Diamond giant De Beers reported an 8 percent drop in earnings to $345 million during the first half of the year and headline earnings of $336 million 21 percent lower than the equivalent period in 2004. DTC sales totaled $3.22 billion during the period and additional diamond sales of $265 million.

 

The following is taken from De Beers’ press release this morning:

 

Own earnings at $345 million were 8 percent lower than the equivalent period in 2004, and headline earnings were 21 percent lower at $336 million. The decrease in own earnings was mostly due to the impact of a weaker dollar and to tighter margins arising largely from a significant reduction in stockpile realizations.

 

Headline earnings were further impacted by the negative swing of $46 million in the group’s share of retained earnings of joint ventures. This was because of the release last year, as the diamond stockpile was being run down, of higher provisions for unearned profits in diamond stocks purchased from the group’s joint venture partners.

 

Operating cash flow fell to $158 million from $871 million in the first half of 2004 when there was a draw down of stocks of nearly $500 million. In addition there was a substantial increase in other working capital in 2005.

 

In line with the lower earnings and cash flow, the Board has declared a reduced interim dividend of $150 million (2004: $250 million) payable on 1st August 2005.

 

Production

Group production for the period was 23.7 million carats, an increase of 23 percent over the same period in 2004. As a result of the increased production, stock levels have risen by about $400 million compared with June 2004.

 

Sales and marketing

Despite mixed economic data it is estimated that the demand for diamond jeweler in the United States is up by 6 percent in the first half over the same period last year. Larger chains and high-end independents have shown the strongest results and polished prices have started to edge up at the consumer level. Performance in other markets was mixed. The local currency value of global diamond jeweler sales is estimated to be higher by 5 percent than the equivalent period in 2004. De Beers is currently forecasting growth of 6 percent in local currency retail demand for the full year due to the level and quality of diamond marketing activity as well as regional macro-economic strength.

 

Throughout the first half, demand for rough diamonds from the cutting centers was strong. Sales by the DTC, the marketing arm of De Beers, for the first six months totaled $ 3.2 billion, 8 percent higher than the equivalent period in 2004. The DTC raised its rough diamond prices on two occasions.

 

Projects

De Beers recently announced the approval of C$636 million for the Snap Lake project in Canada with construction scheduled to commence in 2006. Further expansion projects in Canada and Southern Africa are under evaluation.

 

Agreement was reached with Endiama, the Angolan state mining company, for the establishment of a joint venture for the exploration of diamonds.

 

Regulatory

In early June, the European Commission published a notice indicating its intention to accept the commitments offered by De Beers and Alrosa in relation to the Alrosa Trade Agreement and allowed a 30 day period for public comment. The Commission is now considering any third party comments received.

 

Outlook

The market for rough diamonds remains firm and we expect that, unlike in previous years, sales in the second half of 2005 will at least match those of the first half and that stocks will reduce. This should have a beneficial impact on both cash flow and earnings.