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Dominion Diamond CompanyEnvironment Scan

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TABLE OF CONTENTS

I. Company Overview: ................................................................................................................................................. 2

II. EXTERNAL ANALYSIS ........................................................................................................................................... 3

i. PESTLE ANALYSIS ............................................................................................................................................... 3a. Political and Legal .......................................................................................................................................... 3

b. Economic ........................................................................................................................................................... 6

c. Technological ................................................................................................................................................ 11

d. Environmental.............................................................................................................................................. 11

ii. FIVE FORCES ANALYSIS ................................................................................................................................ 12

a. Potential Entrants ....................................................................................................................................... 12

b. The power of suppliers ............................................................................................................................. 13

c. The power of buyers .................................................................................................................................. 14

d. The threat of substitutes .......................................................................................................................... 15

e. Competitive rivalry ..................................................................................................................................... 16

III. CONCLUSION ........................................................................................................................................................ 17

IV. REFERENCES ............................................................................................Error! Bookmark not defined.

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I. Company Overview:

Formerly called the Harry Winston Diamond Corporation, the Dominion Diamond

Corporation (DDC) is headquartered in Toronto, Canada and mines the majority of its

diamonds from the Diavik Diamond Mine in Lac de Gras in Canada. The Diavik mine isCanadas largest mine and is co-operated by DDC and the Rio Tinto Group though DDC has

sole ownership of the mine.

The company was founded in 1994 shortly after the Diavik Diamond Mine was discovered

and was initially called the Aber Diamond Corporation. In 2004, Aber bought 51% of Harry

Winston Inc., a retail brand selling luxury jewelry and watches. By 2006, Aber had full

ownership of Harry Winston Inc. and the company changed its name to the Harry Winston

Diamond Corporation and gets listed at the New York Stock Exchange.

.

F igure 1: Distribution of major diamond mines all over the world

(Source: Linde et al. 2011)Just this year, the company divested Harry Winston Inc. and gained majority interest in Ekati

Diamond Mine and changed its name (again) to Dominion Diamond Corporation.

DDC mines rough diamonds from Diavik and Ekati and then sorts the diamonds in its

Toronto sorting facilities according to its weight, clarity, color and shape. It then ships the

sorted diamonds to its sales offices in Antwerp and Mumbai.

DDC directly sells its diamonds to manufacturers and retailers including Tiffany & Co. Up to

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75% of DDCs diamonds are sold in the open markets in Antwerp and Mumbai.

In the third quarter of 2013 alone, the Diavik Diamond Mine has produced 1.7 million carats

while in Ekati, about 400,000 carats was mined during the same period. DDC looks to expand

its mining coverage in Ekati where the company will be able to acquire diamonds that can be

priced at approximately $247 per carat.

DDC prides in its sustainable mining practices that minimize the negative environmental and

social impact of diamond mining. The company also uses the CanadaMark diamond

program, which guarantees that the diamonds are mined in Canada, untreated, tracked from

mine to retail and meets stringent quality standards.

This report will analyse the external environment focusing on only the mining segment of

diamond industry (since called diamond mining industry).

II. EXTERNAL ANALYSIS

External analysis is important to identify determinants on underlying structure and

attractiveness of the industry. All the environmental and competitive forces might impact on

all the organisations within the industry. In order to elaborately evaluate the Diamond mining

industrys macro-environment, the PESTLE framework is applied to recognise the key

drivers as well as uncertainty level of these factors impacting the organisations strategies

within this. Moreover, implications of competitive factors are also analysed using Michael

Porters Five Forces Framework to give insights of competition level in the industry(Gerry et

al.2008, pp. 55 -67).

i. PESTLE ANALYSIS

a. Political and Legal

The role of government and international associations plays an important role in Diamond

industry. As diamonds are high value natural resources, the government and law enforcement

agencies have concerned on the criminal and tax issues related to the industry. These legal

agencies are trying to strengthen the laws and rules to take control over the diamond supply

chain activities from mining, cutting and polishing manufacturing as well as diamond

jewellery manufacturing.

In 2002, United Nations established the Kimberly Process to restrict Conflict Diamonds

(refers to rebel groups finance their operations through taking control of diamond mines and

selling process, happening mostly in central and west of Africa). Consequently, exporting

authorities in the industry must meet the Kimberly Process Certification Scheme (KPCS)

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requirements for getting certification for all rough diamonds. Therefore, mining activities and

processes of organisations are under supervision of a chairperson to guarantee rules of

Kimberly Process are adhered (World Diamond Council nd). This rules and supervision

significantly influenced on the change in current mining process of mining organizations as

well as slightly increase on barrier to entry for new entrants. However, the KPCS also

provided protections for authentic mining organisations from being illegally controlled by

rebel groups.

Over last 30 years diamond mining has expanded to Russia, Australia and Canada where the

politics are more stable for mining industry. These new exploring destinations for diamonds

have opened new less risky investment opportunities for diamond mining industry. There is

however an essential point that Russian state-owned entity ALROSA is the single player of

diamond mining in Russia (Linde et al. 2011). It probably adds to higher barrier to entry

diamond mining industry in Russia.

F igure 2: Volume of Diamond production by countries from 1870 to 2010

(Source: Linde et al. 2011)In the past ten years, Canada has developed the diamond mining industry, which comprises

high proportion of diamond production in both volume and value.

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F igure 3: Diamond Production in volume and value by countries in 2010

(Source: Linde et al. 2011)

Since diamond mining industry is one of the beneficial industries for Canadian economy, the

Canadian government has distressed on how tightening the regulations as well as encouraging

the exploration activities might be beneficial for this industry. In 2003, Canadian Mines

Minister and provincial and territorial representatives organised a Diamond Roundtable to

raise issues related to the development of Canadas diamond industry. The conference

distressed on strengthening the law enforcement for diamond industry, which strictly forced

all companies in this industry to follow a rigid trading and exploring process. However, the

conference also suggested the simplification and clarification of the regulatory process for

attracting more trained and skilled labour force through immigration (Natural Resources

Canada 2003). Another favourable suggestion from the conference is fixing the Exploration

Investment Tax Credit (ITCE) of 15% (Natural Resources Canada 2005). These steps, when

applied, enhance the incentives for new junior mining companies to finance their operations

through tax deduction for their investors in flow-through shares.

The following figure represents a various jurisdictions in different countries protect the local

trade, enhance security as well as control the diamond marketing activities.

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F igure 4: Diamond Legislation in various diamond jurisdictions

(Source: Diamond Consultants Canada 2008)In conclusion, several of the practices, exploration rights as well as profits and losses are

directed by the political element and therefore, are the key driver in analysis of the industry.

Moreover, since diamond is a valuable but limited natural resource; the government is

tightening regulation enforcement on activities of exploring companies in order to limit the

criminal and environmental actions. The government of Canada encourages smaller diamond

exploring companies to enter the market through tax incentives. Therefore, the political and

legal environment is anticipated to be continually changing.

b. Economic

Economic factor, which drives demand and supply for diamond industry, might significantly

influence on the industry structure, competition and attractiveness.

The production segment of the diamond mining industry can achieve its highest operating

profit margin of 22-26% (Linde et al.2008). Compared to other industries, Diamond mining

industry also has the highest return ratios (Linde et al.2008).

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F igure 5: Production margin over value chain in 2010

(Source: Linde et al. 2011)Most of the demand for diamonds stems from diamond jewellery and therefore jewellery

industry is a significant driver in the market for diamonds. Statistically, evidence suggests

that the growth rate for diamond jewellery is high quite frequently, more specifically in the

Indian and Chinese markets. Forecasts suggest the Indian and Chinese markets as a promising

market for diamond firms.

F igure 6: Demand and Growth rate for diamond jewellery in major markets 2000 - 2007(Source: Linde et al. 2011)

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Diamonds are classified to be luxury products rather than as a commodity similar to other

products from the industry. Thereby, the change in allocation of middle class of the

population significantly impacts the demand for diamonds people. Consequently, India which

is a rapidly growing market for diamonds, has experienced rapid urbanization and increase in

allocation of the middle class. On the other hand, Canada has been witnessing a stable

increase to the number of middle-income families as compared to the U.S. The Belgian

economy has been stable for most part of the century. Although, the European crisis forced

the government to bailout several companies, the Belgian GDP climbed 0.2% in Q1 of 2014

(Bloomberg, 2014).

The Gross Net Income per capita for Canada has been increasing by just under 3% and

Belgium has stayed constant over the past 3 years at $40,000 (USD). In case of India, the

GNI has been increasing by 7-10% (Worldbank, 2014). It must be noted that although GNI

indicates the health of an economy, it is not a major indicator for diamond mining industry as

it is a luxury product.

Like other luxury products, diamond consumption was heavily affected by the 2008

recession with reduction of 11% (Linde et al.2008).

F igure 7: Share of overall consumption of diamonds from 2000 to 2010


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Although the production segments did not follow the trend of decreasing investments, the

exploration segment was severely impacted with the decrease of investment spend by 64%

(Linde et al.2008).

F igure 8: The world diamond exploration spend from 2001 to 2010


The reason for decrease in investment can be attributed to the surplus of diamond supply in

the market.

Fi gure 9: Long-term rough diamond supply and demand outlook from 2006 to 2018

(Source: Nkiruka 2010)

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In conclusion, economic element has a major impact on profit and loss in mining as well as

the retailing structure of diamond industry. The unstable economic condition recently has

increased both upward and downward risks in diamond mining industry. However, trend of

the market shifting from US to Asia, where the economies are highly growing and less likely

to be affected by recession, promises to have higher upward tendency of growth for diamond

mining industry.

Over the next 2 years, the economic growth principles adopted by Canada should see an

increase in the consumption of diamonds. In case of India, with a GDP growth rate on near

6% year over year (Worldbank, 2012), it has been identified as an important target market.

With the Belgian economy just emerging back from the depression with a growth of 0.2%

(Bloomberg, 2014), diamond consumption will grow or bounce back at a gradual pace.

c. Socio-Cultural Environment:

In time past, firms involved in the natural resources industry did not take into

consideration other stakeholders apart from the government and the shareholders. This

position has changed. With increase in awareness by NGOs on issues like environmental

degradation and conflict diamonds, for a firm to ensure Sustainable Competitive

Advantage, there is the need to engage in stakeholdersanalysis, in order to determine how

to manage them effectively. Bearing in mind that the profitability of diamond industry is

based on perceived value placed on the product by the consumer, and to promote this value,

the firms use movie stars and models. The growth of population is given by the figure below

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The demographic trends indicate significant market opportunities to expand in India. With

several diamond sorting and distribution companies situated in Antwerp, consumers have

several options in terms of merchants. The situation is similar in Canada.

d. Technological

Technology plays an important role in production and safety level for mining industry in

general and diamond mining industry in specific. Technology offers an incentive to gain a

significant advantage over its competitors by increasing the volume of production and win

licences for hard to explore but high value mines.

Exploring and mining technology

Owning high technology has consolidated the position of top four companies (De Beers,

ALROSA, Rio Tinto and BHP Billiton) in diamond mining industry. Technological

capability has helped these giants to take control most of new exploring places as well as

ability to evaluate the value of new mines.

Internet revolution

Since the advent of internet, it has impacted the change in diamond jewellery retailers

structure (appearance of online selling players like Blue Nile) as well as indirectly influence

on power of price makers of mining companies (Nkiruka 2010). Therefore, online sales have

enhanced the transparency of diamonds price in the market leading to more bargaining power

of consumers users.

In conclusion, the technological aspect plays an important role in deciding competitive

advantage and capability of every player in diamond mining industry.

Environmental

Diamond extraction from earth is not evaluated as unfriendly as other mineral extaction due

to lack of use of hazardous materials. However, due to high environmental awareness and its

impact on global nature, most of mining companies have attempted to minimize their

environmental influences through committing to the ISO 14001 standard of environmental

management (World Diamond Council nd). Therefore, any company in mining industry has

to consider a capital investment for environmental management practises.

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ii.

FIVE FORCES ANALYSIS

a. Potential Entrants

The diamond mining market has changed from monopoly market into an oligopoly market.

This is evident from the fact that De Beersmarket share reduced from 90% to 35% in 2013,although it may increase to 40% due to the acquisition of Gahcho Kue mines. It is also

evident from the presence of other giant mining entities like ALROSA, Rio Tinto and BHP

Billiton (Nkiruka 2010).

There are restrictions preventing junior players to enter the market. There are several reasons

that prevent new comers to diamond mining industry listed below.

High capital investment

Diamond mining industry is classified to be high capital-intensive investment where the

exploring activities require high investment on mining equipment and depend on skilled

labour forces. Another aspect is that the payback period cannot be calculated considering the

complexity exploring process. The probability that finding a deposit containing diamonds and

can develop into a diamond mine is 1 to 3 % although the high value of every mine

developed (Linde et al.2011).

The typical production cost for a diamond mining and producing company are described

below

F igure 10: Annual production costs of diamond mining operations

(Source: Linde et al. 2011)Consequently, there is a high barrier of scale and experience prevents new junior players to

enter the diamond mining industry.

Political and Regulatory Enforcement:

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Legislation role in diamond mining industry poses considerable problems due to stringent

regulations such as KPCS, licensing, rough diamonds rules and penalties, etc. as well as strict

regulatory enforcement process (Diamond Consultants Canada 2008).

However, diamond mining industry is one that is a beneficial contributor to the economy of

country where it is explored, thus governments recently have encouraged the investment of

companies through several tax incentives scheme like ITCE of 15% in Canada (Natural

Resources Canada 2005). This incentive has increased the threat of entry through lower

financial risk.

b. The power of suppliers

Equipments suppliers

Since diamond mining is developed across the axes from Russia to Africa and Canada to

Australia, equipment suppliers hold considerable power over diamond mining companies. As

mining equipment requires high capital investment, thus diamond mining companies are

impacted by high switching cost for changing equipment suppliers. Concluded from these

reasons, power of equipment suppliers in diamond mining industry is analysed to be medium.

Ranking = 3

Finance suppliers

Diamond mining industry is a capital-intensive industry. Therefore, Diamond Banks were

established to serve players in this industry. There are a few banks who finance for large and

mid-sizes companies like ABN AMRO and ADB (Linde et al. 2011). However, diamond

banking industry in India is classified to be fragmented with large number of banks serving

the industry. However, these banks in India mostly serve the cutting and polishing

companies. In Canada, RBC and NBC banks are major banks that fund diamond mining

companies.

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F igure 11: Diamond banks market share in 2009

(Source: Linde et al. 2011)In conclusion, the power of finance suppliers for diamond industry is evaluated to be

relatively high. Also, the high switching cost makes the power of financiers high. The

opportunity cost of switching banks is also high since borrowing is long process. It must be

noted that, the level of borrowing is determined by the credit of mining companies. In case of

Dominion Diamond Corporation it is ranked as 4

c. The power of buyers

Retailers are the direct buyers of the diamonds from the mining companies. Due to different

buying behaviour, demand level and scale of business, they have different level of power

over the mining companies.

Retailers have access to the diamonds offered by mining companies through long-termcontracts or auctions (Linde et al.2011). The power of buyers through long-term contract and

auctions is quite low since buyers compete with each other to buy the big size valuable

diamonds through auctions. In addition, diamond mining companies decide the price,

quantity and quality of diamonds based on the financial capability, business practises and

reputations of buyers set by long-term contracts in advance. In contrast, buyers using

sightholder method tend to have medium buying power as to there are fewer than 100

sightholders buying more than 70% amount of rough diamonds in the world (Linde et al.

2011). Ranking 4.

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d. The threat of substitutes

Synthetic diamonds

Synthetic diamond technology has improved significantly over time making diamonds that

are almost equal quality but cost round 40% less than natural diamonds. Buyer perception

may change due to synthetic diamonds partly affecting on demand for natural diamonds. This

threat is significantly recognized, as 95% of diamonds used in industrial consumption are

synthetic diamonds (McAdams & Reavis 2008). Industrial users have higher usage of

synthetic diamonds due price/value quality of synthetic diamonds. This trend changes

significantly as individual consumers of diamonds perceive natural diamonds to be more

important due to their unique nature. It can be concluded that the threat of substitutes from

synthetic diamonds is low for gem-quality consumption but high for industrial consumption.

Ranking = 2

F igure 12: consumption of natural and synthetic diamonds for industrial and jewellery

demand

(Source: Linde et al. 2011)Since 2007, GIA has accepted to grade the synthetic diamonds for transparency. In addition,

Israel Diamond Exchange (IDE) also banned the trade of synthetic diamonds in 2004 (Linde

et al. 2011). These activities responding have slightly decreased the threat of substitutes by

synthetic diamonds in gem-quality market but actually did not affect on industrial

consumption.

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Gold

Gold is also considered to be one of substitutes in gem-quality consumption market due to

several reasons summarized on figure 13.

F igure 13: Value considering factors for Gold and Diamonds


Gold is evaluated with several outstanding value and characteristics such as more easy to sell

back to secondary market, volume sufficient using as currency, homogeneous quality, etc

(Linde et al.2011).

However, due to unique value that diamonds hold, such as a symbol for love, marriage,

engagement cannot totally replace. Consequently, gold is considered to be medium substitute

for diamonds in term of emotional symbol of ownership.

Ranking = 3

e. Competitive rivalry

All four elements of entry level, power of buyers and suppliers and threat of substitutes help

generating a picture of competitive rivalry of diamond mining industry. High barriers of entry

in term of strict regulations and intensive capital have increased the competition level to a bit

higher than medium. Moreover, diamond mining industry now has few companies such as De

Beers, ALROSA, Rio Tinto and BHP Billiton who provides around 60% of the world

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diamonds, which indicates a danger of intense competition in the market (Linde et al.2011).

High growth rate and limited production of diamonds create a low price competition and fair

opportunity for all organisations growing in the market. In addition, differentiation element is

determined by the quality of diamonds in particular mine which is impacted by the scale and

technological capability of mining companies to gain licensing for quality mines production.

Consequently, it is finally concluded that competitive rivalry of diamond mining industry is

at medium to high level.

III. CONCLUSION

Diamond mining industry is considered to be very profitable industry with average profit

margin at 22-26% and growing at high rate of 5%, 17% and 13% in main markets

(respectively in United States, China and India) (Linde et al. 2011). This basic information

indicates a favorable attraction for the diamond mining industry. However in order having

depth overlook and clear insights of the industry, PESTLE and Five Forces analysis

framework are applied to evaluate the diamond mining industry.

Firstly, PESTLE analysis concluded a gradually volatility environment in term of politic,

legislation and economy. Government and diamond associations are trying to strengthen and

are strictly governing the diamond mining process and practices through more rules and

legislation enforcement. Unstable economic condition has influenced on the stability level of

demand for diamonds in the market. However, predicted change of economy has evaluated to

be favourable by investors in the industry. Main markets for diamonds are shifting more to

Asia (mainly in China and India) where the economies are steadily growing leading to higher

demand for diamonds in the future. In addition, technological element is indicated to be not

so volatile but is a key driver for shaping power in the industry. By committing to

environmental management practises like ISO 14001 should be considered (World Diamond

Council nd). Although investment for this standard might require significant capital but it

offers competitive advantage and social responsibility reputation for companies in this

industry.

Secondly, Five Forces Analysis has indicated a medium to high competition environment of

diamond mining industry. With few numbers of competitors with large scale of business and

high technological capability, diamond mining industry is recommended to have intensive

competition. Together with high continuous capital requirement for keep business going on

as well as complex and strict regulations, there are high barriers to entry the diamond mining

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industry. However, medium power of suppliers in term of finance and equipment does give

favourable environment for new entrants. Moreover, low to medium power of buyers was

classified through different ways of selling diamonds to retailers/jewellery manufacturers has

created moderate influence of diamond mining companies in the market. Threat of substitutes

is also another consideration for the attractiveness of the industry. Synthetic diamonds are

one of high threat in term of industrial consumption but do not really change the demand for

gem-quality consumption. Gold is another strong substitute for gem-quality consumption but

still does not totally take replacement over diamonds in term of emotional symbol.

Consequently, diamond mining industry with high growth rate which indicates an enough

market along with ROE of 291.92 for more entrants to join the market and grow within it.

The industry can be said to be favourable and attractive enough for investors to put money in

current companies in the market, especially the big giants dominating the market. However,

there are sophisticated high barriers to entry like regulations, technological capability, scale

of business, experience and intensive capital investment requirements might prevent new

entrants to this extremely attractive industry.

Financials:

ROA: 204.411

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