06/06 5:06A THE BOTTOM LINE: Investors Have To Dig For Diamond Buys
By Adam Aljewicz and Angus Macmillan
JOHANNESBURG (Dow Jones)--Investors around the world will be hard pressed to
maintain their holdings in the diamond sector now that giant De Beers is no
longer listed on the Johannesburg Stock Exchange.
De Beers was taken private June 1, and most of the remaining companies in
the sector are too tiny to attract much investment, particularly from
institutions. But one possible beneficiary is Anglo American PLC (AAUK), the
diversified resources company that was part of the consortium that bought out
De Beers.
James Allan, a diamond analyst at Barnard Jacobs Mellet in Johannesburg,
said Anglo American will become more of a proxy for diamond investors than
London-listed resources company Rio Tinto PLC (RTP) and U.K./Australia-listed
BHP-Billiton.
"About 13% of Anglo's earnings will come from De Beers in the current
financial year. This makes diamonds a much bigger player in Anglo's overall
portfolio than in any other major resources group," said Allen.
Anglo American owns a 45% stake in DB Investments, the new private company
that controls De Beers.
BHP-Billiton's exposure to diamonds is mainly through BHP's 51% stake in the
Ekati mine in Canada. The mine is expected to produce annual diamond revenues
of around $650 million once it is operating at peak capacity. However, the
company recently said it may divest itself of its stake as part of its merger
with Billiton.
Rio Tinto's diamond investments, meanwhile, are largely through Australian
diamond miner Ashton, which it bought last year after a bidding war with De
Beers, and a controlling stake in the Diavik diamond mine in Canada.
De Beers Controls 66% Of Market
De Beers markets around 66% of the world's diamonds and produces
approximately 45% for itself. It exports around $800 million worth of diamonds
a year and sells the bulk to clients who then sell the gems to retailers.
"I just don't see the institutions running to smaller (diamond) companies
just because De Beers has been delisted," said Justin Pearson-Taylor, a
diamond analyst at Standard Bank based in Johannesburg.
The biggest pure diamond play on international stock markets is Canada's
Aber Diamond Corp. (ABERF). It's market capitalization is around ZAR4.8
billion, and it could be attractive to institutional investors, said BJM's
Allen. By comparison, De Beers market cap before going private was about
ZAR143.0 billion.
ABER has a 40% stake in the Diavik mine in Canada, which will only begin
production in late 2002. Analysts say it could have annual production of
around $300 million when full output is reached in 2004 or 2005.
Other possible investments include underwater diamond miners Trans Hex Group
Ltd. (O.TSX), 50%-owned by tobacco-to-financial company Rembrandt Group Ltd.
(O.RGR), and Namibian Minerals Corp. (NMCOF), or Namco.
But analysts say Trans Hex, which is listed on the Johannesburg Stock
Exchange, and Namco, which is listed on the Namibian and Nasdaq Stock
Exchanges, won't attract institutions due to their small free float.
"Trans Hex has a market capitalization of around ZAR1.2 billion and average
monthly trade of only ZAR13 million - far too illiquid for institutions," says
Allen.
Pearson-Taylor says that with their deep sea operations Trans Hex and Namco
are also involved in the more riskier side of diamond mining. This was
illustrated back in January when an underwater accident crippled its seabed
crawler and almost threatened to put Namco out of business.
Because these companies are too small and too risky, analysts say investors
are more likely to ramp up their exposure to Anglo American.
Historically, the company focused on being the custodian of the world
diamond market, using its cash to mop up any excess supply of stones. But an
announcement earlier in the year of a strategic tie up with French luxury
goods retailer LVMH Moet Hennessy Louis Vuitton (LVMHY) could also be
profitable. The 50-50 joint venture could unlock a lucrative revenue stream
from diamond demand, tapping a global diamond retail market of just under $56
billion and a luxury branded good market of $55 billion. And even though the
tie up isn't expected to be make any returns until at least 2003/2004,
analysts say it could be money in the bank.
Unless Anglo American ups its stake in platinum or another metal, Allen sees
De Beers and its diamond income becoming increasingly important to the group's
future earnings.
Analysts also say investors that do exit the sector altogether may put their
money into platinum companies - which, like De Beers, are based primarily in
South Africa.
Stocks like Anglo American platinum Corp. (O.AAP) and Impala Platinum
Holdings Ltd. (O.IM) benefit from having operating costs in rand and revenues
in hard currency as well as the luxury of mining a product that is still
enjoying record demand.
"Platinum will very likely (surpass) diamonds as the premier resources
sector for institutions," said Pearson-Taylor.
-By Adam Aljewicz, Dow Jones Newswires; +27-726-7903,
adam.aljewicz@dowjones.com
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