This article was originally published Dec 2, 2024 by Crux Investor.

Burgundy Diamond Mines, an ASX-listed global diamond company, presents an intriguing opportunity in the diamond sector. With a vertically integrated model spanning mining to retail, a cornerstone asset in a Tier 1 jurisdiction, and a strategy to be an industry leader, Burgundy warrants a closer look from investors. This article examines the key pillars of Burgundy’s investment case.

Cornerstone Canadian Asset with Scale and Upside

Central to Burgundy’s story is its Ekati diamond mine in Canada’s Northwest Territories. Ekati’s appeal lies not just in its current production scale as a top 7 global mine by volume, but its future potential. The property contains a staggering 140 million carats across 125 kimberlite pipes, of which only 10 have been mined so far. This provides immense exploration upside and mine life extension potential, as CEO Kim Truter highlights:

“The Ekati asset that we acquired is a top 10 producing asset […] There is still about 140 million carats left in the ground and arguably another 115 [pipes] to go that we could sequence through over the next few years.”

Low Capital Intensity Approach

Importantly, developing these new pipes will not require heavy investment. Ekati already has over $2 billion of infrastructure in place.

“That’s the other piece of the puzzle – getting something with established, high quality infrastructure.”

By using low capital intensity mining methods like sub-level retreat, Burgundy can fund new developments from operating cash flow without large upfront capital asks.

“You don’t have to wait for very long…within 6 months you can be generating cash out of that pipe,” says Truter.

Grade and Pricing Power

Ekati’s kimberlite pipes are not just plentiful, but high-grade. Canadian diamond mines are known for having smaller but more concentrated deposits than African mines. This supports strong operating margins.

Burgundy also has a wide spectrum of diamond price points, from $50 to $30,000 per carat, with most revenue coming from rarer, higher value stones. By not focusing on just one part of the market, Burgundy can be well-positioned through the diamond price cycle.

Scarcity Value

Truter makes the crucial point that new diamond mines are extremely scarce. With annual production of only 50-60 million carats of gem-quality diamonds for a global population of 8 billion, Truter emphasizes the scarcity of ethically-mined diamonds in the market space.

“You’re talking about quite a rare commodity that’s getting rarer because you’ve got no new mines are coming on-board”

This supply deficit is likely to support robust long-term diamond prices as the world emerges from the current macroeconomic challenges. Lab-grown diamonds are not materially impacting the market for ethically-sourced natural stones.

Interview with Managing Director & CEO Kim Truter

Mine-to-Market Model

Perhaps most unique is Burgundy’s vertically integrated model. By participating in all parts of the value chain – mining, sorting and polishing, and working directly with retailers and luxury brands – the company aims to capture margins at each stage. More than just economics, this stems from an understanding of changing consumer preferences. Truter elaborates:

“It’s not just about capturing the value, it’s about actually being able to guarantee a chain of custody.”

For younger buyers who care about ethical sourcing, Burgundy can credibly claim its diamonds are traceable from origin to wearer.

Catalysts on The Horizon

With mining now underway at the Misery and Point Lake pipes, Burgundy expects to see a quick payback.

“By the end of the year we’ll be producing the first ore, so it’s basically a nine-month payback to the revenue,” states Truter.

This should drive a positive news flow and cash generation to fund further mine developments and potential acquisitions. The company is also advancing discussions with luxury brands and industrial buyers about long-term supply agreements.

Conclusion

While still early in its journey, Burgundy has a clear vision to be a leading diamond company. In an industry historically controlled by a few major players, Burgundy sees an opportunity to carve out a profitable and differentiated niche.

By applying a modern and sustainable approach to a storied industry, Burgundy aims to become the investment of choice for those seeking exposure to the enduring allure of diamonds. With a strong asset base, savvy management, and a vertically integrated model, Burgundy appears well-equipped for the task ahead.

The Investment Thesis for Burgundy Diamond Mines

• Burgundy offers a unique pure-play diamond investment, with a vertically integrated model from mine to luxury retail
• The company’s Ekati mine in Canada is a long-life, top-tier asset with 140 million carat resource across a cluster of 125 kimberlite pipes
• Burgundy can sequence numerous deposits with low capital intensity, enabling self-funded growth. New pipes can payback capital in under 9 months
• By guaranteeing “mine to finger” chain of custody, Burgundy is well-positioned for growing consumer demand for ethical, traceable diamonds
• With a tight share float, proven management, and near-term catalysts, Burgundy presents an attractive risk/reward opportunity to gain exposure to strengthening diamond fundamentals

Macro Thematic Analysis

The diamond industry appears ripe for disruption and Burgundy Diamond Mines aims to be a leader in this change. Historically controlled by a handful of major players, the sector is now opening up to new entrants who can apply modern practices and meet the evolving expectations of consumers.

In particular, younger buyers are increasingly concerned about the ethical sourcing of luxury goods. They want to know the origin of their purchases and be assured of responsible environmental and labor practices. By vertically integrating and owning the entire supply chain from mine to market, Burgundy is aiming to provide a guaranteed, traceable chain of custody that will appeal to this key demographic.

At the same time, the fundamentals of the diamond market are highly compelling. With no major new discoveries in decades and existing mines steadily depleting, the supply of natural diamonds is on a structural downtrend. Yet demand, driven by a growing global middle class, remains robust. This supply-demand imbalance is likely to support strong diamond prices over the long term.

As CEO Kim Truter sums it up:

“Natural diamonds are getting increasingly rare. Human beings like rare, non-replaceable items, and so our belief is that ultimately the diamond market’s going to recover and recover strongly as we work through some of the macroeconomic issues.”

For investors, the diamond sector offers exposure to a market with highly constrained supply, attractive margins, and enduring demand for an aspirational product. Burgundy Diamond Mines, with its strong asset base and differentiated strategy, appears well-positioned to capitalize on these dynamics.