By Eric Onstad

LONDON (Reuters) - Top diamond producer De Beers had a strong first quarter, but remains cautious about further recovery after wrapping up a refinancing and $1 billion (665 million pound) rights issue that slashed net debt by one third.

Valley of Diamonds by De Beers

The group, 45 percent owned by miner Anglo American (AAL.L), has seen a bounce in sales and rough diamond prices after being battered during the global financial downturn.

"It is very, very encouraging compared to the prior year. If you take the first quarter, we're going to sell over $1 billion and last year we sold just over $200 (million). So we sold five times more at a better price," Finance Director Stuart Brown told Reuters.

"But we're still very cautious, we're not back to normal yet, we're still feeling our way through."

The diamond group announced on Tuesday 23 March that it had concluded a refinancing of debt facilities and a $1 billion rights issue to boost its balance sheet.

It used all the proceeds from the rights issue plus $250 million of its own cash to pay off debt, bring the net level down by about a third to $1.9 billion, Brown added.

De Beers, which controls around 40 percent of the rough diamond market, was hit hard during the downturn as consumers shied away from luxury goods.

The group moved to an underlying loss of $220 million in 2009 after underlying net profit of $515 million in 2008, while rough diamond sales tumbled 46 percent to $3.2 billion.

BANK COVENANTS

"As we emerge from the recession in 2010, the completion of the refinancing process enables De Beers to take advantage of a number of exciting opportunities for growth up and down the diamond pipeline," Chief Executive Gareth Penny said in a statement.

The company has announced plans for a major expansion at its flagship Jwaneng mine in Botswana, but some other growth plans will have to wait, Brown said.

Under the loan deal, De Beers will operate under covenants until it certifies to the banks that operations have returned to normal and it is back at investment grade.

"Some of the covenants will be that there's no distribution to shareholders, there's no expenditure on capital over and above what was agreed in the renegotiation process and various other covenants about acquisitions and disposals."

After the refinancing and $1 billion rights issue, the group has $2.64 billion of loan facilities that expire in 2013.

The facility has interest rates ranging from 1.75 percent to 4.5 percent depending on the group's leverage ratio. Currently, the rate is around the middle of the range, he added.

"We're in a much better position than we thought we'd be at this stage in the market recovery. Our leverage is below three times EBITDA," Brown said.

Full rights for the $1 billion fund raising were taken up by all three shareholders, Anglo, South Africa's Oppenheimer family, which holds 40 percent, and the government of Botswana, with the remaining 15 percent stake.

(Reporting by Eric Onstad; Editing by Rupert Winchester and Sharon Lindores)