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Diamond Glut Cuts Sparkle From De Beers Bottom Line : Gems: The company predicts a drop in sales, partly because of illegal mining in Angola.

August 25, 1992|Reuters

LONDON — A diamond rush in Angola is unsettling De Beers, the South African-based company that long has kept a firm grip on the market in the gems.

De Beers stock has fallen by more than 50% in nine months, and analysts say their faith in the issue has been shaken by the company's change of heart on prospects for the global diamond market.

De Beers this year indicated in a series of presentations to analysts in world financial capitals that it believed that the diamond market was picking up.

But in half-year results this month, the company was more subdued, predicting a drop in rough diamond sales in the year's second half. It blamed much of the drop on a diamond rush by illegal miners in Angola that is causing an oversupply of the precious gem.

"A few months earlier, De Beers had been beating their drums about improved sales. We're not saying they deliberately misled us, but they have lost some credibility," mining analyst John Taylor of brokers James Capel said.

De Beers' American shares, which traded on NASDAQ in November for nearly $30, closed Monday at $14.375. Mining analyst Roger Chaplin of Credit Lyonnais Laing predicted that the stock could lose another 30% of its value in the next year.

De Beers corporate communications executive Roger van Eeghen denies that the diamond giant misled brokers.

"We were not intentionally upbeat. Some analysts have told us all the signals were there, but they just didn't take heed of them," said Van Eeghen.

De Beers says the Angolan crisis coupled with a gloomy global economy led to its reassessment of the market.

It estimates that more than 50,000 garimpeiros-- wildcat diggers--are stripping Angola's alluvial diamond beds, removing the best stones. A further 500 diggers are arriving daily to plunder diamond-rich river beds in Cuango province.

"It's like the Wild West out there," Van Eeghen said.

De Beers London-based selling arm, the Central Selling Organization, has been buying up stones to stabilize the market. De Beers controls about 80% of the world's diamond market through the selling organization, maintaining a stockpile valued at the end of last year at about $3 billion.

Some analysts say the organization has been paying above-market prices for diamonds, but Van Eeghen said this was not the case.

Analysts are concerned that De Beers underestimated the impact of the Angolan rush, which the company says will flood the market with diamonds worth about $500 million--more than 10% of the world's total diamond output.

"There were newspaper articles on this from November, 1991, and they should have been more open earlier," Chaplin said. "It does not reflect well on their control and feeling for the world's diamond market."

The diamond giant said it was surprised by the extent of illegal Angolan digging. "Perhaps when we gave our presentations we did not emphasize the problem enough," said Van Eeghen.

De Beers expects the Angolan problem to persist in the medium term. Angola, which ended its civil war in May, 1991, is holding elections next month, and De Beers said it will take some time before a new government acts against the diggers.

The company has a contract with Angola's state-owned Endiama diamond company to buy legal diamonds. But this deal has lost its impact since the Angolan government passed legislation in November, 1991, allowing Angolan citizens to possess diamonds.

Analysts also criticized De Beers for not releasing a balance sheet with its midyear results, and they predicted an erosion of the company's cash balance because of the stockpile of stones.

Chaplin estimated that the company's cash balance will fall to less than $400 million by the end of 1992 from a peak of $1.8 billion at the end of 1989.

"Most companies always release a balance sheet midyear, but De Beers is different. It is far too secretive about these things," Chaplin said.

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