Dominion Diamond (NYSE:DDC), former parent of jewelry retailer Harry Winston, has acquired Canada's Ekati Diamond Mine from BHP Billiton (NYSE:BHP) for $553 million. Is this an indication that Dominion Diamond will soon make a play for the remaining 60% of the Diavik Diamond Mine (currently held by Rio Tinto (NYSE:RIO))? These are exciting times in diamond mining; the question is whether all these moves will add up to anything.

Better Focus
On March 26, Dominion Diamond closed its deal to sell its Harry Winston jewelry and watch business to Swatch Group (OTC:SWGAY) for $1 billion including the assumption of $250 million in debt. As part of the transaction, the mining business that's left over will operate as Dominion Diamond. The sale of the luxury brand was done for two reasons: The price was right at an enterprise value 23 times EBITDA and it didn't have enough scale to help the brand grow on a global basis. Swatch brings the scale necessary to compete with the likes of Cartier and Tiffany (NYSE:TIF). It truly was a win/win transaction.

SEE: Analyzing An Acquisition Announcement

The Future of Diamonds
Diamonds are a girl's best friend. At least that's how the old saying goes. If that's true, women should definitely be interested in Dominion Diamond, whose Diavik and Ekati mines are among the world's richest. As a pure-play diamond business, it's the largest publicly traded company available and located in the politically friendly confines of Canada. The Ekati acquisition and the potential Diavik deal are just the start. It will undoubtedly move quickly to compete with De Beers, who as recently as the 1980s controlled 90% of the global rough diamond market and now have just 35% market share. If CEO Robert Gannicott has his way, that will continue to shrink over the next few years.
Bain & Company released a report this past December entitled The Global Diamond Industry. It does an excellent job explaining what's happening in the diamond industry. In 2011, for example, companies like Dominion Diamond and its peers produced 124 million carats of rough diamonds at a value of $15 billion. By the time they end up on someone's finger or ear, the value of those diamond's balloons to $71 billion, or almost five times the original amount.
The primary reason for this happening is China and India. China is so crazy for diamond's it's now the second largest market behind only the United States. India comes third but is closing fast as people there are increasingly buying diamonds as wedding gifts instead of the more traditional gold. Combined, the two countries accounted for $17.7 billion in diamond retail sales in 2011, only $9.2 billion behind America. Some experts suggest China will pass the U.S. by 2016. I'm not sure that's in the cards with the Chinese government frowning upon excessive displays of wealth but it should continue to grow at a reasonable pace.

Vertical Integration
With all the value added from when a diamond is taken from the ground to the time it's sold in the jewelry store, it does make you wonder why Dominion chose to sell its retail business. The simple answer (in addition to the earlier reasons listed) is that vertical integration, (the ultimate goal of Harry Winston when he founded the business in 1935), didn't exist. It would mine the diamonds, sell them to polishers and then buy the best cut diamonds for its retail stores from someone else. With a link missing between its two operations, the price of rough diamonds rising considerably and a retail business that couldn't compete with the big boys, the choice was relatively simple. Sell one and add value to the other. The board wisely decided it could do more with the mining operation.

Call to Action
The interesting thing about the diamond market is that consumer demand has been rising at a pretty serious pace while supply has remained relatively constant allowing for ongoing price increases. Pricing power is a wonderful thing to have. With the mine life of Diavik at 2025 and a production of 7.2 million carats this past year, and the mine life of Ekati expected through 2022, this should be easily met for the next several years. 
The problem with diamonds is each one is different. This makes valuing a mine's reserves a tricky business. It also makes it difficult to come up with a real-time price, which hinders liquidity unlike gold and silver. On the flip side, less than 1% of diamond demand is generated by investors compared to 44% for gold. This means that the price of gold is influenced to a much greater degree by the actions of investors as opposed to real demand. The upside of any increased interest in diamonds as an investment will lead to price appreciation just as it has for gold investors; probably not anywhere near the same rate but enough to male it interesting.
I like what Dominion's doing. It made sense to sell the retail operation and now it can focus on mining. Up 19% year-to-date, I could see it delivering another 30%-plus year in 2013. If you make it a small part of your portfolio (maximum 5%) I'd definitely consider owning it. 

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.