DTC Status May Have Motivated Sale of Mine Stock

Tiffany's desire to be a De Beers Diamond Trading Company sightholder spelled the end of its groundbreaking deal with Canada's Aber Diamond Corp., Aber executives told JCK.

De Beers recently announced that a company cannot attain sightholder status if it owns part of a competing mine. This was widely seen as targeting ex-sightholder Lev Leviev, who owns several mines and was reportedly interested in a sight.

But it would also disqualify Tiffany, which in 1999 bought 14 percent of Aber, the minority partner in Diavik, the second mine in Canada's Northwest Territories. Aber executives say this is why Tiffany sold its shares in Aber for $268 million, for a pre-tax profit of $194 million. Tiffany executive vice president and CFO, James N. Fernandez, also resigned from the Tiffany board.

Mark Aaron, vice president of investor relations for Tiffany, declined comment on whether Tiffany was interested in a DTC sight. He said the company sold its shares in Aber because "there was no strategic need to hold that equity investment. We are a public company and we took a look at the stock and felt that if we don't have to hold it, why should we? The stock had quadrupled in value and we felt it was more prudent to sell it and have more than $200 million to employ in other things."

One other aspect of the deal is changing. In the original agreement, Tiffany had the right to buy $50 million in rough a year from Aber at below-market prices. But Tiffany is now giving up its discount, in exchange for a $5 million net payment from Aber. The agreement to buy $50 million a year remains in place until 2013.

A Tiffany release says that, when the $5 million is factored in, the difference in the old price and new one "is not expected to have a significant effect on Tiffany's gross margins." But Aber CEO Robert Gannicott predicted that, with Tiffany paying full price, "we'll get the $5 million back in about a year."

There had been market talk of changes in the Tiffany-Aber relationship. Aber recently purchased renowned retailer Harry Winston, which is not only a competitor of Tiffany's but a fellow consumer of high-grade stones. Aber also hadn't been selling Tiffany the $50 million agreed to. In the first nine months of 2003, it had bought only $24 million from the mine. "We just weren't able to supply them with the kind of diamonds they wanted to buy," said Gannicott.