RE: RBC reportby Will Purcell
Harry Winston Diamond Corp. is still selling all its diamonds, although prices are well below the peak values recorded last summer. The company's chief executive officer, Bob Gannicott, said the company would prefer to increase its inventory but it is looking to pay some big bills this year. Combined with the financial woes faced by Harry Winston's partner, Rio Tinto PLC, the two companies are likely to keep Diavik running near full capacity this year.
The gem markets
Rio Tinto recently published its annual financials for 2008 and the numbers showed Diavik continued to be profitable, despite a drop in diamond production. The lower carat crop was the result of kimberlite from the rich A-154 South pipe being increasingly replaced by rock from the A-418 pipe. Nevertheless, Rio Tinto said its earnings before taxes, depreciation and amortization were a hefty $356-million (U.S.), down just marginally from the $427-million (U.S.) recorded in 2007.
Of course, the first nine months of 2008 were the rosiest of times for gem sellers, compared with the bleak final quarter of the year and the start of 2009. Retail diamond prices are down by just 15 per cent but the supply of available credit has all but dried up, forcing retailers to limit their inventories and cutters to curtail the amount of goods in their production facilities. That has resulted in a crash of rough diamond prices, which are down about 40 per cent from the highs of last summer.
As a result, many diamond producers are putting their miners on extended holidays or closing their mines completely. Some are choosing to allow their inventories of rough diamonds to grow, rather than sell them at fire sale prices. Mr. Gannicott said Harry Winston was still selling everything, although he would prefer to build inventory as well, if the company had the money to spare.
Fortunately, the economics should leave Harry Winston with substantial profits. The company guards its diamond prices carefully for regulatory reasons, but a 40-per-cent drop in prices combined with the switch to the cheaper goods in A-418 likely translates to an average diamond price of over $60 (U.S.) per carat. That is well below the $100 (U.S.) per carat that the company was getting for the A-154 South gems last summer, but it is still double the cost of production. Further, Mr. Gannicott described the current prices as no worse than "back to the levels of early 2007," a time which Harry's faithful shareholders undoubtedly remember fondly.
Meanwhile, Harry Winston's retail sales have been holding better than some of its rivals, and its January sales were comparable with sales a year earlier. As expected, sales in the United States are struggling, other than at the Hawaii and Las Vegas outlets. Japan has been tough as well, but revenues have been picking up of late. Harry's other Asian outlets are doing well, led by the two stores in China. European sales also appear satisfactory, Mr. Gannicott said.
The debt
Harry Winston has about $75-million in debt maturing this year and the company is looking at a significant tax bill as well. Late last year, Mr. Gannicott said the company was looking to extend the term of the loans to spread the payments into 2010, but so far, there has been no news of any renegotiated loans.
The first payment of $25-million (U.S) is due this month, with a further $20-million (U.S.) due in June. Two payments of $15-million are due in September and December. Mr. Gannicott said although it would be nice to get an extension, these days the banks just want to get their money back and sit on it. "Obviously we can handle it one way or the other," he said, adding that the company was keeping a close watch on everything. Meanwhile, a big insurance settlement from the Paris robbery late last year could come at an opportune time.