Why are investors shunning exploration stocks?

Investing in exploration minnows has never been for the faint-hearted. But until recently there has always been a willing band of investors prepared to put money into one or other of the many companies that sector veteran John Teeling has bought to market.

But not any more.

Stating that the market for exploration shares “is virtually non-existent” as he announced full-year figures for Botswana Diamonds on Wednesday, Teeling said: “We live in hope that stock market interest in diamond companies will revive. The collapse of interest by investors in the AIM market in London has hurt all explorers. Exploration costs money and, even if successful, does not produce revenue for many years. In recent years the pool of new investors has shrunk dramatically meaning little exploration.”

The flight of investors from the small-cap sector, especially higher-risk exploration stocks has been a recurring refrain in recent years from the man who has brought more companies to the stock market than any other Irishman.

But this year brought added challenges — a 40 per cent fall in diamond prices combined with a 30 per cent increase in energy prices — which, he said had eliminated positive cash flows for most diamond producers and forced the company to temporarily shut down operations at one of its prospects.

Rising interest rates and growing fear of recession have been blamed for the collapse in prices, with buyers pulling back from purchases of luxury goods and diamond wholesalers reducing stock that is largely debt-financed, Teeling said. The rapid growth of the market for lab-grown diamonds, helped by improved technology and falling prices has been another challenge.

Now in his late 70s, the indefatigable Teeling refuses to be bowed, citing advances in data analytics and the potential for solar power to contain energy costs.

And then there is the exclusivity of the product. “Natural diamonds are very rare [compared to the lab-grown alternative]. An analogy can be made with automobiles. A Ferrari and a Ford Mondeo are both good cars but that’s the only commonality they share. Owning a natural diamond is an experience. They really are forever.”

A nascent recovery in diamond prices and operating costs that have either stabilised or dropped allowed the stock market veteran to conclude: “There is cautious optimism for 2024. Any upswing will transform sentiment.” Unbowed indeed.

Scheduling note: This is the final Business Watch of the year. It will return on January 11th. In the meantime, thank your for subscribing to our newsletter and we wish you a very happy Christmas.

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Inside Business Podcast

It's been a tumultuous 2023 in the world of business. Ciaran Hancock looks back on the year with guests Cliff Taylor, Laura Slattery and Ciara O'Brien.

Highlights this week

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• Transport: Is Michael O'Leary worth his mooted €100 million bonus? Chris Bryant argues that despite Ryanair's reputation, there is a strong case for the company's CEO to say he deserves such a payout.

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