Why Didn't That 1,109 Carat Diamond Sell?

Russell Shor

July 15, 2016

The failure of the second largest gem quality diamond ever discovered to find a buyer at a well-publicized public auction touched off a great deal of speculation this month. Lucara Diamond Corp. mined the 1,109 carat (ct) diamond in Botswana last year and named it Lesedi La Rona (“Our Light” in the Tswana language). It went up for sale at Sotheby’s London on June 29 and the price was expected to be “in excess of $70 million” − but the high bid of $61 million did not meet the reserve.

It was one of the only rough diamonds ever offered at a public sale. The CEO of Lucara, William Lamb, in a pre-sale interview with the Antwerp newsletter “Diamond Loupe,” explained why the company took this unusual step:

“The Lesedi is estimated at 2.5 to 3 billion years old, which means that the crystal must have started growing very early on during the creation of the Earth. You cannot replicate it by any means, not by synthetic manufacturing or anything else. It will never be exactly the same. It won’t have the same inclusions, it won’t have a little gap somewhere, it won’t have this growth plane and it won’t be that large. People simply do not understand how long it takes to grow a stone, especially one of this size, or anything that is going to be polished into 100 carats for that matter.”

Lucara sold an 813 ct rough diamond, found late last year, for $63 million at its private auction reserved for company clients several weeks before, but the timing for the Sotheby’s sale could not have been worse.

The Sotheby’s auction occurred just six days after Britain’s Brexit vote roiled the world currency and equity markets. The sale, conducted in U.S. dollars that increased sharply in value after the vote, meant buyers paying in other currencies would pay a premium. (Even the Chinese Yuan declined a few percentage points against the dollar).

In addition, based on Sotheby’s video of the diamond and from comments by a dealer who had inspected it, possible internal fissures could have limited its yield; the 813 ct stone was much cleaner.

Finally, it’s certain that a number of key rough dealers had no intention of bidding for the stone: Sotheby’s 12% buyer’s premium would have added $8.4 million to a winning bid at the probable reserve of $70 million.

That reluctance was evident in the room. Auctioneer David Bennett opened the bidding at $50 million − and there was no rush to top it. The price advanced very slowly before stalling at $61 million.

Other than this diamond, prices have remained quite strong for very large colorless diamonds and top fancy colors, as the results of this auction season attest.

Since the unsuccessful auction,  The Economist , Forbes and several newspapers have used the Lesedi La Rona as an example of how the diamond business is facing difficulties from reluctant millennials and competition from synthetics.

The Economist cited a Frost & Sullivan study claiming that softening diamond prices and rising costs will cut world diamond production to less than 15 million carats within 30 years (compared to 130-plus million this year), while production of synthetic diamonds will rise to 60 million carats in that time.

Forbes, working from a Morgan Stanley commodities report, said synthetics would be increasingly disruptive for the diamond market, especially for smaller diamonds under 0.2 carats, which are easier for manufacturers of these stones to produce.

The report also noted that mine production of natural diamonds is on the rise again (predicting a 9% increase to 143 million carats in 2016), but that sales remain nearly stagnant, causing inventories of both rough and polished to swell again.

ABN AMRO bank, one of the industry’s leading lenders, warned that rising inventories may lead to softening diamond prices once again. The bank said some of the improvement in the rough market has been driven by dealers who believe prices will increase as consumer demand rises. Their actions, according to the bank, however, have bloated inventories to levels that are not sustainable because retail sales have not increased as expected, thus jeopardizing the fragile recovery.

As expected, De Beers backed away from its aggressive selling posture of the first half of the year and sold $540 million at its June 20-24 sight, now called cycle. The fact that there were few goods left on the table was taken as a sign that the company and other major producers (Alrosa, Rio Tinto) have struck a realistic balance between price, demand and supply. The July 25-29 cycle likely will stay on the conservative side.