Petra Diamonds recovers 122.52 carat blue diamond

The Cullinan diamond mine at the foothills of the Magaliesberg mountain range, 37 km northeast of Pretoria in South Africa, is one of the world’s most celebrated diamond mines.

But the mine — one of five Petra Diamonds (LSE: PDL) owns in South Africa — got just a little bit more famous today with the recovery of a 122.52 carat blue stone.

Petra Diamonds said the rarity of a blue diamond of this magnitude “sets it apart as a truly significant find” and noted that it will take some time before it can assess its potential value.

Since Petra Diamonds acquired Cullinan from DeBeers in 2008, it has produced four other important blue diamonds that commanded remarkable prices.

Earlier this year in February, Petra Diamonds sold a 29.6 carat diamond for US$25.6 million, or US$862,780 per carat. In 2013 it sold a 25.5 carat diamond for US$16.9 million, or US$663,144 per carat, and in 2009 sold a 26.6 carat diamond (which yielded a fancy vivid blue and internally flawless 7.0 carat polished stone) for US$9.49 million, or US$1.3 million per carat. In 2008 it sold a 39.9 carat diamond for US$8.8 million, or US$220,551 per carat.

Charles Wyndham, founder of polishedprices.com in the U.K., told The Northern Miner that he would not be surprised if Petra Diamonds decided to joint venture the stone.

“The total cost of the rough is so high that the risk might depress the price, whereas selling the polished might prove easier, firstly the risk of cutting has been removed and secondly there will presumably be several stones with one major piece” he explained in an emailed response to questions. “All I can say is that it is a very nice problem for Petra to have and one they richly deserve for the success they have had in turning this ex-De Beers mine around.”

Blue diamonds are extremely rare and the Cullinan mine is known as the world’s most important source, according to Petra Diamonds. The blue colour comes from small amounts of boron that is trapped in the crystal carbon structure during the diamond’s formation. Typically the more intense the colour, the rarer and more expensive it will be.

Because it will take time to assess the value of the 122.52 carat stone, Petra Diamonds says it won’t sell it before the end of its current financial year, which ends on June 30, 2014.

Wyndham says it’s difficult to judge its value given that he has only seen photographs of the gem.

“Putting a value on it without looking at the stone in detail is not possible; also with such a large fancy stone, it becomes very pie in the sky,” he explained. “However good the colour, it is not as spectacular as the 29.6 carat stone, which was more Oxford blue, whereas the 122 carat is more Cambridge blue, in other words a lighter blue.”

Having said that, he continued, “I would be very surprised if the stone got the same price per carat that the 29 carat blue achieved, which would make the rough cost over $100 million, but equally it is difficult to imagine [with the provisos I have already mentioned], it not being worth around or above $50 million.”

Dmitry Kalachev and Peter Mallin-Jones of Canaccord Genuity wrote in a research note that Cullinan “continues to prove itself one of the world’s largest producers of exceptional blue stones.”

“Production is currently coming from diluted ore blocks and the ongoing recovery of exceptional stones indicates that Petra is doing a good job managing mining and processing from this mature production area,” they added.

The analysts also noted that given the operational set up, it is hard for them to tell where the diamond came from. “Historically, however, Western areas of the Cullinan kimberlite footprint have shown greater frequency of high value gems,” they said. “Once the mine transitions to production from the undiluted ore (from fiscal year 2016) at the C-Cut, the proportion of the recovered material from the Western areas should increase substantially. This indicates that the frequency of recovering exceptional gems may rise, providing upside to our estimates.”

News of the latest diamond discovery sent shares of Petra Diamonds up 7.7% to £1.80 per share. Kalachev and Mallin-Jones have a target price of £1.95 per share.