Wednesday, July 27, 2011

De Beers posts record sales, but cuts output forecast

DE BEERS posted record rough diamond sales in the first half of the year, masking a difficult operational period where skills shortages and rain hampered production, bringing the annual output forecast down to 35-million carats from an earlier estimate of 38-million carats.

De Beers, which supplies about a third of the world’s rough diamonds and which is 45% owned by Anglo American, yesterday posted total sales of $3,89bn in the six months to end-June versus $2,98bn a year earlier. Pretax profit was $951m compared with $484m a year ago and $863m for all of last year .

Prices of diamonds rose 35% in the past six months. Bruce Cleaver, De Beers chief operating officer, said the outlook for the remainder of the year was positive because of the group’s expectation of strong sales in the US over Christmas and robust sales for India’s Diwali celebration and the Chinese new year.

"All the data we have leads us to believe the second half of the year will be strong and produce positive growth," he said, and the group was monitoring macroeconomic events in Europe and the US . "We are quietly confident that prices will continue to grow, perhaps not at the same speed as the first half, but they will continue to be positive."

De Beers produced 15,5-million carats in the interim period and forecast output of 20-million carats for the rest of the year. This is below the prediction of 38-million carats for this year .

The production data was disappointing and the financial results benefited from the strong increase in rough diamond prices, said RBC Capital Markets analyst Des Kilalea, who had expected output of between 17-million and 18-million carats for the interim period.

"If De Beers had produced those extra 3-million carats, would we have seen prices rising 35%? Maybe not," Mr Kilalea said.

One of the problems about not hitting a production target is that cost of sales were pushed up because fixed overhead costs were not offset. Cost of sales for the period was 26% higher at $3,07bn.

De Beers struggled with a lack of available equipment because of a shortage of skilled artisans to maintain it, said outgoing chief financial officer Stuart Brown.

Production was also affected by heavy rains in SA and the closure of the Namaqualand mine at the end of last year , cutting 97000 carats from the region.

Philippe Mellier became De Beers CEO on July 19 and would visit the group’s assets, clients and cutting centres before formulating a strategy for the company near the end of the year, said Mr Brown.

"Philippe says De Beers is a complex group and he needs to understand it," he said.

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