/ 1 January 2002

De Beers H1 sales up, H2 seen less shiny

Global gem giant De Beers reported an 8,5% rise in first-half rough diamond sales to $2,84-billion on Monday, but said it did not expect sales or cashflow to be as sparkling in the final six months of 2002.

Second-half sales are traditionally lower than those in the first half, when jewellers and cutters stock up after Christmas, but uncertainty over the global economic outlook is clouding forecasts across all industries, including the diamond market.

”I think the second half is not going to be as effervescent as the first,” De Beers Managing Director Gary Ralfe told analysts when asked about the group’s pricing strategy. ”We are not planning to sell as much as we did in the first half.”

Ralfe told a conference call that for the first time in June, De Beers had outlined the amount and type of diamonds it planned to offer clients or ”siteholders” for the rest of 2002.

”In June they protested that this would be too little, but now they are probably feeling a bit more relaxed… Clients still seem to have confidence for the year, but they have tempered their confidence in view of the bear market in stock markets.”

De Beers, in which Anglo American owns 45%, supplies around two thirds of the world’s rough gems. Its fortunes are closely tied to consumer confidence in the United States, which accounts for half of all diamond jewellery sales.

In the six months to end-June, De Beers’s rough gem sales rose to $2,842-billion from $2,619-billion a year earlier, in line with analysts’ forecasts of $2,82-billion.

It reported what it calls ”own earnings before income from Anglo American” of $230-million. This was down by a third, but the figures are not strictly comparable since they include some costs associated with the delisting of De Beers in June 2001.

The company is now privately owned by Anglo, South Africa’s Oppenheimer family and the Botswana government.

CASHFLOWS UP, DEBT DOWN

Cashflow rose 56% to $1,1-billion as it ran down stone stocks, and net interest-bearing debt — mainly related to its delisting — fell to

$2,08-billion from $3,26-billion.

De Beers said it was focused on reducing debt and could change the payback period of its loans. Lower gearing — around 54% — would also give it a chance to consider expansion.

”On the face of it, this is a good set of results, with strong cashflow and lower debt levels,” said Allan Cooke of Rice Rinaldi Securities. ”Although they are cautious on the outlook for the second half, you may find that they end up with better-than-feared (year) results.”

Jack Jones, analyst at investment bank CIBC World Markets in London, expressed similar sentiments: ”I thought the margin was quite disappointing, though the cash generation and debt reduction was outstanding.”

The margin on diamond sales dropped to around 15% from 20% in the first half of 2001, partly as a result of De Beers lowering its diamond prices.

Anglo American said it would report headline earnings for its De Beers investment of $166-million for the first half. The diversified miner posts interim results on September 10.

”Restocking by the retail trade in the first half…meant …polished demand from the cutting centres was above underlying retail demand in the consumer markets,” De Beers said.

”As a result, polished stocks financed by the cutting centres reduced over the period from about $4,1-billion to $3,4-billion.”

Apart from its results, De Beers also said it would be looking for reassurances from South Africa on its plans to give blacks a bigger role in mining.

But it would not elaborate on what it hoped to achieve on Wednesday, when its officials meet government ministers.

De Beers also said it would provide anti-Aids drugs to its HIV-positive staff and their partners from next January.

South Africa has more people living with HIV/Aids than any other country, and Ralfe said initial research showed that about 12% of the group’s South African staff were infected.

He said the initial cost of providing anti-retroviral drugs was around R25 000 per person treated. De Beers employs around 11 000 people in South Africa. – Reuters