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Harry Winston gets downgrade

04 march 2009

RBC Capital Markets has sharply downgraded its forecast and price target for Harry Winston, reported.
“In light of steep declines in rough diamond prices, RBC Capital Markets is sharply revising downward its financial forecasts and price target,” RBC said.
“It is clear that diamond prices declined steeply in Q4 2008 (FQ4 09), and continue to do so in Q1 2009. With the rapidly devolving macro situation, it appears that RBC Capital Markets’ model for Harry Winston, which already incorporated significant declines in rough diamond prices at the Diavik mine in calendar 2009, was too optimistic.
RBC now believes prices may fall up to 40% in the fourth quarter of 2009 and 2010, resulting in diamonds at Diavik being sold for $50 to $60 per carat over the next few quarters, well below the highs of $90 to $115 per carat seen in 2008.
RBC also said Harry Winston’s cash reserves were at “substantial risk”.
“RBC Capital Markets analyzed Harry Winston's forecast cash balance in the next 8 to 10 quarters assuming varying prices and sales volumes. Even in
RBC Capital Markets’ upside scenarios, assuming price declines of ‘only’ 30% in calendar 2009, it is likely the company will become cash negative unless it can refinance its expected $75 million of debt due in 2009 and secure incremental financing.
“Harry Winston has several options for cost savings, including cutting capital spending at Diavik and trying to rein in operating costs and G&A.
The company could also save about $10 million per year if it trims its dividend to $0.05 per share, from $0.20 per share, which RBC Capital Markets has assumed in its model.
“This will not be enough to keep it cash positive without a refinancing in 2009, however,” it said. RBC Capital Markets has assumed a $30 million equity financing and a $70 million debt financing in the second quarter of 2010 in its model.
"RBC Capital Markets is lowering its one year target price to $5 per share from $13 per share and lowering its rating to ‘Sector Perform, Speculative Risk’ from ‘Outperform, Above Average Risk’ as a result of the near term financing risk, low visibility for diamond prices in the next 8-10 quarters, and challenging macro economic environment."
Over the long term, RBC said it thinks industry fundamentals remain attractive. “Potential industry consolidation during the downturn would benefit the companies that weather the storm, which RBC Capital Markets believes Harry Winston should,” it said.