De Beers’ rough diamond production dropped 15 percent to 13.3 million carats during the first half of 2016 compared to 15.6 million carats, a year earlier, reflecting the decision to reduce production in response to prevailing trading conditions in the second half of 2015.
The diamond giant’s profit increased 2 percent to $585 million during the first half from $576 million, a year earlier as a result of higher revenues from “stronger” rough diamond demand, tight operating cost control and favourable exchange rates.
Its total revenue was up 8 percent to $3.3 billion during the period under review from $3 billion, a year earlier, mainly driven by higher rough diamond sales, which increased by 11 percent to $3.1 billion.
Given this stable performance, group head of media relations Lynette Gould told Rough & Polished in an exclusive interview that rough diamond demand normalised in 2016 and performance to date had been in line with their expectations.
She, however, said that the market was in a seasonally quieter period for demand.
Gould also said that “good progress” had been registered with their $2 billion investment to take Venetia mine in South Africa from an opencast to an underground operation, extending the life of the mine from 2021 to beyond 2040.
She said synthetic diamonds were not a threat to the group’s operations as their research had consistently shown that consumers do not see synthetic diamonds as potential substitutes for natural diamonds.
Below are the excerpts.
What has been the state of the diamond market during the first half of the year compared to the second half of 2015?
There’s no doubt the midstream faced considerable challenges in H2 2015, which is why we responded decisively by cutting our production, price and costs, introducing extra flexibility for our Sightholders, and investing in additional marketing in the all-important selling seasons in the US and China, and these have definitely had a positive impact. The trends we have seen over the first six Sights of the year have certainly been encouraging as rough diamond demand conditions have improved significantly following the actions undertaken by the industry towards the end of 2015. We have seen rough diamond demand normalise in 2016 and performance to date has been in line with expectations. We are in a seasonally quieter period for demand and this is roughly where we expected to be at this time of year.
What is your expectation in the second half of the year in terms of demand for rough and prices?
Macro-economic conditions, underpinning consumer demand for diamonds, remain broadly stable, but with persistent downside risks in H2 2016 (including recent social and political instability). Rough diamond revenues are expected to be weighted towards H1 2016, consistent with prior years and typical of the seasonal drivers. In the midstream, caution in rough diamond buying is expected to prevail, as the supplies bought by diamantaires in H1 2016 are gradually converted into polished.
How successful was your campaign to spur consumer demand for diamond jewellery during the festive season?
In the weeks leading up to Christmas 2015, Forevermark created an ad campaign called ‘Seize the Day’ to remind people in the US and China, particularly men, that there is no better way to express their love than with a diamond. In the US the campaign was described, by those tracked after seeing the ads, as ‘very eye catching’ by 70%, while 38% thought they celebrated love and commitment. Of jewelers aware of the campaign, four out of five thought it led to more gift enquiries, with an average increase of 16%.
In the US we also ran a campaign called ‘Ever us’ to promote two-stone diamond rings. Nearly four in five jewelers reported more enquiries for the two-stone rings. On average, the number of enquiries for this design increased by just under 10% during the 2015 holiday season, with sales up by almost 8%.
In China, the ‘Seize the Day’ TV ad was very traditional, featuring a man planning a special day for his love, building up to the surprise gift of a diamond pendant. Of the TV campaign, 90% of those tracked said they enjoyed watching it, and 83% described it as persuasive.
De Beers now has a new CEO, following the departure of Philippe Mellier, who was regarded as an outsider when he joined the group. What were his contributions to De Beers that can be said to be his legacy?
When Philippe Mellier announced he was stepping down he said he felt privileged to have led this iconic company with its rich history, great people and culture, and truly unique product. Reflecting on his time at De Beers, he said he was proud to have led the company through: year-on-year improvements in safety performance (with De Beers’ best safety performance to date in 2016); Completing the transfer of the international sales operations from London to Gaborone ahead of schedule and under budget; Signing a 10-year sales agreement with the Government of the Republic of Namibia; investing in future production for De Beers through the new Gahcho Kué mine in Canada (a 51% De Beers/49% Mountain Province Diamonds JV), taking the Venetia mine in South Africa underground, completion of the Cut-8 extension at Debswana’s Jwaneng mine and, more recently, the commissioning of the new diamond exploration vessel, ss Nujoma, that will operate in Namibian waters from 2017, continuing to innovate through De Beers’ auction sales platform; extending Element Six’s position as an innovation leader with the opening of the Global Innovation Centre in the UK, bringing A Diamond is Forever back as part of the Forevermark brand proposition, and significantly increasing investment in consumer demand generation.
What can we expect from De Beers with the appointment of Bruce Cleaver?
It’s early days as Bruce has only been in the role a few weeks. However, from the comments he has made in interviews around our H1 2016 results, and again in India recently, he reiterated that consumer desire for diamonds is De Beers’ only source of value so expect to see a continued focus on driving demand for diamonds in established markets, developing markets and new markets; all the time responding to changing consumer trends.
Bruce has also spoken of the importance of partnerships as De Beers holds a unique position with governments, employees, consumers, Sightholders and its many other partners. In a blog recently he said: “Relationships are the cornerstone of the business, and we must never lose sight of the fact that for each part of the value chain to succeed, every part of the value chain needs to succeed. However, we should not take success for granted. Whether it be stimulating demand, protecting product integrity or increasing production, investment is the only solution”.
Your group recently selected black-owned diamond cutting and polishing companies in South Africa. Will this help boost value addition in the country?
De Beers launched the Enterprise Development Project for Diamond Beneficiators to facilitate the growth and transformation of the diamond industry in South Africa. The successful implementation of the project will result in an increase in the cutting and polishing of rough diamonds in line with South Africa’s beneficiation strategy and an increase in employment and the transfer of skills and entrepreneurial development, thereby accelerating transformation of the diamond industry.
Can you provide an update on your Venetia underground project?
We continue to make good progress with our $2bn investment to take Venetia mine from an opencast to an underground operation, extending the life of the mine from 2021 to beyond 2040. The new underground mine is the biggest single investment in the country’s diamond industry in decades and is scheduled to begin production in 2022, climbing to full production in 2025, treating about 132 million tonnes of ore containing an estimated 94 million carats. Around 1,500 jobs have already been created for local people and another 500 will be drafted in when the major underground work begins. As part of the project, houses are being built in nearby Musina to accommodate workers, and support will be given to improve local roads.
De Beers was prospecting for diamonds in Angola. What is the current status of the project?
Our prospecting licences for the Mulepe-1 kimberlite cluster expired in 2012. We still consider Angola to be highly prospective and our negotiations with ENDIAMA for a Mineral Investment Contract are ongoing. In light of this, we maintain a small representative office in Luanda.
Do you see lab grown diamonds as a threat, if so what are you doing to protect your market?
Synthetic diamonds are not a new phenomenon. They’ve been around for more than 50 years and play an important role for industrial and technological applications.
While we see the commercial opportunity for synthetic diamonds as being within industrial applications rather than jewellery, we have no concerns with other synthetic diamond producers looking to market their products to jewellery consumers.
Our research consistently shows that consumers do not see synthetic diamonds as potential substitutes for diamonds. Diamonds are used to celebrate the most important moments in people’s lives and our research shows that consumers do not see synthetic diamonds as rare, precious or emotionally significant. While the rareness and finite nature of natural diamonds makes them inherently valuable, and ensures that they represent a store of value over time, synthetic diamonds can be mass produced, and so are not rare, and will not retain value over time in the same way.
It is true that we do have concerns about the impact on consumer confidence if synthetic diamonds are sold undisclosed, with the intention to pass them off as natural diamonds. It is vital that consumers can make informed choices. They must know exactly what they’re buying and be confident that they are getting what they paid for. De Beers has invested almost $65m in research over the last 30+ years, to develop sophisticated technology that can readily identify all types of gem synthetics. This technology is in place in all of the world’s major diamond centres to support trade and consumer confidence.
Mathew Nyaungwa, Editor in Chief of the African Bureau, Rough&Polished
