Street-mined: Making sense of off-the-street diamonds

by charlene_voisin | August 1, 2014 9:00 am

By Evert P. Botha

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There has been a lot of talk of late about a lack of high-quality rough diamonds. The fact is, new discoveries are few and far between, and even when they are made, it can take up to 15 years to bring a mine into production. Yet, there seems to be a new source that has come online recently that few anticipated: the street mine.

They are known as off-the-street diamonds and by that, I mean recycled stones—those that have re-entered the market as the result of broken engagements, estate sales, or just plain selling of assets to pay debt. And it looks like this is big business.

Open any trade publication and you will likely see advertisements for companies that buy used diamonds. No doubt, it’s become a thriving industry, the bulk of it focused on smaller goods and melee. Individually, these stones have little or no value, but when aggregated in sufficient volume, they can be sorted, sold, and shipped to India or elsewhere to be recut to create matching parcels.

Industry analyst Chaim Even-Zohar estimates the market share of recycled diamonds in 2012 grew by 5.5 per cent to $1.2 billion. He also believes there is up to $1 trillion worth of ‘used diamonds’ locked away in safety deposit boxes and jewellery cases around the world and many could find their way into the market. According to consulting firm Bain & Co., recycled polished diamonds could eventually account for anywhere between five to 10 per cent of current market supply. Still, these numbers may be understated, as some experts believe a great deal of trading in recycled diamonds happens in private and is not necessarily reported.

What does this mean for a retailer?

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For most manufacturers and wholesalers, recycled diamonds entering the stream is not a good thing, as they cut into already thin margins and cause prices to stagnate over the long term. They also create competition, since retailers are purchasing them from consumers rather than through traditional channels. For retailers, however, the opposite is true. As with the cash-for-gold craze, consumers are trading in their diamonds or using them to upgrade to bigger or better stones. And the good news is, the price is determined by you, the retailer, which can make for some very healthy margins.

When buying lesser-graded diamonds from vendors, the discounts offered are always deep; the same applies to buying diamonds off the street. When a consumer is looking to sell a diamond, he or she has a vague idea of what it may be worth, thanks to the Internet, which means some explanation may be required as to why you cannot match that price.

When determining your offer, there are a few factors to consider, such as:

• “¨”¨the average trade price for a similar stone;
• “¨the investment required to restore and grade the diamond; and
• “¨your selling price based on your store’s strategy.

Of course, the diamonds you buy from your clients may not always be in pristine condition.

Buy and sell

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Whether mined or traded, diamonds are billions of years old, just like the air we breathe and the water we drink. Although no diamond is worthless, they are not all cut equal. Over the centuries, diamond design, cutting, and polishing have evolved tremendously, along with cut grade parameters and other grading standards. While it is true recutting a diamond can result in marginal to substantial weight loss depending on its original condition, it is also true that a better cut can increase its value, and in some cases, by quite a bit.

Chances are you may have thousands of dollars tied up in diamond inventory that you aren’t able—or prepared—to show clients in their current condition. Some may be dull, dreary, and dead, while others are just badly cut. You may even have chipped, scratched, burnt, or broken stones sitting in your safe. And while vintage fine jewellery is always in style, vintage diamond cuts may simply not appeal to your customer base.

Unlike gold that can be recycled and sold relatively easily to a refiner or cash-for-gold operation, diamonds are different, as each one has its own unique characteristics and story. The challenge you face is how to sell a damaged or badly cut diamond, especially if you are known as the trusted source for fine diamonds in your market. You can either sell it to a growing list of companies that specialize in the purchase of such goods (at greatly discounted prices), or you can find a cutter to turn this inventory into product you can present with confidence to your customers.

Cut to the chase

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When working with a diamond cutter, he or she usually inspects the stones you’ve submitted and makes recommendations based on your requirements. However, before you decide to restore a diamond (i.e. recutting, repairing, or re-polishing), consider the following:

• What are the gains in terms of cut, colour, and clarity?
• What costs are involved (i.e. shipping, insurance, restoration, and grading)?
• What is the estimated weight loss?
• What will be the increase in value?

If you’re reviewing your inventory for recutting opportunities or considering buying or trading a diamond off the street, here are a few points to keep in mind:

1. Depending on your cutter’s skill, you may be able to achieve colour and/or clarity gains. More about that later.
2. Size matters. Individual stones less than .30 carats are not economically viable, unless you’re prepared to submit a parcel of smalls and wait a little while longer. The golden rule is that if it’s a diamond you’re prepared to send for grading once recut, then it is worth it. Remember, less is more. Most cutters have a minimum cost per diamond for stones that weigh less than one carat and a per-carat rate for stones over one carat.
   • “¨Most diamonds of higher colour and clarity are perfect candidates for restoration, since they are of higher value and worth making the extra investment.
   • “¨For diamonds with lower colour and clarity, consider cutting stones starting at one carat. For example, you’re not going to send a .45-carat J I2 for recut on its own. Instead, add it to a parcel of smaller goods to be restored abroad.
3. Safe margins for weight loss and yields can be calculated using the following:
   • For diamonds in need of a full recut, expect weight loss of up to 15 per cent, assuming the material is not badly damaged or too poor a cut grade to begin with. There are standard formulas for calculating the finished weight that your cutter should be able to provide.
   • For broken, chipped, or damaged diamonds, weight loss can be substantial. It is not unheard of to lose up to 50 per cent to turn these into something you can sell.
   • For diamonds sent for re-polishing to remove minor blemishes like scratches or polish marks, weight loss is in the single digits.
   • A minor repair typically involves some re-polishing to clean up the stone and possibly faceting the girdle, which may result in colour gains on some borderline stones starting from around I colour and upward. This is minor work to improve the diamond’s overall cut grade.

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Mention recutting a diamond and the first thought that comes to mind is: “How much weight am I going to lose?” Truth be told, the stone submitted for a recut is treated just like rough, with recommendations made during the planning stage to maximize weight retention while achieving the highest cut grade possible.

Provided your cutter can maintain your required size thresholds, the obvious choice is always to aim for the highest cut grade. If your request is to maintain a certain weight threshold, then it is quite likely the cut grade will be less than ideal.

In some instances, clarity gains are important considerations during the recut planning process, as this more than compensates for weight loss during the actual recutting. By the time the job is completed, your cutter should be able to confirm their estimates for cut grade, colour, and clarity. Based on your cutter’s estimate, you can then decide whether to send the stone to your preferred laboratory for grading and inscription. If you don’t have a relationship with a lab, your diamond cutter should be able to assist you. Each laboratory offers different report formats and, more importantly, different turnaround times.

Once the laboratory has completed the initial grading, the grader e-mails results for verification and/or confirmation to the cutter, who will then forward them to you. If you and your cutter are in agreement with the report, the lab will issue a printed report. However, if you disagree with the laboratory on any of the results, you may ask them to re-check the specific grading parameter. Once that’s done, the lab confirms the results with you prior to printing the report.

Finding the right cutter isn’t always about price, so it is important you do your research to verify their credentials through their membership in organizations, such as the Canadian Jewellers Association (CJA), American Gem Society (AGS), or Jewelers of America (JA). Most cutters offer incentive programs for members of these organizations and should be able to provide you with references from their customers. Most importantly, be sure to choose a cutter who works with a diamond grading laboratory you trust.

You get what you pay for

If you’re looking for a cutter, here are some considerations to keep in mind.

1. Most cutters charge a different rate for round, fancy, and proprietary shapes. Fancy shapes normally cost anywhere from 25 to 50 per cent more than round, while proprietary shapes may be subject to additional charges. That said, be sure your cutter does not infringe on someone else’s design patent.
   • For minor repairs and re-polish, expect to pay $150 to $200 per carat.
   • For full recuts, including re-profiling, expect to pay $225 to $300 per carat. For challenging stones (e.g. multiple twinning, poly, etc), expect to pay an additional $75 per carat.
   • For girdle faceting only, expect to pay $100 per carat.
2. Shipping and insurance costs.
3. Grading and inscription varies from lab to lab and the documentation required.
4. Always confirm the laboratory’s turnaround time, as some labs offer same-day grading, while others may have a backlog that may take months to get through.

Sentimentality and superstitions aside

When a cutter looks at a diamond, they see the potential for a piece of rough crystal, a broken diamond, or one that was badly cut, to become something spectacularly beautiful that’s going to become an heirloom, a celebration, a memory, and maybe even an ‘I do.’ Providing this service can not only help your bottom line, but more importantly, create lifelong clients.

Evert P. Botha is chief operating officer (COO) of Embee Diamonds in Prince Albert, Sask., a family-owned atelier established by master diamond cutter, Mike Botha, specializing in cutting and polishing Canadian diamonds. Evert can be reached via e-mail at evert@embeediatech.ca[6].

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