Harry Winston to source polished diamond fund

Harry Winston Diamond (HW-T, HWD-N) has reached an exclusive agreement to source diamonds for a polished diamond investment fund to be set up by Zurich-based Diamond Asset Advisors.

The Canadian diamond miner and retailer said the fund will be structured as a limited partnership, of up to US$250 million,
offering institutional investors direct exposure to the wholesale market price of polished diamonds.

In a May 19 press release, Harry Winston explained that an expert diamond team would source
diamonds having the same characteristics that the company uses in its own jewelry and timepieces, with a portion coming from the company’s existing inventory. 

“The fund will purchase these diamonds and then consign them to the company, who will act as custodian,” Harry Winston said, adding that it will then use the polished diamonds in the manufacture of its products. 

“The price paid to replace polished diamonds sold by the company in its finished products will be used by the fund as a basis for determining the market value of the fund,” Harry Winston explained. “The polished diamonds sourced through this relationship will increase the diamond jewelry inventory available to an expanding international salon network without making additional demands on the company working capital. It will also reduce the
risk associated with diamond price volatility in the luxury brand business.”

The first subscription, of about US$100 million, is expected to be raised later this year, with the remaining US$150 million raised over the following year. Upon initial funding by Diamond Asset Advisors (DAA), Harry Winston expects to sell a substantial portion of its existing polished diamond inventory to the fund at market prices. DAA will manage the fund and there is no ownership interest between the company and Harry Winston.

In other news, Harry Winston reports that Diavik, Canada’s largest diamond mine, is on track to produce 6.9 million carats this year, up from 6.5 million in 2010. Harry Winston has a 40% interest in Diavik, with Rio Tinto (RTP-N, RIO-L) holding the remainder.

The diamonds will be recovered from 2 million tonnes of ore. The company says that for the second half of the year, the partners’ A-154 South pipe will be mined using a “recently approved higher velocity and lower cost mining method.”

In the first quarter Diavik produced 1.35 million carats from 0.5 million tonne of ore. Production was lower than in the fourth quarter of 2010 due to maintenance at the processing plant, and a shift in ore mix from the higher-grade A-154 South underground to the lower-grade A-154 North underground and A-418 open pit.

In a research note to clients on May 18, Brian MacArthur of UBS Investment Research hiked his earnings per share estimates for Harry Winston to reflect increases in diamond prices. His EPS estimates have moved from 23¢ to 26¢ in 2011, from $1.08 to $1.09 in 2012 and from $1.23 to $1.25 in 2013.

“Rough and polished diamond prices have continued their upward trend albeit at a slower pace than earlier this year,” MacArthur wrote. He holds a “buy” rating on Harry Winston stock with a 12-month target price of $17.75 per share, up from his earlier target of $16.50. 

At presstime Harry Winston was trading at $15.89 per share. Over the last year, the company has traded between $10.21 per share (Aug. 25, 2010) and $17.36 (April 6, 2011). The company has about 84.5 million shares outstanding.

In the first quarter Harry Winston held two sales of rough diamonds, and reported on April 13 that prices have increased from March to April. 

The average price per carat for rough diamonds from A-154 South, rose from US$140 per carat in March to US$160 per carat in April, Harry Winston said. Prices also jumped from US$180 per carat to US$205 per carat at A-154 North, US$130 per carat to US$150 per carat at A-418 (A-Type ore) and from US$90 per carat to US$105 per carat at A-418 (B-Type ore).

Separately, Harry Winston’s chief executive Frederic de Narp told Reuters on May 24 that the company is looking to more than double its store count in five years by pursuing markets in China, Russia and Dubai.