Aber and Tiffany Agree to Diamond Supply, Shareholder Changes
December 07, 04
Canada’s Aber Diamond Corp and luxury jeweler Tiffany & Co have agreed to make changes to their diamond supply and shareholder agreements.
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The effect of the alterations is to increase the price at which Tiffany purchases diamonds from Aber to market value and to eliminate certain restrictions on the sale of Aber shares held by Tiffany.
The sides will each pay the other for altering the terms of the agreement, with the result being that Aber will pay Tiffany a net $5 million.
The modification to the original agreement also ends Tiffany's right to representation on Aber's Board of Directors and, as a result, Tiffany's executive vice president and Chief Financial Officer, James Fernandez, will resign as an Aber director.
The agreements the sides have altered date back to 1999 when Tiffany purchased eight million Aber shares, with the diamond producer using the money to develop the Diavik mine. The diamond sales deal at the time gave Aber an arrangement needed to secure a bank loan to fund the mine's capital cost.
Aber and Tiffany remain parties to a Diamond Supply Agreement, in which Tiffany buys at least $50 million of rough diamonds annually that meet its quality requirements. The agreement ends in 2013.
Aber owns 40 percent of the Diavik mine, Canada's second diamond mine, which began producing last year. The other 60 percent is owned by diversified miner Rio Tinto
Industry analysts say Tiffany’s need to cut raw material costs since, in line with other jewelry retailers, it has been unable to pass on the much higher costs of diamonds, gold, silver and platinum to consumers.
Tiffany’s troubles are apparent in its results for its most recent quarter where sales rose 7 percent to $461 million while profits plunged 26 percent to $20.8 million.
The luxury jeweler has also been hit by a weak performance in Japan, its second-largest market, where results are coming in worse than predicted in an increasingly competitive market despite the massive investments the company has made in opening new stores.
In addition, it is also facing the cost of opening its new Iridesse pearl jewelry stores with two opened so far.
Given those extra costs, analysts say it’s hardly surprising that Tiffany is making an effort to cut costs where it can – in other words, its agreement with Aber.