Move over diamonds, it’s tanzanite’s turn to shine

Everyone loves diamonds these days. Last year, demand was so strong that prices for uncut gems rose 14%, and this year De Beers (which still dominates the market, although its market share has shrunk) has already hiked prices twice.

But can the good times last? On the face of it, the answer is that they can: supply is tight and demand is growing at a good speed. However, gem sales are always at the mercy of fashion and some think a film out next year could hit the demand side of the diamond equation. The Blood Diamond, starring Leonardo DiCaprio, will expose the “violent underworld of conflict diamonds”, says The Sunday Times.

The UN tells us that conflict diamonds make up only 1% of total sales. But how does the consumer know which 1% that is? Finding a stone that you know for sure has no connections to wars, terrorism, or underworld gangsterism is not easy.

The same goes for many other gems we consider precious. Emeralds are found in both Colombia and Afghanistan, while rubies are mined in Burma as well as Kashmir and Tadjikistan, making it hard for Western consumers to be sure that they’ve been produced without causing undue suffering along the way. There is, however, one gem that comes with no such complications: tanzanite.

The story behind tanzanite’s discovery – as told by the gem’s public-relations gang, anyway – sounds more like fiction than fact. In 1967, we are told, a Masai tribesman was herding cattle on an outcrop in the foothills of Tanzania’s Mount Kilimanjaro when something glittering in the dust caught his eye. He picked it up and held it up to the bright sun, where it glowed deep blue.

Whether this is exactly what happened or not, who knows, but either way, within a year the new stone’s existence was brought to the attention of Tiffany & Co, who named it tanzanite in honour of the only place on earth it has so far been found. Henry B Platt, the great-grandson of Louis Comfort Tiffany, describes tanzanite as “the most beautiful blue stone discovered in over 2,000 years”.

There is only one tanzanite mine in the world – in the foothills of Kilimanjaro – and if that remains the case, only one generation will ever be able to buy new tanzanite. The supply is predicted to run out in a decade. So should you get a stone?

Perhaps. Tanzanite is extraordinarily beautiful (its shade of blue, “which shimmers in a slightly purplish hue, is magnificent indeed”, says the International Coloured Gemstone Association), and while it isn’t cheap (one carat costs around $800), its scarcity value means it could soon be more highly valued than it now is. The tanzanite miners are aiming to position it as a ‘birth stone’: just as De Beers managed to convince us that we all had to have diamonds to mark our engagements, tanzanite’s supporters hope to persuade us that all new-born babies must be given tanzanite. If they manage to do this, or to make tanzanite fashionable through any other means, expect the price of a piece of tanzanite jewellery to soar.

How to invest in the future of tanzanite

Investing in precious gems directly is not easy. They are not traded as commodities, and there are no exchange traded funds based on them. While you could just buy the stones themselves, this would be high-risk: unless you are a gemologist, you are relying on someone else’s word as to quality and value.

However, if you want to invest in the tanzanite story, you could buy shares in TanzaniteOne (TNZ). The Aim-listed company has the concession to mine approximately 60 square km – 50%-60% – of known tanzanite reserves. (The rest is mined by small independent operations.) The “company is in the unique position of being at the forefront of an industry that, potentially, can be likened to the early days of diamond production,” says a report by Williams de Broë.

TanzaniteOne listed on Aim in August 2004 and now has a market cap of just over £100m. It does everything from mining to setting tanzanite jewellery, though the majority of its profits still come from digging the raw material out of the ground. In order to protect its market, it sells only to selected suppliers (following the highly successful De Beers strategy), who then guarantee to market the stone.

In the past, the price of the raw material has been very volatile, which has made it hard for jewellers to maintain a constant price for customers. TanzaniteOne has tried to combat this fact by selling at set prices, and as it has so much of the market sewn up, it hasn’t had to face too much undercutting. Prices are now growing at a steady rate of about 10% a year. Thanks to this, the company’s turnover and profits are reasonable predictable. And for each 1% the price per carat goes up, the share price should increase by about 8p, according to research from the house broker, Williams de Broë. If tanzanite really takes off, then TanzaniteOne looks radically undervalued. The company’s shares have soared since it listed, yet it is still not expensive on a p/e of ten for 2005 and just 5.5 for 2006. And if TanzaniteOne’s marketing efforts, which are currently pivotal to its business outlook, are as influential as it would like them to be, “then the payoff for shareholders could be significant”, says Stephen Clayson in Resource Investor.