
               running

◇    Large “exceptional” diamonds (+10.8 carat) down >20% in some cases in 2019
      ◇ Reflects polished market for large, gem-quality goods
      ◇ Could be result of manufacturers holding on to best inventory, i.e. larger goods, as long as possible before
          also being forced to liquidate these goods due to continued tight credit conditions, i.e. do not see this as a
          demand problem

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Upstream: Global Diamond Supply Picture
◇   Forecasted declining production through at least 2021/2022
       ◇ Multiple legacy mines reaching depletion, including the significant Argyle mine
       ◇ Post-2021, potential for new incremental production to enter supply chain, although the likelihood is
            uncertain at this point, e.g. Luaxe, Marange
       ◇ Trend of declining production forecasted to continue mid-decade

◇   New potential supply sources in the 2020’s
      ◇ Luaxe: trial mining 1Mcts in 2020; possible full-commercial production by end of decade yielding
           ~8Mcts/yr
      ◇ Marange: Zim. gov’t planning ramp-up to 10Mcts by 2023 (cur. Prod.

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Midstream
◇   Inventories contracting but not necessarily due to end-market demand drivers
       ◇ More stringent lending requirements to manufacturers resulting in reduced operating leverage
       ◇ Manufacturer purchasing power sensitivity to INR/USD
       ◇ Fallout of weaker, more-speculative players in recent years

◇   Relative inventory held is shifting from downstream to midstream
       ◇ Retailers negotiating more goods on memo, i.e. consignment
       ◇ Midstream using B2B platform model to sell B2C, e.g. BlueNile, R2Net

◇   Midstream demand drives shorter-term volatility in rough prices but ultimately end-consumer demand
    drives prices longer-term

◇   As midstream industry shrinks there are less advocates for the diamond industry, i.e. less participants
    pushing diamonds downstream

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Downstream: Global Consumer Demand
◇ In recent years global diamond jewelry demand growth has remained positive although it has only been in the
  low-to-mid single digits
       ◇ In 2019, demand is estimated to have grown at a flat-to- low-single-digit percentage, down from an
            estimated 4% in 2018
       ◇ In 2020, demand is forecasted to grow at a nominal 2-3%
       ◇ Diamond demand growth is correlated with global GDP growth
       ◇ Geopolitical uncertainties, such as the ongoing trade spat between the U.S./China, will continue to
            impact the diamond industry
       ◇ Coronavirus likely to impact atleast Q1 2020 diamond jewelry sales

◇ U.S., China, India and Japan together approaching ¾ of global demand
       ◇ The U.S. continues to be the largest end-consumer market representing about half of global demand
       ◇ China and India continue to be fastest growing large markets due to continued expanding middle-class

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Diamond Consumer Demand Trends
◇   Declining marriage rates in developed markets impacting bridal diamond demand on per capita basis
      ◇ Although:
             ◇ Gross consumer growth in new middle-class markets, e.g. China, India, Southeast Asia, Eastern
                  Europe, Latin America
             ◇ Self-purchases by women on the rise
             ◇ Rise in cohabitating couples buying diamond jewelry

◇   Continuing trend in preference for branded diamond jewelry over generic
      ◇ Consumer preference for jewelry design over (solitaire) carat size
      ◇ Emphasis on supply chain transparency

◇   Consumer preference for researching diamonds online before buying in store, e.g. retail omni-channel
    strategies

◇   ALROSA branding strongest fluorescent diamonds as “Luminous Diamonds” targeting younger consumers,
    e.g. party/club scene

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Implication of Man-made Diamonds on Natural
◇ Will come down to marketing strategies
       ◇ Natural diamonds can be distinguished from man-made with certainty
       ◇ Diamond jewelry is an emotional purchase (it’s a fundamentally different market from industrial
           diamonds where the lowest price comparable option always wins out)
       ◇ Does luxury have to be rare and valuable? (fine versus fashion jewelry)
       ◇ Marketing the social and environmental impact
       ◇ The importance of terminology: “lab-created,” “man-made,” “synthetic” or “LGD”

◇ With or without man-made diamonds, the natural diamond industry has to save itself
      ◇ Regardless if natural or man-made, maybe new generations of consumers simply will not want diamonds
           or other fine jewelry at previous rates
      ◇ Category marketing could be the key, e.g. was “A Diamond is Forever” now the DPA
      ◇ Success in luxury, especially with diamonds, is highly dependent on successful marketing and branding
      ◇ The natural diamond industry has a long history of successful marketing, Anglo American and the
           Russians still have significant incentive for it to succeed

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