Last year proved to be exceptionally successful for
Demand for rough diamonds was strong throughout 2002 as cutting centres responded to the increased demand for polished stones from the retail trade. As a result, the South African major saw its rough diamond sales increase by nearly 16% in comparison with 2001, to US$5.15 billion.
De Beers Managing Director Gary Ralfe says the company’s diamond sales, which are handled through the Diamond Trading Company (DTC), its marketing arm, benefited from an adjustment in prices to more competitive levels in January 2002, and, in part, to its “supplier-of-choice initiative” of offering consistent assortments to its clients. There have since been a couple of price re-balancings, one in June 2002 and more recently in January 2003.
De Beers’ rough diamond sales account for 62% of the gems flowing into the world cutting centres, a business worth about US$8.3 billion in 2002, representing a 9% growth over 2001. The polished equivalent — that is, stones flowing out of the cutting centres — was valued at US$15.3 billion in wholesale prices, representing a 19% increase over the previous year.
Ralfe says global retail sales of diamond jewelry for the year, as a whole, held up reasonably well and appear to be 3% higher than in 2001. The U.S., the largest of all markets, was up 4%, capturing a 53% share of the global pie. Strong growth was also reported from Asia-Arabia. Elsewhere, Ralfe says the Asia-Pacific experienced satisfactory growth, while Europe had a lacklustre sales performance and Japan continued to decline.
Based on the performance of De Beers’ first sale in January, Ralfe says it appears the markets are dry and that “the industry is showing an appetite to restock with rough.”
On the other hand, polished stocks, which stood at US$4.1 billion in 2001, had risen to US$4.3 billion at the end of 2002.
De Beers’ core business is the mining and marketing of rough gem diamonds. Headline earnings at US$570 million were 12% ahead of 2001, after excluding the impact of De Beers’ investment in
Total net earnings for the De Beers group were US$434 million, including US$41 million of retained joint-venture income. The comparative figure in 2001 was US$492 million. A weaker rand against the U.S. dollar in 2002 increased the profit-to-revenue ratios throughout the De Beers group and gave a boost to cash flow. Like many other South African operations, De Beers is eyeing the current strengthening of the rand and the effect it will have on this year’s results.
De Beers reduced its diamond inventories by nearly US$1 billion in 2002, which led to an exceptionally strong cash flow of just over US$1.6 billion. Against this backdrop, De Beers was able to reduce its debt by just over a US$1 billion by way of a scheduled March 2002 repayment of US$355 million and a voluntary early repayment of US$710 million in December 2002. The major accrued some US$3.55 billion of debt as it moved from being publicly listed to privately owned. The balance of the senior debt facility has been reduced to US$2.48 billion.
De Beers operates some two dozen diamond mines in South Africa and in nearby Botswana, Tanzania and Namibia. Some are wholly owned, whereas others are run in partnership with governments through Debswana in Botswana, Namdeb in Namibia, and Williamson Diamonds in Tanzania.
Group production exceeded 40 million carats. The South African operations of De Beers Consolidated Mines posted a 3% reduction in production at 10.4 million carats. Ralfe says production was held back in the first half of the year until it became evident how good a year 2002 was going to be.
Namdeb was off 8% in carats at 1.3 million carats for the year. Ralfe blames the decline on the failure of the company’s dredging technology. The depletion of the land resources in Namibia has to be matched by an increase in production at sea. “We hoped that we would get there through dredge technology,” says Ralfe, “and I am sure that, in the future, we will.” For the moment, Namdeb is suspending dredging operations and converting the ship to a drill operation.
Debswana, a 50-50 partnership with the government of Botswana, is the largest producing company within the De Beers group. Production was up 7% in 2002 to 28.4 million carats. Ralfe attributes the increased production to improved recoveries.
In Canada, the Snap Lake underground mine project in the Northwest Territories is advancing through the permitting process. “We hope the mine will be in production in 2007,” says Ralfe. Snap Lake will be De Beers’ first mine outside of southern Africa. Meanwhile, the Victor project in the Attawapiskat region of northern Ontario has now been advanced to full feasibility.
To the limit
De Beers is currently stretching the capacity at all of its mines to produce at higher levels. The result, says Ralfe, should be a further increase in carat production during the course of the year.
In addition to its own mines, De Beers purchases diamond production from group companies such as Debswana and Namdeb, as well as the Russian producer Alrosa. In December 2001, De Beers signed a 5-year deal with Alrosa for annual diamond purchases of US$800 million. The agreement covers about half of Alrosa’s production.
Under European competition rules, the trade agreement was submitted to the European Commission for clearance. The commission has issued a statement of objections relating to the trade agreement, opening up an avenue of dialogue with De Beers. In the interim, De Beers and Alrosa are trading “satisfactorily” on a willing-buyer/willing-seller basis.
A 3-year contract with BHP Billiton to buy a third of the production from Ekati terminated at the end of 2002 without renewal. The contract represented about US$150 million a year for De Beers.
In early 2003, De Beers finally received a letter of comfort from the European Commission on its supplier-of-choice strategy. The intent of the multi-faceted strategy is to drive consumer demand for diamond jewelry by working with its customers in a manner which will encourage long-term growth at the retail level.
Says Ralfe: “We should be able to implement our policies in an increasing fashion during the course of this year, and that gives us great confidence in our future because we believe that with those policies we shall be able to grow demand for diamond jewelry globally.”
In other developments in 2002, De Beers formed a partnership with the black empowerment mining company Mvelaphanda Resources to explore for kimberlites in northern parts of South Africa. The joint venture is eagerly awaiting its first licences.
The company is also involved in “serious negotiations” in Angola with Empresa Nacional de Diamantes de Angola on terms and conditions relating to prospecting and mining rights, as well as production and marketing arrangements for any discoveries arising from work done in licensing areas. Ralfe remains hopeful that the negotiations will produce the results to allow De Beers to resume exploration in this “very prospective country.”
At the end of 2002, De Beers invested US$2.7 million in
to a depth of 500 metres. This is equivalent to 67 million recoverable carats greater than 1 mm in size at an estimated value of US$79 per carat.
De Beers believes that with its long history of working in Russia, it may be able to help resolve the dispute. The company states: “We made this investment with great caution, and we would be indeed interested in getting further involved in diamond prospecting in Russia.”
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