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					Global Mining

October 31, 2008
                                                                  Diamond Update No.2
Diamonds                                                          Supply Side Case for Rough Intact Despite Softening

                                                                  1:     Rough diamond prices rose by 20% (January 2008 to August 2008) and are
                                                                         now down by around 10% from those peak levels. Depending on the
                                                                         economic downturn, average rough prices could fall by a further 10% to
Diamond Shares Substantially                                             H1/09, recovering in H2/09.
Underperform BMO Diamond
                                                                  2:     BMO forecasts a further 30% rise from the August 2008 peaks by 2012
Index Since January 2008
                                                                         despite current short-term weakness, driven by little or no supply growth
                                                                         and no producer stock overhang.
                 Index                % Change (Jan
                                      2000-Oct 2008)
                                                                  3:     Harry Winston Diamond Corporation (Outperform), Petra Diamonds
      BMO Diamond Share                                                  (Outperform Speculative) and Gem Diamonds (Market Perform) are
      Index                              No Change
                                                                         examples of oversold, quality diamond shares.
      BMO Index of Average
      Rough Diamond Prices                            90%         Fig 1: Selected Hard Rock Diamond Producers and Near Producers


                                                                       Company             Price    Rating        Market Cap        Comments
300                                                                    African Diamonds    45.5p   Not Rated           £35M    AK6 Production, H1 2011
                                                                       DiamondCorp         56.0p   Not Rated           £20M     Lace Mine, South Africa
                                                                       Gem Diamonds       277.0p Market Perform       £175M          See BMO Reports
100                                                                    Harry Winston      C$9.74  Outperform         C$600M          See BMO Reports
                                                                       Petra Diamonds      84.0p Outperform(S)        £155M          See BMO Reports
 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

                BMO Diamond Index
                BMO Index of Rough Diamond Prices ♦               Source: BMO Capital Markets

                                                                  The BMO Diamond Index has 32 constituents, all small- to mid-cap. The above
                                                                  are the only quoted hard rock companies in production, or with a firm production
Analyst: James Picton
+44 207 246 5420                                                  However, ALROSA, the world’s second-largest producer after De Beers, has                                              several times spoken of an IPO and this looks possible around 2010/2011. CEO
                                                                  Sergey Vybornov said in December 2007, “our planned capital investment is
Associate: Kodees Waran                                           US$5B over the next five years, and no investment banker in the world at this
+44 207 246 5431                                                  moment could tell you our likely market capitalisation.” The valuations of two                                              independent Russian agencies in 2007 averaged US$5B, excluding new money.

Assistant: Laura Coates
                                                                  In any event, a diamond major should list in around two years, according to

                                                                  Alluvial mines are currently excluded. Grades are typically very low and variable,
                                                                  and costs need to be kept very tight. With a few exceptions like the old Trans
                                                                  Hex, no quoted alluvial mines have made decent earnings. Spero Optima (Hope
                                                                  for the best)-Oppenheimer family motto.

This report was prepared by an Analyst employed by a Canadian affiliate, BMO Nesbitt Burns Inc., and who is not registered as a research
analyst under FINRA rules. For disclosure statements, including the Analyst's Certification, please refer to pages 14 to 19.
Global Mining Research
Diamond Update No. 2
October 31, 2008

                              1. Introduction
                                   There are no meaningful economic precedents against which to compare the
                                   diamond industry’s likely performance through the current financial turmoil.

The 1981/82 fall in rough          For example, in 1982 U.S. GDP fell by 3%, its steepest recession since 1945,
prices is not comparable to        world GDP grew by only 0.9%; but then there was also the multi-billion dollar
the current economic               unwinding of the speculative boom (1977-1980). De Beers stocks of rough
turmoil. There was surplus         alone rose by US$1.6B between 1977 and 1983; speculation in polished was
mine production and the            much greater still. And yet average rough diamond prices fell by only 11% in
unwinding of the massive           1982 following a 90% rise during the speculative boom, which De Beers was
1977-80 speculative boom.          powerless to prevent, much as it tried. More on this topic below.

                                   Figure 2 shows how 2008/2009 compares with: (1) the severe 1982 U.S.
                                   Recession; and (2) the Japanese implosion of the 1990s, followed by a small
                                   U.S. Recession in 1992, a more severe Asian Contraction in 1998 and the
                                   bursting of the dot-com bubble in 2000.

Fig 2: Severe 1982 U.S. Recession; 1990s Japanese Implosion and U.S./Asian Recessions Versus 2008/2009F

                          Change in Average           Level of Diamond Stocks               U.S.
                            Rough Prices                                                Consumption
         1982-1983                       -11%            Very high, excess production            53%
         1990s-2002                      -25%         Very high, increasing production           53%
         2008-2009F                      -20%      None, flat/declining mine production          40%

Source: BMO Capital Markets

                                   In the short Stock Market crash of October 1987 to early 1988 (minus 33% as
Average price falls above are      measured by the S&P 500 Index), average rough diamond prices rose by 10%
from peak to trough, not           in 1987 and 13.5% in 1988.
necessarily calendar years.
                                   Since BMO’s basic industry report, “Diamonds: Past, Present, and Future”,
Rough diamond prices               January 22, 2008, average rough diamond prices rose by 20% to August 2008
performed well in the credit       and have since fallen by 10%. This Update No.2 looks at the likely scenario
crunch to August 2008, but         through the trough and expected ensuing recovery.
have now softened.
                                   In the major 1982 U.S. recession coinciding with the multi-billion dollar
Historical precedents are           unwinding of the 1977-1980 speculative boom, rough prices fell by 11%. The
difficult due to special            Japanese economic implosion of 1990-2002 coincided with: (a) the sale of
adverse factors in the 1980s        US$6B of Russian rough stocks; and (b) the onset of three major mines
and the 1990s, namely one-          (Venetia, Catoca and Ekati) and a doubling of production at the big Orapa
off, multi-billion stock sales      mine. Artisanal production in the DR Congo and Angola rose sharply. Russian
in both decades and surplus         stock sales alone were equivalent to 1995’s mine production.
mine production.
                                   There was also a minor U.S. recession in 1992, a more severe Asian
                                   contraction in 1998 and the dot-com bubble burst in 2000. From both the
                                   demand and supply side, it was the worst period for the diamond market since
                                   the 1930s and diamond prices fell by 25%.

Page 2
Global Mining Research
Diamond Update No. 2
October 31, 2008

                              In this current period of economic downturn and financial uncertainty there are
Now there are no big mine     no stocks of rough diamond to sell and no new net mine production. Per
stocks of diamonds to sell,   contra, the productions of the four main producers (De Beers, ALROSA, Rio
and production is flat-to     Tinto and BHP Billiton) are declining, Rio Tinto and BHP Billiton down by
declining.                    23/24% in the first nine months of 2008 on lower grades. This is in total
                              contrast to 1990-2002 when mine supply rose by 45% and ALROSA added
                              US$6B of stock sales.

                              De Beers, having raised its rough prices by 16% in August, said in October
De Beers has its say.         that, “we still believe we are going to close this year with a substantially higher
                              price for diamonds than we started the year”. It has since toned that down a
                              bit, but such a comment would have been unthinkable in the downturns of the
                              1980s and 1990s.

                              On the demand side there are varying reports: the retail arm of major
Some surprisingly upbeat      diamantaire Rosy Blue predicts an overall rise in 2008 global sales despite a
retail reports thus far.      forecast 15% decline in the USA. Tiffany & Co recorded 11% Q3 sales growth
                              worldwide; the CEO of Harry Winston Diamond Corporation said in an October
                              interview, “There’s a lot more upside in diamond prices than the public market
                              appreciates….I don’t think the supply-demand gap is appreciated very well.”
                              Harry Winston plans to tie up with another diamond producer within three
                              years to ensure access to supplies of rough diamonds.

                              •       After eight decades of mine production surpluses, heavy Russian stock
                                      sales in the mid 1990s and selling of De Beers’ buffer stock in 2006,
                                      rough diamond producers can look forward to a structurally very good

                              •       This is particularly so as the markets of China, India, the Gulf and to
                                      some extent Russia are growing at around twice the world average.

                              •       The general financial turmoil of 2008 is blunting H2/08 – with a fall in
                                      average rough prices of 10% from the August peaks. A further fall of
                                      10% is quite possible during H1/09.

                              •       By 2012, BMO predicts average rough prices will be 30% above their
                                      August 2008 peak levels. In the short term, there may be a further fall
                                      of up to 10% but this should not divert attention from the very sound
                                      medium-term supply/demand position.
                              •       H2 is almost always seasonally weak in the diamond business as some
                                      65% of rough purchases are made in H1 for the long preparation for
                                      the Christmas season (some 40% of retail sales). Comments on rough
                                      prices in H2 should be seen in this light.
                              •       Given that the BMO Diamond Share Index has not responded to the
                                      90% rise in average rough prices (recent softness allowed for) since
                                      January 2000, there is good value in selected producers and near

                              Example of a major mine’s price/production matrix.

Page 3
Global Mining Research
Diamond Update No. 2
October 31, 2008

                                Fig 3: Jwaneng’s Production/Price Matrix
Figure 3 shows the
complexity of forecasting
                                                                 Gems Medium/ Indian Industrial Total
rough diamond prices
applicable to a particular                                       over 2 Small  Goods
mine. The example is very                                        carats Gems
simplified; suffice it to say        Percentage of Output           6%    21%    53%     20% 100%
that different categories can        Estimated Value per Ct      $1300    $325    $50       $2    n/a
move very differently in             Weighted Value                 $78    $68    $27       $0 $173
                                Source: BMO Capital Markets

                                World Rough Diamond Production; The End of Surpluses
                                •          Eight decades of relentless diamond mine supply increases ended in
The 20th and early 21st                    2003 with the onset of Diavik, the last of the major mines.
centuries were plagued by
sharply rising production…

…and major stock sales by       •          Russian stocks (US$6B) were sold during the 1990s and De Beers’ final
ALROSA and De Beers.                       buffer stock selling occurred in 2006.

                                Fig 4: Rio Tinto Supply/Demand



                                    US$ Index                                                            Supply



                                                 2005     2007      2009      2011      2013      2015

                                Source: BMO Capital Markets

                                “Between now and 2016, even under the most optimistic supply scenario,
                                demand will outgrow supply. We cannot overlook the fact that that the US
                                accounts for half of all diamond jewellery consumption; however, we must
                                acknowledge the accelerating diamond jewellery sales in China, India and the
                                Middle East. These emerging markets are set to provide some solid insulation
                                from any volatility in the US”. Bill Champion, Managing Director, Rio Tinto
                                Diamonds, 29 May 2008.

Page 4
Global Mining Research
Diamond Update No. 2
October 31, 2008

                                Fig 5: World Rough Diamond Production 2007 (Carats M)

                                                                     Others Namibia
                                                           Angola     5.4     2.2
                                                            9.6       3%      1%               Botswana
                                                            6%                                   33.6
                                                S.Africa                                         23%

                                                                                                   DR Congo
                                                       19.2                           Russia
                                                       12%                             21.9
                                Source: BMO Capital Markets

                                Botswana continues to be the dominant producer in both carat and value
                                terms. It will remain so, but going underground at the huge Jwaneng and
                                Orapa mines will lead to a production fall-off, also at deepening Russian mines.
                                The decline continues at Argyle in Australia, and in Namibia.

                                Fig 6: World Rough Diamond Production 2007 (US$B)
Argyle in Australia declines
sharply, as does Namibia.                                                 Australia
Russia is declining. Only                                     0.9           0.4
Canada is expanding (Snap                                                   3%             Bostwana
                                                     DR Congo 6%
Lake and Victor), but Ekati                                                                   3.4
declines as it transitions to                                                                24%

Botswana rules by                                                                                    2.5
production value (Jwaneng                                                                           17%
alone is around 20% of the                                  Canada
                                                              1.7                 S.Africa
world total) but is set to                                                          1.7
decline as Jwaneng and                                                             12%
Orapa go underground.
                                Source: BMO Capital Markets

                                By major producer, De Beers was around US$6.1B in 2007, Alrosa ~US$2.3B
                                excluding its 33% of Catoca (total ~US$500M), Rio Tinto ~US$1.2B and BHP
                                Billiton ~US$600 million.

Page 5
Global Mining Research
Diamond Update No. 2
October 31, 2008

                            Moreover, De Beers forecasted in July a drop of around 1M carats in its 2008

                            Fig 7: Rough Production Split Into Five Categories (Carats M)

                                    Category          2006 2007 2008F 2009F 2010F 2011F 2012F
                              Fine Large                8.4   8.5   8.4   8.6   8.7   8.6   9.1
                              Fine Small               10.1   9.7   9.3   9.7    10   9.8  10.5
                              Comm. Large               7.8   7.6   7.4   7.5   7.7   8.3   8.9
5–6% of rough diamonds by     Comm. Small              38.6  36.3  34.5  35.8  37.1  38.2  41.3
carat weight…                 Mixed                    97.3  93.4  89.3  92.3  95.3  97.4 104.8
                              Total                   162.2 155.6 148.8 153.9 158.8 162.3 174.6
                              Fine Large as a %
                              of Total Carats              5        5        6    6       5       6       5

                            Source: WWW International Diamond Consultants

                            Gem Diamonds’ Letseng mine is the world’s most prolific producer of the
                            largest of Fine Large Gem. Fine Large Gem is only 5–6% by carat weight…

                            Fig 8: Rough Production: Five Categories (US$B at H1 2008 Values)

                                    Category          2006 2007 2008F 2009F 2010F 2011F 2012F
                              Fine Large                5.8  6.3   7.1   7.4   7.6   7.2   7.5
                              Fine Small                2.0  2.1   2.4   2.5   2.5   2.8   2.9
                              Comm. Large               2.2  2.3   2.6   2.7   2.8   2.8   2.9
                              Comm. Small               1.3  1.3   1.5   1.5   1.5   1.8   1.9
…make up 44–45% of the
                              Mixed                     2.0  2.1   2.4   2.5   2.5   2.6   2.7
                              Total                    13.2 14.2  16.0  16.6  17.0  17.2  17.9
                              Fine Large as a %
                              of Total Value              44      44        44   45     45       42      42

                            Source: WWW International Diamond Consultants

                            …but 44–45% by value. The distressed U.S. goes heavily for Commercial
                            Large, which was only 20% of 2007 production by value. Commercial Large is
                            chunky but not of top colour or clarity; a big stone at a relatively modest price.

Page 6
Global Mining Research
Diamond Update No. 2
October 31, 2008

                                Fig 9: Rough Production: Five Categories (US$B at H1 2008 Values)
Gem Diamonds reported
weaker prices in October,                                      Mixed
but it is not generally                                         2.1
recognized that 65% of                                         15%
rough demand typically falls
seasonally in H1, and only
35% in H2. Rough is bought                 Comm. Small
in H1 to cut, polish and set                  1.3                                            Fine Large
for the Christmas season.                     9%                                                 6.3
Trade in H2 is always                                                                           45%
seasonally thin and price
moves therefore erratic. H2
is almost a false market in
loose stock market                         Comm. Large
terminology.                                   2.3

                                                              Fine Small
                                Source: BMO Capital Markets

                                    1.   Fine Large: +3 grainer (a grainer is a quarter of a carat), D to I
                                         Colour, Flawless to VS2 Clarity
                                    2.   Fine Small: -3 grainer, D to I colour, Flawless to VS2 Clarity
                                    3.   Commercial Large: +3 grainer, J to K Colour, SI1 to S13 Clarity

                                    4.   Commercial Small: -3 grainer, J to K Colour, SI1 to SI3 Clarity
                                    5.   Mixed: All Goods Colour K and down, below I1 Cleavage, Rejections,
                                         Industrial Boart, etc

                                As in Figures 7 and 8 Fine Large Gem constitute 5–6% of world rough
                                production by carat weight but around 45% by value.

                                Diamond prices rose sharply in 2007 (averagely by around 20%) and much
Average rough diamond           more so at the top end of the market. Hence, a US$1B increase in world rough
prices rose 20% in 2007 and     production value despite a 4% fall in carat output. Production value forecasts
20% to August 2008, then fell   (Figures 7 and 8) after 2007 are in constant U.S. dollars. Rough prices are up
by 10% in August 2008.          by 10% on balance in 2008.

                                Good Fancy Colours like the Williamson Pink from Petra Diamonds’ Williamson
Petra Diamonds has fancy        mine are way above the prices of white diamonds, as are fancy blues from its
blues at Cullinan, and Gem      huge Cullinan operation. Cullinan is now the only reliable source of fancy blues
Diamond’s Letseng mine          (record price in polished form US$1.37M per carat).
produces a succession of
special stones.

Page 7
Global Mining Research
Diamond Update No. 2
October 31, 2008

Fig 10: 23.6 Carat Centre Stone Brooch                       Fig 11: 6.04 Carats, Sold by Sotheby’s Hong Kong 2007

Source:                                  Source: Sotheby’s Hong Kong

                                 Pipeline Stocks of Rough and Polished
                                 Total trade stocks of rough fell from US$3.16B in Q1/07 to US$2.93B in Q3
Rough and polished trade         2008. Over the same period, trade stocks of polished fell from US$9.77B to
stocks down from Q1/07           US$9.45B, according to WWW International Diamond Consultants

                                 Supply and Demand
                                 Using the IMF World Economic Outlook dated October 2008, WWW forecasts
                                 the following Polished Wholesale Values for diamonds in jewellery; the actual
                                 diamond content and not including the add-on value of setting and retailing.

                                 Fig 12: GDP Growth Forecast
Precise levels of GDP growth
have usually been less                                                    GDP Growth Forecast
important to moves in rough                     2006          2007      2008     2009      2010    2011     2012
prices than mine production        USA         2.9%          2.2%       1.3%     0.8%      2.9%    3.7%     3.5%
increases/decreases and            Japan       2.4%          2.1%       1.5%     1.5%      1.7%    1.7%     1.7%
major stock sales, or their        Italy       1.8%          1.5%       0.5%     0.5%      0.7%    1.0%     1.1%
absence                            France      2.2%          2.2%       1.6%     1.4%      2.5%    2.6%     2.6%
                                   Germany     2.9%          2.5%       2.0%     1.0%      1.7%    2.0%     2.1%
                                   UK          2.9%          3.1%       1.8%     1.7%      3.3%    3.2%     2.8%
                                   Canada      2.8%          2.7%       1.0%     1.9%      3.4%    3.3%     3.1%
                                   China       11.6%         11.9%      9.7%     9.8%     10.5%   10.0%    10.0%
                                   India       9.7%          9.2%       8.0%     8.0%      8.0%    8.0%     7.9%

                                 Source: IMF, October 2008

Page 8
Global Mining Research
Diamond Update No. 2
October 31, 2008

                       Fig 13: GDP Growth Forecast for USA, Japan, China and India








                                2006       2007        2008         2009       2010       2011       2012

                                                    USA        Japan         China      India

                       Source: IMF, October 2008

                       Fig 14: Diamond Jewellery Retail Sales: 2006, 2007 and 2008F to 2012F (US$b)

                                                   2006     2007    2008F    2009F    2010F     2011F 2012F
                         1. USA                    33.50   34.10     32.80    34.70    36.40     38.30 40.40
                         2. Europe                 14.00   15.60     17.80    17.30    18.10     18.80 19.70
                         3. Japan                   9.20     8.80     9.70     9.80     9.80      9.80  9.90
                         4. Asia                    8.70   10.00     11.30    12.30    13.50     14.60 15.90
                         5. Gulf etc                8.60     9.70    11.00    11.10    11.70     12.40 13.10
                         Total                     74.00   78.20     82.60    85.20    89.50     93.90 99.00
                         4. Asia + 5. Gulf         17.30   19.70     22.30    23.40    25.20     27.00 29.00
                       Source: WWW International Diamond Consultants, September 2008

                       Asia and the Gulf represent three of the four main high-growth areas, namely
                       China, India and the Gulf. Between 2006 and 2012F, sales in those areas are
                       expected to rise by about 70% in US$ value terms compared with 30% for the
                       world as a whole. Europe includes Russia, the fourth high-growth area.

Page 9
Global Mining Research
Diamond Update No. 2
October 31, 2008

                       Fig 15: Diamond Jewellery Retail Sales – 2007 (US$b)
Retail Sales 2008E
                                         Asia, Gulf +
USA         40%                            Others
China*      12%                                                                USA
India      10%
Gulf        4%                              Japan
Europe** 23%
Other       11%
*Including Hong Kong
** Including Russia                                           20%
                       Source: BMO Capital Markets

                       The U.S. peaked at 53% and was down to 40% in H1/08. The retail arm of
                       Rosy Blue forecasts an overall rise in 2008 demand despite predicting a 15%
                       drop in U.S. sales.

                       Fig 16: Diamond Jewellery Retail Sales – 2012 Forecast (US$b)

                                         Asia, Gulf +
                                            29.00                              USA
                                             29%                              40.40

                       Source: BMO Capital Markets

                       Asia and the Gulf are prime growth areas, as well as Russia included under

Page 10
Global Mining Research
Diamond Update No. 2
October 31, 2008

                                 Fig 17: Projected Rough Diamond Supply and Demand


A US$5B supply/demand gap                                            20.0
by 2012 is equivalent to 80%

                                                      US$ billions
of another De Beers. The gap                                         18.0

gets wider after 2012 (Figure
4). Figures for pipeline
stocks (page 8) suggest that                                         14.0
the trade has been using
them: rough stocks are down                                          12.0
to 20% of 2007 mine
production                                                           10.0
                                                                                     2006E            2007E             2008F                2009F           2010F                2011F          2012F
                                                                                                                               Supply                 Demand

                                 Source: BMO Capital Markets

                                 A US$5B annual supply deficit is almost another De Beers (US$6.1B in 2007).
                                 And the deficit is set to widen by 2016 (Figure 4).

                                 Rio Tinto’s projection (Figure 4) emphasizes the sharp supply fall after 2012, as
                                 some major old mines decline further or phase out.

                                 2008 Actual Rough Diamond Prices: The Credit Crunch
                                 Rough diamond prices usually move very swiftly in bad economic conditions;
That rough prices are still up   diamantaires use their own money, not other peoples. And yet, as described
on 2007 levels has much to       above, rough prices have risen so far this year, despite a 10% fall in October.
do with the supply situation.
                                 Fig 18: Diamond Price Changes, Surplus/Deficits and World GDP Growth

                                                        6                                                                                                                                                      25%
The price falls in 1982 and
the 1990-2002 are very                                  4
evident.                                                                                                                                                                                                       15%

                                        US$ billion

                                                        0                                                                                                                                                      0%





















                                                      -6                                                                                                                                                       -25%

                                                                            Production Surplus/(Deficit)                 Avg Price Change (RHS)                       World GDP Growth (RHS)

                                 Source: BMO Capital Markets

                                 Rough diamond prices move more in line with surplus/deficits than with GDP.
                                 In 2006, prices fell by 5% as De Beers sold its buffer stock, only to rise by
                                 20% in 2007 on similar world GDP growth.

Page 11
Global Mining Research
Diamond Update No. 2
October 31, 2008

                                 Fig 19: Index of Rough Prices; 1948=100. 1948 to 2008 Actual, thereafter

Figure 19 alongside includes
the 20% rise from January to
August 2008, the 10% fall in
October and, for illustrative      4000
purposes, a 10% fall in early



                                          1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012


                                                                               Diamonds Index

                                 Source: BMO Capital Markets

                                 Production deficits will last longer than the 2008 crash. The 1990s to 2002 was
Supply shortages should last     the worst period for rough prices as around US$6B of Russian stock sales
a lot longer than the 2008       coincided with the Japanese economic implosion, U.S. recession in 1992 and in
crash; indeed intensifying as    Asia in 1998. Then the dot-com bubble burst. Average prices fell by 25%.
the fallout from the latter
                                 President Nixon Closes the Window at the Fed in 1971
                                 Bretton Woods, 1946, enacted fixed exchange rates. Governments could buy
A rough analogy between the      gold from the U.S. Treasury at US$35/oz. When President Nixon stopped the
end of the U.S. sitting on the   U.S. from effectively dumping gold in 1971, the price went from US$35/oz to
gold price and the end of        US$ 150/oz…and the rest is history. The analogy is not perfect, but in a
major diamond mine               different way the same is now happening with rough diamonds: surplus mine
production increases and         supplies are a thing of the past and Russian and De Beers’ buffer stock sales
stock sales.                     are over.

                                 Rough Diamond Prices With Projections
                                 There remains an expected supply shortfall of US$5B by 2012. That compares
BMO predicts supply              with production of US$3.4B in 2007 by Botswana, the world’s largest producer,
shortage of US$5B by 2012        or US$6.1B for De Beers (in Botswana, South Africa and Namibia). US$5B is a
impossible to fill.              40% rise over 2007’s world production of US$14.2B and, in the absence of
                                 sufficient net, new production, has to be met by price increases.

                                 The question now is: must the implied rise of 40% be discounted by current
                                 economic circumstances and price/demand destruction? As regards the
                                 economic situation, that has been accounted for, at least to a considerable
                                 degree, in the above demand forecasts.

Page 12
Global Mining Research
Diamond Update No. 2
October 31, 2008

                              Price/demand destruction is more difficult: the top end of the market, namely
Despite the 40% rise in       Fine Large Gem, (around 44% by rough production value) will likely be
average rough diamond         relatively unscathed over the period due to the relative price inelasticity of the
prices since January 2007,    super rich who dominate this sector of the market. This does not mean that
and the credit crunch, BMO    there will not be dips, as even they defer purchases. Most affected will
forecasts a 30% increase,     probably be Commercial Large (20% of production value) as that is the
from August 2008 levels, by   dominant area of the U.S. market. A 30% forecast rise should account for
2012.                         price/demand destruction.

                              It is factors such as this, together with continuing growth in China, India and
Note Rosy Blue’s demand       the Gulf, which may have led the chairman of Rosy Blue’s retail division to
forecast.                     predict higher global sales of diamond jewellery in 2008 despite a predicted
                              15% fall in the U.S. market.

                              Some Company Comments

                              African Diamonds (AFD) has a highly prospective kimberlite in JV with De
                              Beers. Production must start by April 2011 in terms of the Botswana Mining
                              Lease. AFD also has exploration interests in Botswana and the DR Congo, and
                              18% of West African Diamonds in Sierra Leone and Guinea.

                              DiamondCorp (DCP) has the Lace mine in South Africa, close to De Beers
                              Voorspoed operation. It is getting into the main kimberlite where it expects
                              revenue of US$35 per tonne and costs of US$17 per tonne.

                              Gem Diamonds, Harry Winston Diamond Corporation and Petra Diamonds are
                              all serious producers-see recommendations on page 1 and BMO reports.

                              All in all BMO, taking a conservative line, forecasts a 30% increase in average
                              rough diamond prices from August 2008 levels by 2012.

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Global Mining Research
Diamond Update No. 2
October 31, 2008

                               Gem Diamonds (GEMD-LSE)

                                              Share Price (£)
                                              Target Price (£)



                    10-05   02-06   06-06   10-06   02-07   06-07   10-07   02-08   06-08   10-08

                                  GEMD-LSE = Rating as of 24-October-05 = NR
                                  Date      Rating Change Share Price
                                1 22-Jul-08 NR to Mkt                10.82

                                                                    Last data point: October 24, 2008

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Global Mining Research
Diamond Update No. 2
October 31, 2008

                                                             Harry Winston Diamond (HW)
                                                                                                                     Target Price
                                       Quarterly Price
                                                                                                                     Share Price
                                                                                           60                                                                60
  50                                                                               50

                                                                                           50                                                                50
  40                                                                               40
                                                                                           40                                                                40
                                                                                                                2) Mkt
  30                                                                               30
                                                                                           30                                                                30
                                                                                                                             3) OP
                                                                                                1) OP
  20                                                                               20      20                                                                20

                                                                                           10                                                                10
  10                                                                               10

                                                                                            0                                                                0

                               HW Relative to S&P/TSX Comp.                                                 HW Relative to S&P/TSX Comp.
                               HW Relative to Metals & Mining                                               HW Relative to Metals & Mining
1200                                                                               1200   120                                                                120

                                                                                          100                                                                100
1000                                                                               1000
                                                                                           80                                                                80
 800                                                                               800
                                                                                           60                                                                60
 600                                                                               600
                                                                                           40                                                                40
 400                                                                               400
                                                                                           20                                                                20
 200                                                                               200
                                                                                            0                                                                0
    1980        1985           1990           1995           2000     2005                       2006                    2007                    2008

                                         Revenue / Share                                                BMO 2009FY EPS ( Sep 08 = 2.72 )
                                         Price / Revenue                                                IBES 2009FY Cons.EPS ( Sep 08 = 2.25 )
  20                                                                               10
                                                                                          2.5                                                                2.5
  10                                                                               5
                                                                                          2.0                                                                2.0
   0                                                                               0      1.5                                                                1.5
                                    EPS (4 Qtr Trailing) - (US$)                                        BMO 2010FY EPS ( Sep 08 = 1.13 )
                                    Price / Earnings                                                    IBES 2010FY Cons.EPS ( Sep 08 = 1.62 )
   5                                                                               100
                                                                                            2                                                                2
   0                                                                               0        1                                                                1
            1985             1990           1995            2000     2005                        2006                    2007                    2008

     FYE    EPS      P/E       DPS       Yield     Payout     BV    P/B   ROE                      HW - Rating as of 16-Nov-05 = Mkt
   (Jan.)   US$                 $          %         %        $            %
    1994    -0.19      nm      0.00        ND        nm      0.58   7.5      nm
    1995    -0.03      nm      0.00        0.0         0     1.02   6.4      nm                          Date            Rating Change      Share Price
    1996    -0.01      nm      0.00        0.0         0     1.38   7.1      nm                    1     9-Jun-06        Mkt to OP          $36.24
    1997    -0.02      nm      0.00        0.0         0     2.42   9.7      nm
    1998     0.00      nm      0.00        0.0         0     2.79   5.6        0                   2     14-Feb-07       OP to Mkt          $46.05
    1999    -0.07      nm      0.00        0.0         0     4.27   2.3      nm
    2000     0.01      nm      0.00        0.0         0     5.47   1.5        0                   3     10-Sep-07       Mkt to OP          $38.51
    2001     0.02      nm      0.00        0.0         0     5.52   2.3        1
    2002    -0.06       16     0.00        0.0         0     7.01   3.4      nm
    2003    -0.12      nm      0.00        0.0         0     6.99   4.2      nm
    2004     0.49      nm      0.00        0.0         0     7.38   6.3        9
    2005     1.04       31     0.74        1.8        56     8.99   4.5       16
    2006     1.56       25     1.16        2.5        63     8.89   5.2       20
    2007     1.46       27     1.16        2.6        70    10.12   4.5       18
    2008     2.19       11     0.20        0.8         9     9.74   2.5       22
 Current*    2.33        6     0.20        1.4         8    12.40   1.1       20
Average:               24                  0.6       16             5.0      0.4
  5 Year:   28.6                nm                           12.2
 10 Year:   71.8                nm                           16.1
   * Current EPS is the 4 Quarter Trailing to Q2/2009.

                                                                                                                         Last Daily Data Point: October 27, 2008

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Global Mining Research
Diamond Update No. 2
October 31, 2008

                            Petra Diamonds Ltd. (PDL-AIM)

                                         Share Price (£)
                                         Target Price (£)





                  10-05      04-06      10-06       04-07    10-07        04-08    10-08

                          PDL-AIM = Rating as of 24-October-05 = NR
                                Date       Rating Change Share Price
                              1 1-22-08    NR to OP(S)            £1.22

                                                            Last data point: October 24, 2008

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Global Mining Research
Diamond Update No. 2
October 31, 2008

Analyst’s Certification
I, James Picton, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or
issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this report.

General Disclosure
The information and opinions in this report were prepared by BMO Capital Markets Limited (U.K.), (“BMO Ltd”). BMO Ltd. is not subject
to U.S. rules with regard to the preparation of research reports and the independence of analysts. “BMO Capital Markets” is a trade
name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO
Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée./Ltd., collectively (“BMO NB”) in Canada and BMO Capital Markets Corp. in the U.S.
BMO Capital Markets Corp. is an affiliate of BMO Ltd.            Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending
arrangements with, or provide other remunerated services to, many issuers covered by BMO Ltd. research. A significant lending
relationship may exist between BMO Financial Group and certain of the issuers mentioned herein. The opinions, estimates and
projections contained in this report are those of BMO Ltd. as of the date of this report and are subject to change without notice. BMO
Ltd. endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain
information and opinions that are accurate and complete. However, BMO Ltd. makes no representation or warranty, express or implied,
in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss
arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Ltd. or its affiliates that is not
reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and
because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any
investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. The
research analyst and/or associates who prepared this report are compensated based upon (among other factors) the overall profitability
of BMO Ltd. and its affiliates, which includes the overall profitability of investment banking services. BMO Ltd., or its affiliates expect to
receive or will seek compensation for investment banking services within the next 3 months from all issuers covered by BMO Ltd. BMO
Ltd. or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Ltd. or
its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in
options, futures or other derivative instruments based thereon. The reader should assume that BMO Ltd. , BMO NB, BMO Capital
Markets Corp., Bank of Montreal or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating
whether or not to buy or sell securities of issuers discussed herein.

Sector Risk Disclosure

In addition to the risks involved in investing in common stocks generally, we also highlight the following risks that pertain to the mining
sector. Feasibility Study: Mine plans, mining schedules and production are based on reserve and resource estimates. These plans involve
inherent uncertainties. resource estimates contain statistical computations and judgments by geologists. Reserve estimations and mine
plans contain technical and commercial judgments by engineers that are optimized on the basis of estimates for mining costs, ore haulage
costs, processing costs and recoveries, as well as gold price assumptions. Expected metal recoveries are based on test work carried out
on representative samples of the ore and treatment processes at the laboratory, sometimes involving bench tests or pilot plant scales. It
is not possible economically to obtain absolute certainty as to the representative nature of the sample or the laboratory results when
applied to the full-scale operations. Mining and processing costs estimates are historically based and may change as a result of changed
physical conditions, market conditions and transportation costs, or changed economic conditions in general.

Technical: Mining and processing may be affected by unexpected events, such as pit failures, dike failures or equipment breakdowns,
which may result in significantly higher costs, revisions to mine plans, sterilization of reserves or ultimate closure of the mine.

Operating: Mining operations can be affected by a number of risk factors, including: unexpected geological conditions; unusual mining
conditions, unexpected processing problems, unexpected metallurgical problems, shortages in skilled workforce; environmental issues and
a lack of availability of support infrastructure.

Permits and Approvals: Operations and development activities are contingent on the receipt and maintenance of various permits and
approvals from appropriate governmental authorities. There is no guarantee that any company will be successful in obtaining the
necessary permits or acceptances for its planned development, or that it will be successful in obtaining renewals of existing permits and
approvals on a timely basis or at all.

Litigation / Political risk: Mining operations are exposed to various levels of political risks and uncertainties. Changes, if any, in mining or
investment policies or shifts in the political landscape may adversely affect any mining company’s operations or profitability. Operations
may be affected in varying degrees by government regulations or unanticipated changes to regulations with respect to, but not limited to,
restrictions on production, income taxes, royalties, maintenance of claims, environmental legislation, land use, land claims of local people,
water use and mine safety. Failure to comply with applicable laws and regulations could result in financial losses, litigation, revocation of
permits or other negative consequences. The occurrence of these or other various factors and uncertainties cannot be accurately predicted
and could have an adverse effect on any mining company’s operations or profitability.

Metal Prices: Any reduction in the price of copper, gold, or silver could adversely affect any mining company’s share price performance.
There are no guarantees that future metals prices will be sustained at levels that enable any mining company to operate its planned
operations at a profit. The company’s cash flows are exposed, among other things, to fluctuations in the gold and silver prices.

Financing: Any mining company could require additional funding for future operations. Funding of operations or projects could take the
form of debt and/or equity financing. There are no guarantees that debt or equity for the project will be available, arranged, or offered on
terms acceptable to any mining company.

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Global Mining Research
Diamond Update No. 2
October 31, 2008
Company Specific Disclosure

 Gem Diamonds Ltd. (GEMD-LSE)                          5              Harry Winston Diamond Corp. (HW-TSX; HWD-NYSE)
 Petra Diamonds Ltd. (PDL-AIM)                         2,3,5,7,10A

Disclosure Key
BMO uses the following Company Specific Disclosure Key. Please refer to the Company Specific Disclosure section above for specific
disclosures applicable to issuers discussed in this report:
1-          BMO NB has provided advice for a fee with respect to this issuer within the past 12 months.
2-          BMO NB has undertaken an underwriting liability with respect to this issuer within the past 12 months.
3-          BMO NB has provided investment banking services with respect to this issuer within the past 12 months.
4-          BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate beneficially owns 1% or more of any class of the equity
securities of this issuer.
5-          BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate makes a market in this security.
6-          BMO Capital Markets Corp. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer
within the past 12 months.
7-          BMO Capital Markets Corp. or an affiliate has received compensation for investment banking services from this issuer within
the past 12 months.
8-          BMO Capital Markets Corp. or an affiliate or its officers or partners own options, rights, or warrants to purchase any securities
of this issuer.
9-          BMO Capital Markets Corp. or an affiliate received compensation for products or services other than investment banking
services within the past 12 months.
10A -       This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate within the past 12
months: Investment Banking Services.
10B -       This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate within the past 12
months: Non-Investment Banking Securities Related Services
10C -       This issuer is a client (or was a client) of BMO NB, BMO Capital Markets Corp., BMO CM Ltd. or an affiliate within the past 12
months: Non-Securities Related Services
11 -        An employee, officer, or director of BMO NB is a member of the Board of Directors or an advisor or officer of this issuer.
12 -        A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this
13 -        A household member of the research analyst and/or associates who prepared this research report is a member of the Board of
Directors or is an advisor or officer of this issuer.
14 -        The research analysts and/or associates (or their household members) who prepared this research report directly or
beneficially own securities of this issuer.
16 -        A redacted draft of this report was previously shown to the issuer (for fact checking purposes) and changes were made to the
report before          publication.

Distribution of Ratings
Rating             BMO                             BMO              BMO                     First Call
Category           Rating                          Universe         I.B. Clients*           Universe**
Buy                Outperform                      44%               55%                    52%
Hold               Market Perform                  48%               41%                    42%
Sell               Underperform                    8%                4%                     6%
* Reflects rating distribution of all companies where BMO Capital Markets has received compensation for Investment Banking services.
** Reflects rating distribution of all North American equity research analysts.

Ratings Key
We use the following ratings system definitions:
OP = Outperform - Forecast to outperform the market;
Mkt = Market Perform - Forecast to perform roughly in line with the market;
Und = Underperform - Forecast to underperform the market;
(S) = speculative investment;
NR = No rating at this time;
R = Restricted – Dissemination of research is currently restricted.

Market performance is measured by a benchmark index such as the S&P/TSX Composite Index, S&P 500, Nasdaq Composite, as
appropriate for each company. Prior to September 1, 2003, a fourth rating tier—Top Pick—was used to designate those stocks we felt
would be the best performers relative to the market. Our six Top 15 lists which guide investors to our best ideas according to six
different objectives (large, small, growth, value, income and quantitative) have replaced the Top Pick rating.
Dissemination of Research
Our research publications are available via our web site Institutional clients may also receive our
research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO NB, BMO
Capital Markets Ltd., BMO Capital Markets Corp. and BMO Nesbitt Burns Securities Ltd. client groups entitled to our research. Please
contact your investment advisor or institutional salesperson for more information.
Conflict Statement
A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for
managing       conflicts   of   interest     in   connection     with    investment        research     which      is     available     at

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Global Mining Research
Diamond Update No. 2
October 31, 2008
Additional Matters
TO U.S. RESIDENTS: BMO Capital Markets Corp. and/or BMO Nesbitt Burns Securities Ltd., affiliates of BMO NB, furnish this report to
U.S. residents and accept responsibility for the contents herein, except to the extent that it refers to securities of Bank of Montreal. Any
U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Capital Markets Corp. and/or BMO
Nesbitt Burns Securities Ltd.

TO U.K. RESIDENTS: In the UK this document is published by BMO Capital Markets Limited which is authorised and regulated by the
Financial Services Authority. The contents hereof are intended solely for the use of, and may only be issued or passed on to, (I)
persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (II) high net worth entities falling within Article 49(2)(a) to (d) of
the Order (all such persons together referred to as “relevant persons”). The contents hereof are not intended for the use of and may
not be issued or passed on to, retail clients.

BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltée/Ltd. are Members of CIPF. BMO Capital Markets Corp. and BMO Nesbitt Burns
Securities Ltd. are Members of SIPC.

"BMO Capital Markets" is a trade-mark of Bank of Montreal, used under licence.
"BMO (M-Bar roundel symbol)" is a registered trade-mark of Bank of Montreal, used under licence.

Page 19