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1990: Diamond Stock of De Beers Earned Hefty Profits While Others Suffered Profit Squeeze

December 1997

While we are not in business of offering stock market advice, the sudden slide of De Beers stock is of great interest to us and the entire diamond industry. The reasons for the this interest have little to do with stock market profits and losses and much to do the role which De Beers plays as the main steering mechanism of the diamond trade. Just this summer, De Beers was criticized for its hefty profits while sightholders and others in the industry suffered amid a profit squeeze. And the De Beers balance sheet remains healthy. In August, following the release of De Beers first half year results, stock analysts were pleased and projected sales of $5 billion by the end of the year.

>Why then a sudden stock slide — from a 52-week high of $37.75 to a current (as of Nov. 20) trading price of $21.69) — a 42% drop? Various explanations are offered by observers. One is that De Beers is not alone — gold stocks are down as well. But this is hard to understand since the latest data from the World Gold Council shows that demand for gold is up 11% for the first three quarters. The second explanation given is the disappointing nature of the Russian contract.

Still another explanation is the perception by many analysts’ of De Beers’ loss of control over the diamond market. One such analyst, Paul Goris, general manager of Antwerp Diamond Bank, speaking at the recent Financial Times Conference in London, commented that “one has to reconcile himself to the fact that the days of a predictable and stable market, an exclusive single-channelled supply and guaranteed profit are probably over.”

A fourth possibility lies with the competition from the introduction of new synthetics — such as C3’s moissanite colorless gemstones. Although C3 is not a synthetic diamond, but rather a fine substitute with the hardness of “9.25” on the Moh scale and other close similarities to diamonds, it’s still a potential competitive threat to diamonds since it can be graded on the color and clarity scale. In fact, the company is cooperating with the GIA as far as establishing standards of differentiation, since the C3 stone is not easily identified as a non-diamond by standard diamond testers.

Meanwhile, De Beers has also been denying reports of Russian progress on colorless synthetic diamonds, despite their admitted discussions with the Russians on the subject. Some sources say the Russians may not ultimately even be the first to introduce synthetic diamonds commercially.

The fifth and perhaps most pressing reason for the stock decline is the necessity for De Beers to cut their sales in the coming due to the dramatic drop in demand in Asia.

In conclusion, while we can’t assess the value of De Beers’ stock value, as far as the diamond business is concerned we need a strong De Beers to hold the whole industry together. As for the company itself, De Beers does meet that criterion of strength. And certainly this is also true of the further bolstering of its position as part of the giant Anglo American group and its formidable assets.

Argyle’s Mike Mitchell recently summed up the need for cooperation among competing diamond producers: “We need to move away from merely selling diamonds as a commodity. This only has one end: price competition. That is negative for us all. It is in everyone’s interest to have a stable diamond market with responsible players.”

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