De Beers smiles as diamond prices rebound

While a certain amount of global uncertainty remains, 2010 saw a strong recovery in diamond prices driven by exceptional demand in China and India, coupled by a better than expected retail performance in the U.S. during the Christmas season.

Rough diamond sales by De Beers‘ marketing arm, the Diamond Trading Co. (DTC) were up 57% over 2009, at US$5.08 billion. Total diamonds sales for the family of De Beers’ companies were US$5.88 billion, representing a 53% increase over 2009. De Beers produces and markets about 40% of the world’s supply of rough diamonds.

“2010 was an extraordinary year that saw De Beers rapidly move from stabilization to strong recovery. The price of rough diamonds has recovered strongly as confidence returned to most parts of the diamond pipeline. While restocking picked up throughout the year, it was also clear that consumer demand rebounded,” reports De Beers in its recent year-end review.

The prices of DTC rough diamonds rebounded by an average of 27% in 2010 to levels which are above those that prevailed prior to the onset of the 2008 economic crisis. De Beers met the increasing demand by boosting production from its wholly-owned and joint-ventured mining operations in Botswana, South Africa, Namibia and Canada.

De Beers recovered 33 million carats in 2010, a 34% increase over the 24.6 million carats produced in 2009. The company’s Canadian operations – Snap Lake in the Northwest Territories and Victor in Ontario – accounted for 1.75 million carats, up 54% over the year before.

“While the directors remain cautious about the diamond market in 2011, continued positive growth is expected, albeit at a lower rate. The world is not yet back to where it was prior to the onset of the economic crisis, and risks to growth remain,” cautions De Beers.   

“For the foreseeable future, continued recovery in global economic outlook and strong retail confidence are expected to underpin positive growth in consumer demand for diamond jewelry in 2011. After a better-than-expected Christmas retail season, the U.S. market is expected to continue its recovery and the exceptional growth seen in China and India is expected to be sustained.”

Markets in China and India were up 25% and 31%, respectively, while the U.S. grew about 7% for the full year. Consumer demand in the States accounted for an estimated 38% of jewelry diamond sales worldwide in 2010, followed by Japan and China/Hong Kong at 11% each. De Beers expects China, Hong Kong, Taiwan, India and the Middle East to account for nearly 40% of consumer demand by 2015.

“In the longer term, the supply and demand dynamics of diamonds remain attractive. Diamonds are a finite resource and Western consumer markets are recovering at the same time as demand growth in the emerging markets of China and India is expanding rapidly,” states De Beers.

De Beers is ramping up production at its diamond mines in line with demand and expects to approach 38 million carats in 2011, with full production anticipated in 2012.

In Botswana, a major extension project at the Jwaneng mine has begun. The project, known as Cut-8, will provide access to a further 100 million carats worth about US$15 billion over the life of the mine, which will be extended until at least 2025.

The Cut-8 development will require the stripping of over 700 million tonnes of waste, exposing an additional 78 million tonnes of ore, and deepening the Jwaneng pit to a depth of 650 metres. The project is expected to require US$3 billion in total investment over the next 15 years. 

The Debswana Diamond Co., the leading mining company in the De Beers family, produced 22.2 million carats from its four mining operations in Botswana, a 25% increase over 2009. Debswana, a 50-50 partnership with the government of Botswana, accounted for 67% of the De Beers group’s output.

In Canada’s Northwest Territories, an environment impact statement for the proposed Gahcho Kué mine was completed and submitted to authorities last December. De Beers expects the review process will take two to three years to conclude. Gahcho Kué is owned 51% by De Beers Canada and the remainder by Mountain Province Diamonds (MPV-T, MDM-X).

The final draft of an independently completed project feasibility study, delivered to the partners in December 2010 presents “an economically viable, technically credible and environmentally sound development plan for the project.” The mine will create some 400 permanent jobs during the operational phase. 

The study suggests the project can support a proposed open-pit mine life of 11 years, based on an average annual production of 4.5 million carats and a life of mine average diamond price of US$75 per carat.

Initial capital costs total $599 million, including $49 million in working capital, while operating costs come in at $49 per tonne processed or $31 per carat recovered. The project generates an after-tax internal rate of return (IRR) of 20.7% and a net present value (NPV) of $136 million, at a 15% discount. Excluding sunk costs, the project yields a 33.9% IRR and $277 million NPV.

The feasibility study is now the subject of a final review by the partners, which is expected to be completed by the end of March. “Early indications are positive,” states De Beers.

The Gahcho Kué project is 150 km south of Lac de Gras, where both the Ekati and Diavik mines are located, and 80 km southeast of the Snap Lake diamond mine. The project centres on a cluster of four main kimberlite pipes, including 5034, Hearne, Tuzo and Tesla, all within 2 km of each other.

The mine plan incorporates only the first three pipes, as Tesla, the smallest of the bodies (0.4 hectare), is considered too low-grade, based on early mini-bulk sample work. The pipes are steep-sided and mainly occur under the southern portion of Kennady Lake, which is about 8 metres deep on average.

Taken together, 5034, Hearne and Tuzo contain an open-pittable reserve of 31.3 million tonnes grading 1.57 carats per tonne, equivalent to 49 million carats, at a waste-to-ore stripping ratio of 7.5-to-1. The pipes remain open at depth.

In order to mine the three kimberlite deposits, Kennady Lake will be lowered and some parts of the lake almost completely drained. This will be done by building a series of dykes, ditches, berms and ponds. 

On the exploration front, De Beers says it has good greenfield prospects in Botswana, Angola, Canada and India. Group exploration has discovered 82 new kimberlites since the start of 2008, mostly in Angola.

To date, 108 kimberlites have been discovered by the Endiama-De Beers joint venture on the Lunda NE concession, near the town of Lucapa in Angola. Sixty have been sampled for microdiamonds and 33 bulk-sampled at depth through large-diameter drilling.

De Beers describes the preliminary results from the Mulepe-1 prospect as “encouraging” and is starting a conceptual study and resource phase drilling. Mulepe-1 comprises three large adjacent kimberlites that were discovered in 2007.They have a combined size of at least 20 hectares and are covered by 20 to 40 metres of sand.

In a separate program at Dando Kwanza in the province of Bié in the highlands of central Angola, exploration activities have focused on an isolated cluster of some 42 kimberlites in the catchment area of the diamond-bearing Lubia River. In 2009, an on-site diamond recovery plant was installed and one kimberlite bulk-sampled.

Resource expansion projects are also underway at Orapa in Botswana and Victor in Canada. The Victor open pit mine in northern Ontario is located in the James Bay Lowlands, 90 km west of the coastal community of Attawapiskat. Victor is one of 18 kimberlite pipes discovered on the property by De Beers in 1987-1988, and 16 are diamond-bearing.

At the time of its opening in 2008, the Victor mine had an expected life of 12 years and a total project life of 17 years. One of the
main goals going forward will be to target the Attawapiskat area surrounding the Victor mine to search for and assess new and known kimberlites that could potentially contribute to the reserves of the mine.

In 2009, two additional kimberlites were discovered and evaluation work continued on the prioritized kimberlites in the Victor cluster. 

De Beers reported a profit, before finance charges and taxation, of US$1.05 billion in 2010, a 230% increase over 2009.  Underlying earnings totaled US$598 million, compared to a loss of US$220 million the year before. A significantly reduced cost base enabled De Beers to generate a free cash flow of US$943 million, versus US$35 million in 2009.

De Beers remains cautiously confident about the diamond market in 2011 and expects to continue to produce positive growth.

The shareholding of De Beers is controlled 45% by Anglo American (AAL-L), 40% by the Oppenheimer family through Central Holdings and the rest by Botswana’s government.