UPDATE: De Beers Eyes 2nd Half Recovery After Demand Cut Profit

(Adds executive, analyst comment.)

By Robb M. Stewart Of DOW JONES NEWSWIRES

JOHANNESBURG -(Dow Jones)- De Beers SA, the world's largest diamond company, Friday said it expects to ramp up production of uncut gems in the second half of the year in response to recovering demand, which slumped early in 2009 and slashed its first-half profit.

Sales of rough diamonds by De Beers's marketing arm fell 57% to $1.4 billion as clients, known as sightholders, cut inventory amid the global recession that has dented sales of luxury goods. De Beers, 45% owned by Anglo American PLC (AAUK), said it reduced production 73% for the six-month period to 6.6 million carats.

"There was a considerable improvement in the second quarter," Managing Director Gareth Penny told reporters during a conference call.

He said the diamond producer will continue to take a cautious approach to output, sales and costs, but added that while retail demand for gems remains subdued in the key U.S. market, the rate of decline has slowed and demand from emerging markets - including China and India - remains positive.

Penny said that as its mines in South Africa and Canada lift output, and now that its major venture operations in Botswana and Namibia have ended temporary production suspensions, output for the year should be about half that of 2008. Production last year fell to 48.1 million carats from 51.1 million in 2007.

Net earnings for the half-year fell to just $3 million against $316 million in the same period last year, and total sales were 54% lower at $1.71 billion from $3.74 billion previously, De Beers said.

After swinging to a net loss of $186 million for the first three months of the year, De Beers said it recovered to a profit of $189 million for the second quarter. Sales similarly picked up, rising to $1.31 billion for the second quarter from $400 million in the first.

"It is clear quarter-on-quarter trends in diamonds have improved dramatically," Liberum Capital in London said, adding the company's outlook for the remainder of the year is "almost wishfully optimistic."

While the results are neutral for shareholder Anglo American, Liberum said De Beers may be putting a positive spin on things ahead of refinancing its debt. Liberum echoed concerns of some other analysts that the company may need an equity injection to clear a refinancing gap.

Penny, however, said De Beers doesn't anticipate needing additional funding. A $500 million loan from shareholders received in April hasn't been used, and negotiations with banks to renew a $1.5 billion loan facility that expires in March is expected to conclude during the second half of the year, he said. De Beers had net debt of $4.06 billion at the end of June, but Penny said the company was sitting on cash of about $622 million. "We feel we have the facilities and feel we can work within them," he said.

As the global economic turmoil picked up steam in the final quarter of last year, De Beers deferred investments, cut jobs and reduced production in line with client demand. The company's Debswana Diamond Co. joint venture in Botswana suspended mining for 50 days and its Namibian Namdeb Diamond Corp. venture halted output for three months.

Founded in 1888 and taken private in 2001, De Beers produces and markets some 40% of the world's rough diamonds by value. The Oppenheimer family owns 40% of the company and the Botswana government 15%.

Company Web site: www.debeersgroup.com

-By Robb M. Stewart, Dow Jones Newswires; +27 11 783 7848; robb.stewart@dowjones.com

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(END) Dow Jones Newswires

July 24, 2009 05:45 ET (09:45 GMT)

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