De Beers’ Chairman Nicky Oppenheimer says the company faced difficult rough diamond market conditions in the first half of the year. Though the outlook for the medium to long term is very positive, there is a cautious outlook for the second half of 2006, said Oppenheimer during a press conference this morning.

 

De Beers Societe Anonyme released its results for the first half of the year ending June 30 2006 during the conference.

 

The difficult conditions, the company says, result from the impact, on rough diamond demand, of higher interest rates, higher gold and platinum prices in the retail jewelry product, reduced margins across the distribution pipeline, and the increasing need to manage polished inventory levels.

 

Despite the difficulties facing the rough diamond market, it was not felt in the retail market where De Beers says that the consumer markets remained “robust” with estimated growth of three to four percent on the record levels of 2005.

 

De Beers’ sales and marketing arm the Diamond Trading Company (DTC) achieved sales in the first half of 2006 of $3.25 billion, marginally above the same period in 2005. In line with revenues, EBITDA is up two percent to $748 million, while net earnings, before the class action payment and the surplus on sale of a 26 percent interest in De Beers Consolidated Mines (DBCM), are down 1 percent, reflecting tighter margins and increased exploration spending. Cash flow from operating activities increased from $158 million to $353 million. Adjusting for the impact of currency and interest rate hedging transactions, underlying earnings, at $308 million, are down 14 percent.

 

Highlights from the first half of 2006 included:

 

• The April 18 sale of 26 percent of DBCM, the South African mining arm of De Beers, to Ponahalo, a broad-based, black economic empowerment consortium for R3.7 billion. This resulted in a profit of $229 million in the consolidated income statement.

 

• The May 23 signing of a suite of agreements with the government of Botswana covering the renewal of the Jwaneng mining license, and the harmonization of the Orapa, Letlhakane and Damtshaa licenses, for a further 25 years, the sale of Debswana’s production to the DTC for a further five years and the establishment, in partnership with government, of the DTC Botswana, which will carry out local sales and marketing activities.

 

• Overall production at Group mines in Botswana, Namibia, South Africa, and Tanzania rose four percent to 24.7 million carats.

 

Plans for future growth and investment include:

 

• 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. Project costs have increased, principally due to higher energy and material costs in the competitive Canadian environment, technological, construction challenges, and the impact of the early closure of the winter road. The Board has approved a total expenditure of CAD$2 billion ($1.76) to bring these two projects into production on schedule.

 

• Two expansion projects in South Africa: South African Sea Areas (SASA), a marine mining project, which is on track for commissioning during the first quarter of 2008, and the Voorspoed mine.

 

• De Beers has significantly increased exploration in first half of 2006, 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 program in Angola and the DRC, where we have access to some of the world’s most diamond prospective ground.

 

• 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 U.S., UK, Japan, and Taiwan.

 

Concerning the outlook for the second half of 2006, De Beers expect rough diamond market conditions to remain challenging, and constrain growth in second half DTC sales. “On the back of increased DTC marketing expenditure and new marketing initiatives, expectations remain positive for consumer diamond jewelry sales in the second half. This consumer demand growth will, in the medium term, translate into increased demand for rough diamonds. This is particularly so given the strong second half 2005 comparables when, against historical trends, DTC sold as much in second half as in the first half. In respect of production, despite the closure of a number of South African mines, we expect full year production to be up in the low single digits in carats,” said the company in a release.