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De Beers stuns market with 26% earnings fall

DE BEERS, the South African diamond giant, yesterday shocked investors with a threatened dividend cut, plunging earnings and the resumption of a quota purchase system last used in 1982 at the depth of the recession.

Analysts were unprepared for the extent of the bad news, and De Beers' units tumbled dollars 1.75 in London to close at dollars 20. In South Africa, the surprise dividend warning provoked a rout among mining shares, wiping more than 3.2bn rands from the Johannesburg Stock Exchange.

The group blamed its problems on the global downturn, de-stocking by the jewellery trade, and diamond smuggling from Angola, which was boosting supply.

The interim dividend of 25.1 cents per De Beers-Centenary linked unit is being maintained, but the directors expect to have to make 'a significant reduction' in the final dividend. Brokers said the dividend might have to halve from last year's total payment of 87.3 cents.

According to the company, demand has been falling because jewellery manufacturers have been destocking against a background of stagnant retail sales.

De Beers' Central Selling Organisation handles 80 per cent of the world's rough diamond sales and operates a buffer stock to keep prices stable.

Steve Oke, an analyst with Smith New Court, estimated buying in smuggled Angolan diamonds had so far cost De Beers up to dollars 500m ( pounds 259m). 'The problem is that their cash balances at the begining of the year were only dollars 760m. Not only have they had to use that to finance the Angolan purchases, they have also had to use it to build their stocks.'

At the end of December the stockpile was valued at about dollars 3bn but analysts say by the end of this year it may swell to dollars 4bn.

In an attempt to keep the stockpile under control, De Beers is applying clauses in its contracts with diamond producers which, from September, will allow it to defer taking delivery of about 25 per cent of the amounts to which it is committed.

'The last time it did that was in 1982 and it lasted about a year,' Mr Oke said. 'Then, it had a severe impact on confidence among both the trade and investors. It wasn't until 1984/85, when growth in demand really began to show, that things improved.'

In the half-year ended June, the combined attributable earnings of De Beers Consolidated Mines and the Swiss-based De Beers Centenary (which handles the foreign business of De Beers) dropped to dollars 330m, or 87 cents per share, 26 per cent lower than the same period last year.

When the retained earnings of associates are included, combined earnings came to dollars 460m, or 121 cents a share, 21.5 per cent down on last year's total.

The company said the overall result for the year was likely to show a greater percentage recuction in combined profits than that recorded in the first half.