Aber Diamond changes name, seeks acquisitions

Now called Harry Winston Diamond, company looks to back up its retail expansion with new mining properties

ANDY HOFFMAN
November 19, 2007 at 6:43 AM EST

The head of Aber Diamond Corp., which officially changes its name to Harry Winston Diamond Corp. and begins trading on the New York Stock Exchange today, concedes his company can confuse investors.

The firm owns 40 per cent of the Diavik Diamond Mine in the Northwest Territories, a stake that accounts for roughly 3 per cent of the world's diamond production, making it the largest publicly traded diamond company and a stock with few comparables. The diamond operations of the world's major diamond producers such as DeBeers, BHP Billiton Ltd. and Rio Tinto PLC are either privately held or part of massive mining conglomerates.

Yet the company also owns Harry Winston Inc., the storied diamond retailer with 18 locations worldwide, including New York, Beverly Hills, Paris, Tokyo and Hong Kong.

So is it a miner or a retailer? Neither, according to Robert Gannicott, Harry Winston's chairman and chief executive officer. "We're not trying to draw a distinction between a mining company and a retail company. This is a diamond company," he said in an interview.

It is not however, truly vertically integrated. The company's share of rough diamonds from Diavik must be sold to diamond polishers. The retailer still buys polished diamonds from suppliers, meaning the Diavik stones may not even end up in the Harry Winston stores.

"There are no obvious synergies. If it was a case of where you sell directly from the mine to the retailer then you could get some added margin by doing that. But it's not," said David Whetham, who manages the Scotia Resource Fund, which doesn't hold any Harry Winston shares.

Yet as both a seller of rough diamonds and a retailer, the company does enjoy some advantages, the CEO said. "Our job is to do the best we can selling rough diamonds. We do that a lot better because we've got an information base that comes from a retailer that is buying and selling polished diamonds. We're able to pull that information back into the rough diamond sales, so that has improved our rough diamond sales a lot," Mr. Gannicott said.

For example, the company is able to implement price changes much more rapidly because it knows the price retailers are paying for polished diamonds.

"It's a symbiosis that works very well ... [the company] does what it does better because it has information from these bookends of the industry," he said.

Its rough diamond business is still larger than its retail operations. Sales of about 4.8 million carats are expected to be worth about $400-million this year, while the Harry Winston "salons" are expected to generate revenue of slightly less than $300-million, Mr. Gannicott said.

Yet the company trades at a multiple higher than most mining firms and more in line with a retail chain. The company's price-to-earnings multiple based on estimated 2008 earnings is 24, according to Bloomberg. The stock has certainly underperformed most mining firms, having dropped 11 per cent so far this year. Diamonds simply haven't enjoyed the massive price increase that metals such as copper, nickel and gold have.

Mr. Gannicott, however, expects diamond prices to increase as a result of rising demand from an emerging middle class in the fast-growing economies of China and India.

China already accounts for roughly 10 per cent of worldwide diamond purchases. Indian consumers buy a similar amount and sales in that country are increasing about 25 per cent a year.

A new retail store is planned for Beijing and others are being considered for Shanghai and Mumbai, Mr. Gannicott said. As for the rough diamond side, the company is looking for acquisitions. Mr. Gannicott said he would jump at the chance to purchase Rio Tinto's 60-per-cent interest in Diavik. Rio Tinto is considering asset sales to finance its $38-billion purchase of Alcan. It is also trying to fend off an unsolicited takeover offer from industry giant BHP, that, if consummated, could see some mines sold.

Mr. Gannicott said the company would consider buying into diamond properties that are either in production or close to production in Canada and Australia. He would look at an African mine if he was satisfied the diamonds could be mined in an ethical manner, he said.

Yet just as diamonds are valued for their rarity, diamond mines are proving even rarer. "One of the reasons we got into retailing is because the diamond mining space is a very tight space compared to gold or say copper. There are not a lot of things out there that are good quality that one could think about buying into or taking over," he said.

Aber Diamond Corp.
(ABZ-TSX)
Friday's close $37.95, down 87¢