The world’s largest diamond producer, De Beers, reported a 1% fall in total sales to $3,44-billion for the first six months of 2006 compared to $3,49-billion in the first half of 2005, with the rough-gem market experiencing a “challenging” period.

However, the group said the medium- to longer-term outlook remained favourable, pointing to continued strong consumer demand, particularly out of the key markets of the US and Japan, as well as in the growth markets of China and India.

The unlisted company, which is owned, in part, by Anglo American, also reported a 2% rise in earnings before interest tax depreciation and amortisation to $748-million, but a 1% fall in net earnings, which, it said, reflected tighter margins. The net earnings figure was also before the class-action payment and the surplus on sale of a 26% interest in De Beers Consolidated Mines (DBCM), which has been sold to a black economic empowered consortium, Ponahalo.

Speaking during a conference call on Friday morning, MD Gareth Penny said that, while demand for diamond jewellery in the consumer markets had remained robust, with estimated growth of 3% to 4% on the record levels of 2005, more difficult trading conditions existed in the market for rough diamonds.

He said there was some “indigestion” in the pipeline, brought about by higher interest rates as well as higher gold and platinum prices, which reduced margins across the distribution pipeline.

In the short term, Penny expected rough-diamond market conditions to remain challenging, which would constrain growth in second-half DTC sales. Given that context, Penny indicated that it was unlikely that there would be any further price increases for the rest of the year. In the first half, prices rose by some 3%.

However, the group was bullish about production and growth possibilities in the medium term. On the production front, it expected full-year production to be up in the low single digits in carats. During the first half, output was 4% higher.

It was also continuing to pursue a robust project pipeline to grow output in the medium term and was ramping up exploration, particularly in Angola and the Democratic Republic of Congo. It increased its exploration expenditure in the first half to $75-million from $50-million in the same period last year.

“We are increasing our exploration activities as new opportunities open up, particularly in Central Africa. We have teams of men and women on the ground doing prospecting work in interesting areas in both Angola and the DRC,” Penny reported.

Finance director Stuart Brown said that project expenditure was expected to peak during 2007 and that the group would spend some $800-million during the current year and slightly more next year.

Should all its projects come to fruition, De Beers expects its production to climb from the current level of around 50-million carats to 55-million carats in the next few years.

Key projects included the R1,2-billion Voorspoed development in the Free State, which was still awaiting rights approval from the Department of Minerals and Energy, its R900-million South African Sea Areas project, which should bee commissioned early next year, and the Victor and Snap Lake projects in Canada, worth a combined C$2-billion.

During the first half, some $394-million was spent on capital projects, which was a 338% increase year-on-year.

Penny was concerned about the flare-up of conflict in the Middle East, pointing out that Israel remained an important diamond centre and that the conflict, should it be sustained, could undermine the industry.

He also indicated that the more generic fallout, in terms of oil prices and global economic destablisation, would, ultimately, place downward pressure on diamond sales, which were highly sensitive to consumer-confidence and economic-growth outlooks.

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