Editorial: De Beers’ US$500M Bailout

The seventh trading week of 2009 closed out with news of profound cash-flow problems at the iconic diamond miner De Beers, underscoring the global collapse in demand for luxury goods such as diamonds.

• It’s always tricky to figure out what’s really going on with De Beers, with their famous secrecy, unmatched expertise at spin, and status as a private company. Ownership is split three ways between Anglo American (45%), the Oppenheimer family (40%) and the Botswana government (15%).

But we do know that the company has just been thrown a US$500-million, interest-free loan from its three shareholders, divvied up in proportion to their existing holdings. This is on top of the US$300 million tossed De Beers’ way late last year under similar terms. Anglo American in particular, having just suspended its dividend, can’t be too happy about shovelling more good money after bad.De

Beers was careful not to break down its year-end results into quarters, but they did show that the company only made a US$90-million profit in 2008 as sales were essentially static at US$6.8 billion during the year (including industrial diamonds).

But 2008 was made up of two completely different markets: the first nine months were highlighted by record sales, near-record production and the pushing through in July of a 16% price increase for rough diamonds; the last quarter, of course, was characterized by the deepening of the global recession, and a 40% plummet in rough diamond prices.

But perhaps even more shocking is that De Beers and its partner at Debswana, the Botswana government, haven’t pulled a single diamond out of the ground in Botswana since mid-December. The 32 million carats Debswana mined in Botswana last year accounted for two-thirds of the total production of De Beers and its joint-venture partners. Accordingly, De Beers and its partners saw their total production slashed by 18% from the third quarter to the fourth quarter, to 10.8 million carats — data gleaned from Anglo American’s quarterly results.

With De Beers’ biggest, best and lowest-cost mines now idled, the next question is how will it generate enough cash flow to pay down its heavy debt load, which stood at US$3.6 billion at the end of 2008, plus the US$748 million remaining in bailout funds?

And our Canadian Arctic diamond explorers must be asking themselves: why the heck are we knocking ourselves out and spending all this money looking for diamonds at the edge of civilization if De Beers can’t make a buck blasting one more round in the Jwaneng pit?

In presenting De Beers’ annual results to the public, managing director Gareth Penny appeared alone in an odd, taped videocast, rather than the usual press conference. The tone was similar to a vague annus horribilis pep talk broadcast by the Queen to her subjects on Christmas morning. That the usually highly visible chairman Nicky Oppenheimer and group finance director Stuart Brown didn’t appear on camera speaks volumes.

Remarkably, Penny didn’t mention that, oh by the way, the company has just been thrown a US$500-million lifeline or that all production had ceased in Botswana, which makes you wonder what else was left unsaid.

There was certainly no indication as to how secure De Beers mining jobs are in Canada, or that the company was on the verge of axing 128 employees at its Snap Lake mine in the Northwest Territories and cutting off or severely reducing the work for another 90 contractors.

• At presstime, news had broke that the friendly but hotly disputed merger between HudBay Minerals and Lundin Mining was being scuttled by HudBay after its management admitted shareholders would vote against the deal. HudBay had done all it could to avoid a vote, until forced into it by the Ontario Securities Commission.

After plummeting around 40% when the merger was first announced in November, HudBay shares have almost recovered to their pre-merger announcement level in the $5.25 range.

The coming week will see Lundin’s managers present their full-year results. They’ll likely field a volley of questions from shareholders and analysts about those murky covenants the company has on its massive debt load, and whether the company will be viable in the longer term if base metals prices stay depressed for the rest of the year.

March 25 should provide some fireworks, too, when HudBay shareholders meet to decide whether to wipe out the board that got them into this mess.