Those who didn’t get a “Millennium diamond” as a New Year’s present shouldn’t sigh, moan or cast scornful looks at their absent-minded lovers. The “Millennium” marketing campaign of
The ongoing campaign should also benefit shareholders of De Beers, according to a recent research report by Canaccord Capital’s Roger Chaplin. The company posted stronger-than-expected earnings in 1999 on the back of “Millennium” sales, a trend that is expected to continue this year. “We therefore look for further strong sales growth of around 8% to 9% in 2000,” Chaplin adds.
The buoyant market for diamonds prompted the mining analyst to issue a “buy” recommendation for De Beers, which currently trades at about US$23.06 per share within a 52-week range of US$31.75 to US$17.38. The company has about 400 million shares outstanding and a market capitalization of US$9.2 billion.
The Central Selling Organization (CSO), De Beers’ marketing arm, posted record sales of US$5.24 billion last year, while earnings from De Beers’ own operations rose 83% in total, to US$686 million from US$374 million. Headline earnings, which include the share of associated companies’ retained earnings (but excluding any extraordinary items), rose by 31% to US$838 million from US$639 million.
Chaplin says the diamond market appears to have fully recovered from its weakness following the Asian financial crisis. “We estimate that total retail diamond jewelry sales in 1999 were around US$53 billion, up 9% from 1998 and also marginally up from the pre-crash levels of US$52 billion in 1996.”
The best market for diamonds was the U.S., which accounted for about 48% of total retail diamond sales last year. However, Chaplin sees encouraging signs of growth in all other markets, with the exception of Japan, which fell by around 4% in U.S. dollar terms. He expects that, by 2003, total retail diamond sales will total about US$62 billion.
Chaplin also notes that the improved demand for diamonds is exceeding regular mine supplies. This is reflected in the drop in the diamond stockpile, the value of which fell to US$3.9 billion from US$4.8 billion at the end of 1998. “The added sales from this source are good news,” Chaplin writes, “but apparently the stockpiles that had built up on the mines (and hence off balance sheet) were also reduced in 1999, to practically nothing. This apparently gave an additional US$500 million (at least) in sales. So the market was strong enough to absorb not only the ‘normal’ production from De Beers’ mines and the contracted CSO purchases, but also took a further US$1.3 billion from De Beers stockpiles, on and off-balance sheet.”
The buoyant market for diamonds led to improved cash flow, which De Beers used to reduce its total debt, down by US$795 million to US$618 million, and increase cash in the bank, up by US$691 million to US$890 million. “The balance sheet now shows net positive cash flow of US$272 million,” Chaplin notes, “a major turn-around from the net debt of US$1,214 million at the end of 1998.”
On the price front, Chaplin is hesitant to estimate increases in diamond prices and, accordingly, has not included increases in its model for De Beers. His report includes details of De Beers’ Strategic Review process, which began in early 1999. It has four major goals:
to improve operating efficiencies and economies significantly (mainly at De Beers’ own mines but also at the operations of the CSO);
to transform the CSO from the “buyer of last resort” for mines to the preferred supplier for the sightholders — a fundamental change in emphasis;
to work with downstream markets to derive and implement strategies to increase demand; and
to seek ways to develop the De Beers brand, thereby driving additional demand and increasing the company’s share of the existing demand.
“These developments will take some time to really be felt in the market,” Chaplin says, “and particularly at De Beers’ bottom line. Nonetheless, they have the potential to generate more radical change than the diamond market has seen for the past 60 years — since the creation of the CSO.”
Be the first to comment on "Millennium campaign adds sparkle to De Beers Investment Commentary"