Trying times at De Beers

The world’s largest diamond miner, De Beers, on Friday said it expects the outlook for the global rough diamond market for the second half of 2006 to be difficult.

De Beers’s marketing arm, the Diamond Trading Company (DTC), is estimated to have lowered the prices of its smaller diamonds by 5% to 7% at its July sight — the sixth for 2006. The DTC holds 10 such marketing events each year.

“It has been a testing time over the past six months. It has been difficult trading conditions,” De Beers chairperson Nicky Oppenheimer said during a results teleconference.

However, the retail market for diamond jewellery is vibrant, he added.

“Asia-Arabia is currently returning mixed reports with good growth seen in China and slower growth in India. The risk factors in the second half was rising fuel prices and higher interest rates, stock-market volatility as well as global instability,” De Beers MD Gareth Penny said.

During the half-year to June, the DTC increased its rough diamond prices by less than 2%, in February. Comparing the first half of 2005 and the first half of 2006, rough diamond prices rose by 3,3%, De Beers financial director Stuart Brown said.

Earlier on Friday, De Beers reported a 1% increase in DTC sales for the half-year to June to $3,252-billion from $3,220-billion in the previous interim period.

The group’s total attributable diamond production at its mines in Botswana, Namibia, South Africa and Tanzania rose by 4% to a record 24,7-million carats.

In the first half of 2005, De Beers reported diamond production of 23,7-million carats.

De Beers has six diamond mines in South Africa, 50:50 diamond-mining joint ventures with the Botswana and Namibian governments and a 75:25 venture mining venture with the Tanzanian government.

Two of the South African mines are profitable and four are close to profitability, Brown said. In February, De Beers said that four out of six local mines were profitable.

The positive aspect of De Beers’s first-half results is the increase in diamond production, while its earnings have come out more or less in line with expectations, an analyst said. “The negative was the dull outlook for rough diamond prices,” the analyst added.

Investment analysts have been concerned about the level of cutting-centre debt. The world’s key diamond cutting centres are in Belgium, China, India and Israel.

There is a lack of liquidity in cutting centres due to rising interest rates, Penny said.

De Beers reported that its first-half underlying earnings declined by 14% to $308-million from $357-million previously.

The group said that in the short term, the company expects rough-diamond market conditions to remain “challenging”, with constrained growth in the second half of DTC sales.

“On the back of increased DTC marketing expenditure and new marketing initiatives, expectations remain positive for consumer diamond jewellery sales in the second half. This consumer-demand growth will, in the medium term, translate into increased demand for rough diamonds,” De Beers said.

De Beers declared an interim dividend of $150-million, unchanged from the previous comparative period.

The group is 45% held by global resources group Anglo American (Anglo), which said it will report underlying earnings of $164-million for the half-year to June from De Beers, down from $188-million in the six months to June last year.

At 11.05am, Anglo shares were quoted at R282,50, down 0,6% or R1,90 from the previous close.

Demand for diamond jewellery in the consumer markets has remained robust, with estimated growth of 3% to 4% on the record levels of 2005, but more difficult trading conditions exist in the market for rough diamonds, De Beers said.

“This results from the impact, on rough diamond demand, of higher interest rates, higher gold and platinum prices in the retail jewellery product, reduced margins across the distribution pipeline, and the increasing need to manage polished inventory levels,” the group added.

In Canada, the Snap Lake and Victor projects remain on track for commissioning, as planned, in the fourth quarter of 2007 and the fourth quarter of 2008 respectively, De Beers said.

Snap Lake is expected to produce 2,4-million carats a year and Victor 630 000 carats a year, MD Penny said.

“Project costs have increased, principally due to higher energy and material costs in the competitive Canadian environment, technological and construction challenges and the impact of the early closure of the winter road,” the group said.

De Beers has approved a total expenditure of Can$2-billion to bring the two projects into production on schedule.

The group’s capital expenditure for the half-year to June was $394-million, up 338% from the $90-million in the same period in 2005.

Other projects that De Beers is involved in are the South African Sea Areas project expected to add 260 000 carats a year — the project is to be completed by 2007.

De Beers is also looking to proceed with the Voorspoed mine, which would add 595 000 carats a year, Penny said.

In Botswana, Debswana is looking to 10-million carats a year from the Orapa 3 project, of which production will largely be replacement carats, Penny added.

In the first half of 2006, De Beers increased exploration, investing $25-million more than in the corresponding period in 2005.

“This includes the use of state-of-the-art geophysics technology deployed on a Zeppelin in Botswana, and the re-establishment of full-scale programmes in Angola and the Democratic Republic of Congo, where we have access to some of the world’s most diamond-rich prospective ground,” the group said.

“2006 results from the De Beers joint venture with LVMH in the retail sector have been good, with sales well up on 2005 in total and on a like-for-like basis. New stores have been opened in Japan and Dubai, and further expansion is planned in the United States, United Kingdom, Japan and Taiwan,” De Beers added.

De Beers is looking to open 20 new stores before the end of 2006, Penny said.

In April, De Beers concluded an empowerment deal that resulted in 26% of De Beers Consolidated Mines (DBCM) or De Beers’s South African operations being sold to Ponahalo empowerment consortium for R3,7-billion. About R4,5-billion in debt had been raised for the transaction, Brown said.

On conflict diamonds, Oppenheimer said that according to the United Nations, these diamonds were an estimated 4% of global production in the 1990s. Oppenheimer claimed that these stones now make up 0,2% of total global diamond production.

On safety, Penny said that that group’s lost-time injury frequency rate was 0,19 in the first half of 2006 from 0,22 in the first half of 2005. — I-Net Bridge

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