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In 2002, De Beers and its partners produced 40.2 million rough carats, a 4% increase over the previous year. This represented a 29% share of the market by volume, or 38% by value, based on an estimated global production of 137 million carats valued at US$7.2 billion. De Beers’ portfolio of some two dozen mining operations in southern Africa, includes partnerships with the governments of Botswana, Namibia and Tanzania.
The De Beers group is targeting a 7% production increase in 2003, led by the Venetia open-pit mine in South Africa, which contributes the lion’s share of cash flow from the major’s South Africa-based mining operations. Last year, Venetia produced nearly 5.1 million carats from the treatment of 4.7 million tonnes of kimberlite ore grading 1.08 carats per tonne. De Beers reported a US$55-per-carat value for Venetia in 2001.
De Beers has committed to spending more than US$150 million on its South African operations. The Venetia mine will receive R200 million to increase production levels to 5.2 million tonnes this year and ultimately to 5.9 million tonnes.
During the first of half of 2003, success at Venetia helped to mask operating difficulties at the Kimberley, Koffiefontein and Premier mines, says Gary Ralfe, De Beers’ managing director. He adds: “We are unhappy with the progress so far on the new combined treatment plant in Kimberley and look forward to full delivery of operating up to rated capacity next year.”
The new treatment plant, built at a cost of US$80 million, is expected to improve the recovery efficiencies and profitability of the Kimberley mines, while extending the potential life to about 30 years. The Kimberley operations produced 474,000 carats in 2002 through the treatment of 3.6 million tonnes grading 13 carats per 100 tonnes. Kimberley’s rough was valued at US$76 per carat in 2001.
A stronger rand has put pressure on the margins of De Beers’ South African operations. Operating costs were close to 20% ahead of budget for the first half of the year.
Rough diamond sales by the Diamond Trading Company (DTC), the marketing arm of De Beers, reached US$5.15 billion in 2002, representing a 15.7% increase over 2001. DTC’s sales accounted for about 62% of the gems flowing into the world’s cutting centres.
Sales by the DTC for the first six months of 2003 totalled US$2.92 billion, up 2.7% over the comparable period in 2002. Industrial diamond sales accounted for an additional US$201 million, or 2% more than last year.
“We’ve had a good first half to the year and there has been strong demand for rough diamonds,” says De Beers Chairman Nicky Oppenheimer.
Strong demand is attributed to a re-stocking after a better-than-expected Christmas season in 2002, ongoing optimism in the U.S. retail sector, and a willingness to hold higher levels of inventories as a result of low interest rates. Ralfe is confident rough sales will remain strong for the remainder of the year.
There were a couple of modest price increases — one in January and a second in May — and Ralfe believes “the prospect for further price increases is fairly positive.”
Polished stocks within the pipeline are running at high levels, with bank debt at record levels. In the first half of the year, retail markets were marginally up in the U.S., Asia and Arabia but down in Europe and the Asian Pacific. Overall, global retail sales were flat to marginally positive. Ralfe says the strength of the rough market will be justified in the fourth quarter, when 40% of diamond jewelry purchases are made.
As part of the company’s “supplier-of-choice” strategy, approved by the European Commission in January 2003, the DTC intends to work with those diamantaires who are best-placed to distribute and market diamonds efficiently. The DTC wants to help expand a US$55-billion retail diamond jewelry industry by 50% over the next 10 years. The European Commission’s approval of this new initiative was contingent on a fair selection of sightholders, using objective and competitive criteria. This application process will take place every two years.
This assessment was recently completed for the July 2003 sight and has resulted in a new list of sightholders, which is 20% shorter. “It’s a painful business to say goodbye to a number of sightholders, main of them long-standing,” says Ralfe. “On the plus side, we will talk about the reinvigoration that we look to a new clients who are joining the sightholder list.”
De Beers and Russian diamond producer Alrosa continue to engage in dialogue with the European Commission to address concerns over the five-year trade agreement notified to the commission in March 2002. In December 2001, De Beers signed a 5-year deal with Alrosa for annual diamond purchases of US$800 million. The agreement, subject to approval by the European Commission, covers about half of Alrosa’s production. In the meantime, the DTC is buying from Alrosa on a willing buyer/willing seller basis.
Headline earnings of US$414 million for the De Beers group in the first half of this year are 34% greater than in the first half of 2002. De Beers further reduced its diamond inventories by US$600 million, which contributed to an operating cash flow of US$1.1 billion. “We continue in our efforts to shorten the pipeline and liberate further capital,” says Ralfe. Against this backdrop, De Beers made a scheduled March 2003 debt repayment of US$355 million. The South African major accrued some US$3.55 billion in principal debt as it moved from being publicly listed to privately owned under the banner De Beers Socit Anonyme (SA) in June 2001. The balance of the outstanding debt has been reduced to US$2.13 billion.
De Beers has replaced its acquisition debt with a new, 5-year, US$2.5-billion syndicated multi-currency revolving credit facility. The new credit facility is on standard commercial terms and, says Ralfe, “should give us sufficient room to continue to grow our business.”
De Beers SA is owned by a consortium of three major shareholders, including the Oppenheimer family and
De Beers remains concerned about new mineral legislation in South Africa, in particular the Royalty Bill, which is part of the Minerals and Petroleum Resources Development Act. “Like the rest of the mining industry in South Africa, we deplore the fact that the proposed bill puts the royalties on revenue and not on profit,” says Ralfe. “This will surely have a sever impact on marginal mines.” At a proposed rate of 8%, diamonds have been singled out for double the royalty proposed for the next highest category of mineral, which is platinum.
Meanwhile, De Beers has assembled a team of experts to advise on black empowerment, as required under the new minerals act. The team will advise shareholders on how best to select appropriate partners.
De Beers’ efforts to return to Angola failed after it was unable to reach a mutually satisfactory agreement with Endiama, the Angolan State Diamond Mining Company. De Beers’ geologists view the country has highly prospective. Ralfe says De Beers will continue to pursue its arbitration case against Endiama.
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