The Fancy Color Research Foundation (FCRF)

The Fancy Color Research Foundation (FCRF) Fancy color diamonds rarity and pricing Mr. Oren Schneider Co-founder, Adama Partners, LLC October 10, 2017

Background Adama Partners Adama Partners is a New York-based venture firm that focuses on the global diamond, gemstone and jewelry industry. Adama Partners builds and operates transformational or high-impact businesses across the industry value chain, leveraging unique and proprietary knowledge in supply analytics, product sourcing, pricing, manufacturing, branding and distribution.

Introduction the Fancy Color Research Foundation (FCRF) www.fcresearch.org Non-for-profit, led by industry veterans The FCRF goals are to empower fancy color diamond sellers by improving consumer experience through a new information channel and to provide fact-based support for fancy color diamonds as an asset class To achieve that, the FCRF provides members with unique analytic tools and innovative commercial research; Promotes fair and transparent buyer experience through the Fancy Color Diamond Price Index; and introduces a proprietary ability to analyze and compare fancy color diamond rarity

Agenda What are fancy color diamonds, where do they come from and how rare are they in fact What is the pricing behavior of fancy color diamonds (yellow, pink and blue) Beyond the 4Cs, what are the key value drivers for fancy color diamonds Introduction to the FCRF analytic tools and products

Diamond production is mainly concentrated in Southern Africa, Russia and Canada; only few mines regularly produce fancy color diamonds Source: BofA Merrill Lynch Global Research

Diamond mining wears many shapes Kimberley mine (open pit), South Africa Diavik mine (open pit), Canada Alluvial mining, Congo Marine mining, Namibia

As do rough diamonds

Rough diamond production experienced a permanent carat decline from 2005 peak levels Global rough diamond production by country (carats, m) 2004-2016 CAGR -1% -24% +5% Carats, M 180 177 176 168 159 163 160 32 34 34 31 32 140 133 130 134 125 124 128 125 127 38 38 22 21 120 38 39 37 18 21 23 21 23 25 100 12 13 35 40 13 16 17 15 35 35 38 15 42 80 35 38 7 14 9 15 13 11 12 10 13 10 9 11 60 6 6 33 14 11 7 12 12 8 30 20 15 14 8 8 8 19 8 9 9 40 8 7 7 9 9 16 10 9 8 12 14 30 33 29 33 22 9 14 20 28 20 19 16 21 16 16 23 8 9 12 10 5 0 1 1 3 1 3 1 2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Kimberley Process Botswana Russia Canada South Africa Angola Namibia Australia D. R. Congo Zimbabwe Lesotho CAR Sierra Leone Guinea Tanzania Others CAGR 04-16 -3% 0% 0% -4% 3% -1% -3% -2% 38% NM NM NM NM NM

However, in dollar terms global rough diamond production has been climbing Global rough diamond production by country ($, B) 2004-2016 CAGR +2% $, B -11% 15 14,4 14,1 14,5 13,9 12,7 12,6 12,1 12,1 12,0 3,6 12,4 11,5 3,9 3,6 3,0 10,2 3,3 3,0 3,2 3,0 2,6 2,8 10 2,9 2,6 8,6 2,7 3,1 3,7 4,2 2,5 1,4 2,4 2,9 2,5 2,6 2,6 3,6 2,2 2,6 2,3 1,9 2,3 2,0 2,0 1,4 1,4 1,7 2,3 1,7 5 1,7 1,2 1,4 1,6 1,3 1,4 1,4 1,2 1,5 1,0 1,2 1,8 1,4 1,1 1,3 1,2 1,1 1,1 1,1 1,3 1,2 0,9 1,2 1,3 1,2 0,8 1,0 1,1 1,2 0,9 1,4 0,7 0,9 1,2 0,4 0,4 0,7 1,2 0,9 0,5 0,6 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Botswana Russia Canada South Africa Angola Namibia Australia D. R. Congo Zimbabwe Lesotho CAR Sierra Leone Guinea Tanzania Others Source: Kimberley Process

Lesotho Nambia South Africa Botswana Angola Canada Average Russia Zimbabwe Australia Congo 2016 saw a 17% rough diamond price decline Average rough diamond price ($/ct) 2001-2016 Average rough diamond price by country ($/ct) 2016 1,070 1,067 CAGR 150 533 150 139 120 110 100 90 80 70 60 72 66 75 63 64 67 69 77 +1% 68 91 117 99 110 114 107-17% 89 130 120 110 80 70 120 107 89 89 50 40 30 20 10 60 50 10 50 15 11 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 Source: Kimberley Process

The USA is still the global demand driver for diamonds Global polished diamond demand share by geography Global polished diamond demand Source: De Beers

Polished diamond prices (excluding fancy color diamonds) have declined by 15-20% over the last 5 years Source: www.polishedprices.com

Fancy color diamonds Diamonds come in a wide range of colors, from colorless to black, yellow to green and red to blue A white diamond s color is graded on a scale that ranges from D (colorless) to Z (a diamond with a light yellow or brownish shade). This color grading scale applies only to white diamonds and not to fancy color diamonds The value of color in a white diamond is inverse to that of a fancy color diamond. The less color a white diamond has, the more valuable it is; whereas, the more color a fancy color diamond has, the more valuable it is Only a very small fraction of the 130 million carats mined every year will become polished fancy color diamonds (few tens of thousands certified diamonds every year)

Rough to polished Left and Right: This 5.25 carat fancy intense pink, VS1 (right) was cut from a 10.82 carat rough (left). The rough stone originated in South Africa.

Rare Fancy Color Diamonds (RFCDs)* are the most sought-after and noncommoditized diamonds in the world One-of-a-kind stones Extremely limited supply Inability for consumers to shop on price / high margins Demand driven by emerging market UHNWI Exclusive supply chain Shot Blue Marilyn (Andy Warhol, 1964) Requires unique technical expertise *Note: Fancy color diamonds that retail for at least $1M

The RFCD supply is concentrated within a small number of market participants Mines Only 90-110 new RFCD rough diamonds estimated enter the market per annum. Estates release very few vintage products to the market many times via auction houses. Cutting and polishing RFCDs require a high level of technical cutting expertise, maintained by a small number of artists. Speculators vaults Auctions and trades Estates Value enhancement Value may be increased via technical enhancements (e.g., re-cutting). Retail Consumer RFCDs are regularly sought after by private jewelers as well as luxury retailers who typically exhibit them prominently in their flagship store displays, drawing customer traffic and enhancing sales of other category jewelry. Source: FCRF research

Yellow diamonds account for ¾ of the world s fancy color diamonds by units, but only 40% by value Other Blue 3% 7% 13% 100% Pink 16% 13% 37% Yellow 74% 37% Source: FCRF research Carats $ Value

Fancy Color Diamond Index (FCDI) methodology Quarterly wholesale transaction pricing read 25 data contributors (leading FCD traders in 3 markets: HK, NY, Tel Aviv) Fully audited process No prices published, only changes in prices

Source: FCRF research Price trends fancy color diamonds (2005-2017)

Source: FCRF research Pink fancy diamond price appreciation beat the performance of all major equity and commodity indexes between 2005-2017

Source: FCRF research Price performance varies mainly by carat weight and color intensity

Using the Index to assess value of an individual diamond

https://www.fcresearch.org/the-fancy-colordiamond-index/

Beyond the 4C s, FCRF research found 3 key factors that significantly affect fancy color diamond prices Inner Grade (IG) Color Dispersion (CD) Undertone (U)

Inner Grade is the color strength range within each saturation level

Inner Grade grading IG1 - the stone has the weakest saturation possible for entering a designated GIA category. IG2 and 3 - mid-level inner grade in each saturation category. Grade 2, the most common grade on the market, is a bit below average, grade 3, a full-bodied color, is just above average. IG4 and 4+ - IG4 is the strongest in its category for all but yellow and pink diamonds, which can achieve a grade of 4+. Stones graded as 4 could easily be mistaken as belonging to one full saturation level higher; for diamonds exhibiting a yellow or pink hue, an additional grade of 4+ (for extra-vivid saturation) has been added; a grade 4+ thus describes an extraordinarily Vivid Yellow or a highly saturated pink stone.

Inner Grade visual examples

Inner Grade has significant impact on price

Color dispersion describes the ratio between colorless patches to color areas on the diamond CD1-40%-60% colorless patches (poor color dispersion) CD2-22%-39% colorless patches (low color dispersion) CD3-11%-21% colorless patches (good dispersion the average diamond) CD4-5%-10% colorless patches (very good dispersion) CD4+ - 1-4% colorless patches (perfect dispersion)

Color dispersion visual example

Color dispersion pricing impact

Undertone is the presence of a unique tint in a color For yellows, undertone refers to the color temperature and presence of greenish, brownish or orange tint For blue fancy color diamonds, undertone refers to the degree of a gray or green presence For pink fancy color diamonds, undertone refers to the amount of a purple or orange tint The most desired hue variation in yellow, blue, green and pink is marked on the color circle; these hues are often referred to in the trade as canary yellow, sky blue, grass green and bubble gum pink

Undertone grading The FCRF identifies the following levels of undertones Pink: U1 (orange) to U4+ (purple) Blue: U1 (gray) to U4 (primary blue with no undertone) Yellow A: U1 (green) to U4 (primary yellow with no undertone) Yellow B: U1 (brown) to U4 (orange) Descriptors assigned to U ratings: 1. Poor 2. insufficient 3. Sufficient 4. Very good 4+ Exceptional

Undertone visual examples (1 of 2)

Undertone visual examples (2 of 2)

Undertone impacts value significantly cold undertone with a purple presence; premium warm undertone looking more orangey; significant discount

For more details https://www.fcresearch.org/product/the-pricingarchitecture-book/

In 2017, FCRF is launching the fancy color diamond rarity evaluator

The FCRF plans to create rarity certificates for participating retail programs

In 2017, FCRF has launched a beta version of the fancy color auction calculator

In 2017, FCRF has started testing appraisal services for important fancy color diamonds Typically for $1m+ FCDs Service offered to accredited investors only Physical / remote Conducted by world class FCD experts

Questions and follow-up info@fcresearch.org oren@adamapartners.com