Overall, 2003 proved to be a good year for the
Rough diamond sales of US$5.52 billion by the Diamond Trading Co. (DTC), De Beers’ marketing arm, were well ahead of budget and represented a 7% increase over 2002. De Beers Managing Director Gary Ralfe says the rough market was strong all last year and that the company’s sales can be calibrated against the “satisfactory” growth seen in the retail market.
The DTC raised its prices on three occasions in 2003, so that by year-end its rough diamond prices were 10% higher than at the beginning of the year. Also, in January 2004, there was a 3% price increase. Group turnover, which includes DTC sales, as well as the sales of polished diamonds and industrial-grade products, was 7% higher than in the previous year at US$5.91 billion.
Ralfe says the retail diamond market saw good growth in the fourth quarter of 2003, when 40% of all jewelry sales are made worldwide. De Beers estimates global retail sales of diamond jewelry were up 5% in local currency, or 6% in U.S. dollars. The U.S. market, which had the lion’s share, was up 5%, capturing 55% of the global pie. Japan turned in a surprisingly strong performance, up 4% in local currency or 7% in U.S. dollars. Strong growth was reported from Asia-Arabia, for a 9% gain in local currency or 10% in U.S. funds.
Ralfe believes the retail growth numbers are sufficient to justify De Beers’ rough sales of last year and to have pulled these diamonds right through the pipeline to the consumer, setting up the industry for another good year in 2004.
De Beers Chairman Nicky Oppenheimer attributes a large part of the growth to the success of its “supplier-of-choice” strategy and the increased focus on marketing. The supplier-of-choice initiative aims to drive consumer demand by offering consistent, competitive assortments to a select group of clients or sightholders who are best-placed to distribute and market diamonds effectively. “Any of you who look in the fashion magazines will see the number of what we call ‘quality advertisements’ that no doubt has contributed to a strong demand and a strong Christmas season,” says Oppenheimer. (‘Quality advertising’ is advertising that is designed to play on the emotional appeal of the diamond’s brand.)
Global polished stocks (that is, stones flowing out of the cutting centres) amounted to US$4.4 billion at the end of 2003, equivalent to about three and a half months’ supply of the US$14-to-15-billion-per-year business.
De Beers has seen its control of the global rough diamond market erode in recent years, with the arrival of well-accepted Canadian production and the reduction in its own stockpiles. De Beers expects to account for about half of the world’s total rough supply, compared with 70% as recently as 1999. “Clearly, we’re no longer in that dominant position, and I believe there are probably beneficial legal consequences that can flow from that,” says Ralfe. “Even with half of the world’s supplies, there is no competitor that comes anywhere near to giving as good a proposition in terms of quantity and regularity of supply as our own.”
Diamonds are sourced from some two dozen mines owned and operated by De Beers in South Africa and in partnerships in nearby Botswana, Tanzania and Namibia. In addition, De Beers purchases rough stones from Russian diamond producer Alrosa on a willing-buyer/willing-seller basis. In 2003, De Beers bought US$634 million in Russian stones.
De Beers and its partners produced 43.9 million carats of rough diamonds in 2003 — a 9% growth over the previous year. Debswana, a joint-venture partnership with the government of Botswana, is the major mining company in the De Beers group. It accounts for the bulk of the group’s production at 30.2 million carats, up 9.5% over 2002. This increase has been achieved largely on the back of improved efficiencies with hands-off recovery processes. During the year, a new small mine, called Damtshaa, was commissioned.
Debswana contributed US$409 million in operating revenue to De Beers in 2003, compared with US$362 million the previous year. De Beers notes that the 25-year mining lease covering the Jwaneng mine expires in mid-2004. Ralfe says the lease will be renewed and that the company is now in discussions with the government of Botswana.
Production from the Namdeb joint venture in Namibia was up 14% at 1.4 million carats on increased marine production. This was achieved through the purchase of a new crawler ship from the liquidators of Namco, and the conversion of another mining vessel into a drill ship.
De Beers expects to expand the marine production to 760,000 carats in 2004 — an increase of some 160,000 carats. A strong exchange rate has hampered Namdeb earnings, and its contribution has fallen to US$33 million from US$52 million in 2002, in spite of increased production.
Venetia
The South African operations of De Beers Consolidated Mines recorded a 14.5% increase in production at 11.9 million carats. Production levels at the Venetia open-pit mine were expanded last year to 5.9 million tonnes per year, for a 20% increase in treatment capacity. The full benefits of that expansion will be realized in 2004.
A weakening U.S. dollar has caused substantial currency fluctuations for De Beers, and these have taken their toll on operating costs around the world.
The major estimates that production costs in South Africa alone have risen nearly US$120 million as a result of the foreign-exchange impact. The strengthening of the rand against the U.S. dollar has put particular pressure on the company’s older, marginal mines in South Africa, such as the Koffiefontein and Kimberley underground operations, which are well over 100 years old now.
“At eight and below [rand-to-U.S. dollar exchange ratio], they have gone into the red, and they’re obviously crying right now,” says Ralfe. “We are involved in a life-and-death struggle on those mines to see if we can keep them open, waiting for a more favourable exchange rate.”
So far, the company has eliminated 440 jobs within De Beers Consolidated Mines by offering a voluntary early severance package as it searches for ways to lower overhead costs.
While Ralfe regards Canada as a “shining light for the future,” he is finding the permitting process “enormously slow and frustrating.” De Beers Canada continues to wait for final operating permits for its wholly owned Snap Lake underground mine project in the Northwest Territories. The company received federal approval of the environmental assessment for Snap Lake in October 2003 and is now awaiting final approval for the water licence and land-use permit, which are expected by April.
Snap Lake
De Beers has proposed development of a 3,000-tonne-per-day (1.1-million-tonne-per-year) underground diamond mine on the shallow- dipping-to-flat-lying Snap Lake kimberlite dyke, with an operating life of at least 20 years. The project is expected to deliver 1.5 million carats of diamonds annually, based on a minable resource of 22.8 million tonnes grading 1.46 carats per tonne, equivalent to 32.3 million carats. The diamonds are valued at US$83 per carat.
The project, which represents De Beers’ first mine outside of southern Africa, has estimated capital costs of $490 million and operating costs of $103 per tonne. The mine is expected to create about 550 permanent jobs and generate $180 million annually in operating revenue.
Once permits are in place, De Beers will begin preproduction underground development work in May 2004 to provide critical data related to final design and equipment selection for the construction of the mine, slated to start in 2005. This would put Snap Lake on the path for startup in the second quarter of 2007.
Elsewhere in the north, De Beers Canada commenced a $25-million technical study of the Gahcho Ku project in January. The technical investigation will take about 18 months to complete and include geotechnical drilling, engineering design, and environmental studies. The program will focus on three of the most promising kimberlite pipes of the Kennady Lake cluster, including Hearne, 5034 and Tuzo.
In a 2003 updated desktop study, the 5034 pipe was modeled to contain 13.1 million tonnes of kimberlite grading 1.67 carats per tonne, equivalent to 21.9 million carats valued at US$63 per carat. Hearne holds 7.1 million tonnes grading 1.67 carats per tonne, or 11.9 million carats, at US$50 per carat. A high-grade zone in the top 80 metres of the Tuzo pipe was estimated to contain 1 million tonnes averaging 2.7 carats per tonne at US$47 per carat.
The 2003 study failed to meet a critical 15% internal rate of return based on a proposed a production rate of 2 million tonnes per year, with capital costs estimated at $608 million and operating costs of $56 per tonne. In spite of this, De Beers remains committed to the project and is doing everything in its power to enhance its profitability.
Geotechnical work
Site work will focus on geotechnical aspects to firm up mine designs, along with waste and water management. The existing environmental baseline work will be extended to support a potential environmental assessment for a mine, with consultation of the affected aboriginal groups and federal and territorial agencies. Further exploration is being carried out, with a large gravity geophysical survey now in progress.
De Beers is the operator and 51% owner of the Gahcho Ku joint-venture project, 300 km northeast of Yellowknife.
De Beers also hopes to start construction of the Victor project in northern Ontario in 2005, as it awaits notification from federal authorities regarding scoping requirements for the environmental assessment.
The wholly owned Victor project is in the James Bay Lowlands, 90 km west of the coastal community of Attawapiskat. A final feasibility study was completed last year, results of which have not been disclosed.
De Beers had earlier proposed an open-pit mine plan containing a kimberlite resource of 25 million tonnes to a depth of 200 metres, with the potential for an additional 3 million tonnes. De Beers has reported a revenue model of $94 per tonne for Victor. The project’s low grade is offset by its extremely high-value diamonds. “The Victor mine is close to the sort of average value per carat that in southern Africa we get only on our alluvial properties, and at Namdeb, that’s something like over US$300 per carat,” says Ralfe.
He adds: “By the year 2010, we hope to be mining some US$500 million worth of diamonds from these three mines in Canada.”
7% growth
In the meantime, group production is forecast to grow by 7% in 2004.
Headline earnings of US$676 million for the De Beers group in 2003 are 17.6% greater than in 2002. De Beers further reduced its diamond inventories or stocks by nearly US$700 million, which contributed to an operating cash flow of US$1.6 billion for the second year running. This enabled the group to lower its net interest-bearing debt (after taking account of the company’s cash) to US$906 million, a reduction of US$810 million, and pay US$486 million in dividends to its shareholders for the year 2003.
“We are looking to reduce our stocks again this year but not by nearly as much as we did over these past two years,” says Ralfe.
The South African-based major accrued US$3.5 billion in privatization debt when it moved from being publicly listed to privately owned under the banner De Beers Socit Anonyme (sa) in June 2001.
De Beers sa is owned by a consortium of three major shareholders, including
In the meantime, De Beers is preparing for the implementation of new mineral legislation in South Africa, in particular the Royalty Bill. The first draft of the bill proposed an 8% royalty for diamonds, which De Beers felt was out of line, compared with other South African minerals. “It’s our hope that when the Royalty Bill is put forward in its final form, we won’t see such a high royalty applied to diamonds,” says Oppenheimer.
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