Upscale jeweler
Aber holds a 40% interest in Diavik, which is shaping up to be Canada’s second diamond mine. The project lies 300 km north of Yellowknife and 35 km southeast of the producing Ekati diamond mine. Diavik Diamond Mines, a division of London-based
Provided all permits are issued this year, and the boards of both companies give the go ahead, construction could begin in early 2000, leading to start-up in mid-2002.
According to Michael Kowalski, president and chief executive officer of Tiffany, the deal will guarantee the company a steady supply of the stones at competitive prices.
“Diamond jewelry represents our largest product category, and ongoing growth will require us to secure an increasing quantity of the highest-quality diamonds,” he says. Jewelry sales accounted for three-quarters of the company’s 1998 sales of US$1.2 billion.
Aber says the deal, which will channel rough production from the mine directly to the retailer, will allow both companies to share the financial benefits of a segment of the diamond trade not normally accessible to either a producer or a jewelry retailer.
Andrew Muir, a mining analyst with Canaccord Capital, says Tiffany will buy at least US$50 million worth of diamonds a year from Aber. The diamonds will be valued at the open market price and sold to manufacturers under contract to Tiffany.
“The two companies also share in a 10-20% mark-up between the value of the diamonds and what they sell to the manufacturer,” Muir writes in an investment newsletter.
The deal hinges on the sale of a 14.3% stake in Aber to Tiffany for $104 million. The sale will take the form of a private placement consisting of 8 million treasury shares priced at $13 each. James Fernandez, executive vice president and chief financial officer of Tiffany, will be appointed to Aber’s board of directors following the company’s annual meeting on July 30, 1999.
On completion of the deal, Aber will have working capital of $214 million, with 53.8 million shares outstanding, or 56.1 million fully diluted.
Aber says it can raise the balance of its share of the mine’s $875-million price tag without diluting its shares further. The proposed Diavik operation will mine four kimberlite pipes with a reserve of 26 million tonnes grading 3.9 carats per tonne, for 102 million carats at an average value of US$56 per carat.
The final feasibility study has been delayed while the federal environment minister determines the terms and conditions by which the project should proceed to the permitting stage.
The feasibility study is based on a production rate of 1.3-1.9 million tonnes of kimberlite per year, which would yield 6-8 million carats of diamonds annually during the full-scale open-pit mining phase. The project is expected to have a mine life of 16 to 22 years.
Tiffany enjoyed stellar earnings and sales for the fiscal year ended 1998. The company reported record earnings US$90.1 million (or $2.50 per diluted share), a 24% increase over earnings of US$72.8 million ($2.02 per diluted share) in 1997. Worldwide sales rose 15% last year to US$1.2 billion, compared with US$1 billion in the previous year.
This strong growth continued into the first quarter of 1999, with earnings up 45% between periods. The company earned US$16.2 million (44 cents per diluted share) for the three months ended April 30, compared with US$11.2 million (31 cents per diluted share) for the same period in 1998.
At US$272 million, sales for the first three months were up 20% over the US$226 million in sales recorded in the comparable period last year.
Tiffany reaches the buying public through more than 100 fully owned stores and boutiques, as well as through select jewelers and department stores in the Americas, Pacific Rim, Europe and the Middle East. Direct marketing sales, including catalogue sales, represent about 10% of sales in 1998. Tiffany’s product line includes high-quality jewelry, timepieces, sterling silver goods, china, crystal, stationary, fragrances and accessories.
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