MINING MARKETS & INVESTMENT NEWS — INVESTMENT COMMENTARY — De Beers expected to rebound as Asia recovers

The chance of a recovery in the jewelry market and new strategies in marketing could push diamond producer De Beers Consolidated Mines (DBRSY-Q) back up following two years of poor results.

Analyst Roger Chaplin of T. Hoare, the London-based affiliate of Canaccord Capital, has recommended De Beers as a buy on the strength of better sales and indications that some of the company’s major markets may be turning the corner. De Beers is currently trading as American Depository Receipts at US$25.50.

The Japanese jewelry market, which had been De Beer’s most important growth region for two decades, is currently flat — a welcome change from the spiral of the past two years. Chaplin interprets that as a bottoming signal, noting that imports of polished diamonds have been increasing slightly even though retail sales have not. “The stronger yen has also helped,” writes Chaplin, “and there is a general impression that the worst is probably over in the Japanese and broader Asian markets.” Retail inventories have fallen by about US$1 billion as well.

The company’s marketing pipeline, the Central Selling Organization, reported sales of US$2.4 billion, up 44% from the first half of 1998 and well ahead of forecasts. The CSO’s own stocks have fallen by about US$1 billion, which, together with the decline in polished stocks in Japan, is bringing the market into line.

De Beers’s contract with the Russian diamond production system has also held up, and, in contrast with recent years, Russian stones are not finding other ways on to the international market. Unrest in Angola has cut exports from that country drastically, which has made room for additional production now coming from the Ekati mine in the Northwest Territories.

In addition to the “commodity” side of the market, De Beers’s branding strategies appear to be working. The company’s “millennium” diamonds — a

limited number of stones that will be cut and laser-engraved with a brand — have been well-received by the cutting trade, commanding as much as a 50% premium over stones of equal size and quality.

Test marketing of De Beers-branded polished stones at the retail level was described by the company as a success, which offers hope for one of De Beers’s long-term strategies in the market.

Expecting that De Beers’s Millennium strategy will bolster sales, Chaplin is looking for second-half revenues of around US$2.2 billion. The possibility of recovery in the Asian markets has Chaplin predicting total sales

of US$5.4 billion in 2000.

De Beers’s earnings are not expected to advance as quickly as sales, partly because the company’s large investment in Anglo American (AAUK-Q) will not be paying dividends this quarter, and partly because an ongoing dispute with the Government Diamond Valuator’s office in South Africa has forced the company to sell mainly stones from outside sources rather than from De Beers’s own mines. These stones give the company a lower profit margin as they are generally bought at market price less 10%.

Chaplin is forecasting earnings of US$1.92 per share for 1999 and US$2.59 per share in 2000.