De Beers is confident that it will have rough diamond production of 35 million carats for all of 2011, despite output for the first half of the year being almost the same as for the corresponding period of 2010 at 15.5 million carats, Antwerp Facets says.
Having seen its share of the global rough market fall to around 38 percent from 80 percent little more than a decade ago, is De Beers on a long-term path as the world's second-largest diamond producer? The question arises following the half-year financial results the company announced last week which, despite record sales, higher profit and lower debt, also showed the company's production was flat on the same period of 2010.
De Beers provided justification for the production figures, saying there were specific problems in South Africa. However, the company's results were, nonetheless, overshadowed the following day by results for the first six months of the year released by Alrosa. They showed the Russian miner producing 22.6 percent more carats than De Beers during the first half of 2011, which was 7.4 percent lower than Alrosa's output in the corresponding period a year earlier.
Furthermore, what will be the impact on De Beers of its mining and distribution agreement with the government of Botswana? The southern African nation, which produced 22 million carats of rough diamonds last year according to the latest Kimberley Process statistics, is determined to develop the beneficiation of its diamonds with 10 percent or more of production being sold in Gaborone.
Given that the output of the jointly owned Debswana accounts for around two-thirds of De Beers' production, the loss of two million carats or more will inevitably reduce the amount of goods available to De Beers' sightholders. Could the reduction in amount of goods also play a part in the number of companies selected in the DTC sightholder selection process to be held in the coming months?
In its financial results for the first half of 2011, De Beers reported that group sales jumped 30 percent on the year to $3.89 billion, while the Diamond Trading Company's sales of rough goods soared 33 percent on 2010 to $3.5 billion. Prices surged around 35 percent in the first half of this year due to continuously growing retail demand in India and China, while demand in the United States was higher than expected. De Beers' profit before finance charges and taxation soared 74 percent to $1.02 billion, while net debt was 27 percent lower at $1.45 billion.
Referring to the results, De Beers’ new Group CEO Philippe Mellier focused on the increase in revenues, and not on the lower output or market share. "Following a strong 2010, De Beers has delivered an outstanding performance during the first half of 2011," he stated. "Sadly, I can’t claim any credit for these excellent results but what I can say is I am determined to build on them. For the remainder of the year, we are focused on building on a very strong start to 2011, and look forward to a positive year overall," he added.
Meanwhile, Bruce Cleaver, Chief Commercial Officer, said: "The fundamentals of the diamond market are robust and powered by growing consumer demand, which has driven the strongest growth in polished prices in the past 30 years. Major retailers posted strong double-digit growth both across the globe and in individual regions – particularly in India and China.”
Dealing with the company's debts remains an important issue, Cleaver said. "The fragility of the global economic environment continues to dictate caution, and uncertainty remains over the Eurozone debt crisis which could spread more globally. That is why De Beers has worked since 2009 to reshape its balance sheet to be able to withstand external shocks."
Following the slashing of expenditures as a result of the 2008 financial crisis, the company has worked hard to reduce debts and keep costs under tight control. Indeed, the $500 million of savings the miner made in 2009-2010 have been permanent, the firm said. "The downturn transformed the structure of our business with a 23 percent reduction in the size of our workforce in 2009," De Beers spokesperson Lynette Gould told Antwerp Facets Online. "At the end of 2010 there were 11,718 permanent and non-permanent workers within the Group compared with 15,547 in 2008."
Although the half-year period was a success financially, production was around 15.5 million carats, only slightly above the 15.4 million carats seen in the same period last year. "Like many operators in the region, De Beers was impacted by a number of operational challenges - including excessive rainfall and a general skills shortage in the southern African mining industry," Gould said. "De Beers also experienced some maintenance and asset management challenges, principally in southern Africa, that are now being addressed."
Although those reasons are entirely valid, De Beers' output levels were overshadowed by results from Alrosa which reported production of 19.0 million carats and sales of 19.1 million carats of diamonds during the period. In addition, Alrosa's revenues were almost unchanged at $1.87 billion from $1.91 billion in the first half of 2010 despite selling considerably fewer diamonds –19.1 million carats of versus 24.1 million carats last year.
The average price per carat that Alrosa managed to secure for its diamonds rose significantly to $113 this year from $80 in the first half of last year, however it is still well below the average price per carat being achieved by De Beers. Meanwhile, Alrosa's net profit in the first half of 2011 was more than five times higher on the year at $585 million compared with $105 million.
However, De Beers is confident that it will be able to produce around 20 million carats in the second half of this year, with output for 2011 amounting to 35 million carats. "Operations have been impacted by a number of operational challenges that have also affected the wider mining industry – including excessive rainfall and a general skills shortage in the southern African mining industry," said Gould. "The operations have also experienced some asset management and maintenance challenges and these are now being addressed. Our full year production will, we believe, be around 35 million carats."
As for prices of diamonds, although the firm believes that the strong growth in retail markets, especially in Asia, will continue to drive demand for diamonds, it does not expect to see "the unprecedented growth that we saw in the first half of this year," Gould said. Furthermore, it does not see a bubble in prices for rough goods since the high price of goods means manufacturers need to move the goods to factories and onto markets as quickly as possible. "We’re not seeing any build -up of stock in the cutting centres. With liquidity coming under increasing pressure this isn’t really a market to be hanging onto stock," Gould commented.
As for De Beers' future strategy, the company is "focused on investing in mines that will provide a superior risk adjusted return," said Gould. "We have a number of upstream projects underway, including the Jwaneng Cut-8 extension in Botswana, the Venetia underground project in South Africa, and the progression of Gahcho Kué in Canada."
The company's exploration budget is focused on Angola, Canada, India, Botswana and South Africa, Gould said. "Angola probably represents one of the most exciting prospects given its past 90 years of diamond mining, the high prospectivity of the underlying craton, and the fact that it has never been systematically explored in the past 50 years," Gould commented.
The miner and retailer also aims to "capture demand, particularly in the Far East," Gould said, since the firm forecasts that China, India and the Gulf combined will surpass the United States and account for approximately 35 percent of consumer demand by 2015. This would include expansion of its Forevermark brand which saw the number of retail outlets in which the brand is sold rise by 53 percent in 2010. In addition, De Beers Diamond Jewellers, which saw sales growth in the first half of 2011 of 47 percent and which recently opened its first store in mainland China, will see "aggressive expansion" over the next five years.
As for Mellier, who only moved into the CEO's office at De Beers earlier this month, he says he is working on how to project the company into the future. “Maybe one of the catalysts for the decision to bring in an outsider was to cope with the fact that for many years the diamond industry was De Beers,” he told the Financial Times. "Today, De Beers is the key player, but there are competitors. We have new markets opening. We are in constant discussions with governments. This is where I can bring some experience. I think the shareholders understood that to grow in a new environment De Beers is going to need some work. You need new skills. The purpose of a CEO is not to become a specialist and impose views.”
