De Beers takes US$965-million hit for Snap Lake

Capital cost overruns at De Beers‘ Snap Lake diamond mine in the Northwest Territories forced the company to take a US$965-million impairment charge in its 2007 year-end results, released today.

With the impairment charge, the company posted a net loss of US$521 million for the year though underlying earnings were up 14% to US$483 million.

The charge was put against the value of De Beers’ Canadian assets, which include Snap Lake, located 20 km northeast of Yellowknife, where production started in late 2007, and the Victor diamond mine in the James Bay lowlands in northern Ontario.

De Beers says its Canadian assets, which will be the company’s first diamond mines outside of Africa, are valued at just under US$2 billion plus the impairment charge.

“I think it’s absolutely the right thing to do from an accounting point of view,” De Beers chairman, Nicky Oppenheimer said during a conference call in Johannesburg. “It doesn’t impact the bottom line of DeBeers.”

With 20 mines in production in Africa, De Beers produced 51.1 million carats over 2007 including 81,000 carats in Canada and expects to maintain that in 2008.

“At fifty-one-point-one million carats we are on a par with 2006, and just to remind you that was a record production year,” Oppenheimer says.

Snap Lake is expected to reach full production of 1.6 million carats per year over a 20-year mine life. The Victor mine is expected to produce about 600,000 carats per year over 12 years. The company is working to extend the mine lives of both mines.

DeBeers attributed the cost problems at Snap Lake to the increase in value of the Canadian dollar verses the U.S. dollar, as well as higher fuel, labour and capital costs that resulted from challenges in constructing the mine.

“What has happened here, as we’ve reported previously, is there was a capital overrun at Snap Lake,” Oppenheimer says. “And with the very heated nature of the resource business, construction costs have been going up.”

De Beers spent US$1.12 billion in expansion capital in 2007, with most of the money going towards construction at the Snap Lake and Victor mines as well as the Voorspoed mine in South Africa, and SASA offshore mining vessel in South Africa.

The company expects that things will change in 2008 once Snap Lake and Victor are both in production.

“Certainly next year, our Canadian operations will be delivering cash,” Oppenheimer says.

DeBeers is preparing to deal with other issues in 2008 such as the power supply shortage in South Africa and the economic downturn in the United States.

The company, which says it’s focusing on energy conservation programs, is putting together a plan of how to make the most effective use of the available energy between the different operations. So far, DeBeers says power levels may be maintained at 90%, which will have some impact.

“If we go below that, (the impact) will start to mount up,” says De Beers managing director Gareth Penny.

In regards to the U.S. situation, Penny says that while the country accounts for 50% of the world diamond retail business, De Beers is confident that the pain would not be felt for long thanks to growth markets like China and India.

“A considerable amount of our time and effort is going to building demand in China,” Penny says.

Despite that, overall diamond sales decreased 3% to US$6.4 billion in 2007.Penny says the world market will reach a stage where there’s a much more balanced consumer retail position than is the case right now.

“But I think it’s disingenuous to say that a downturn in America at the moment is still not of considerable concern given the impact that is could have in the medium term,” Penny says.