In line with most products in the luxury goods sector, the diamond industry was severely affected in 2009 by the global recession. The combination of three principal factors – high stock levels throughout the diamond pipeline, constricted liquidity in the industry, and lower levels of retail and consumer demand – led to substantially lower demand for rough diamonds. In the consumer markets we believe global demand for diamond jewellery declined for the full year in the low single digits, although the fourth quarter showed an improved and positive trend on 2008. Demand remained strong in the developing markets of India and China with US Christmas trading results likely to show the first year-on-year increase since September 2008. Industry inventory and debt levels reduced as the year progressed, positioning De Beers to benefit from improvements in consumer demand.
2009 Snapshot
- H2 sales increase by 24 percent over H1 for a full year total of US$3.84 billion (2008 US$6.89 billion)
- EBITDA of US$654 million (2008 US$1.222 billion)
- Profit before net interest charges and tax (PBIT) of US$318 million (2008 US$823 million)
- H2 free cash flow of US$161 million resulting in a positive full year cash flow of US$35 million (2008 US$258 million)
- Full year production and operating costs reduced by 45 percent to US$1.1 billion (2008 US$2.0 billion)
2009 Operating Performance
De Beers responded quickly to the global economic crisis with a 6-point Recession Action Plan focused on sustaining the business through the recession and positioning it for future growth. In spite of exceptionally difficult trading conditions, which saw sales decline from US$6.89 billion in 2008 to US$3.84 billion in 2009, De Beers exceeded its cost-reduction targets, enabling the company to remain cash positive for the year and generate positive EBITDA (US$654 million) and PBIT (US$318 million). The 6-point action plan focused on:
1. Keeping Safety as Top Priority – De Beersf safety performance showed marked improvement in 2009, and the company is proud to report no fatalities on its operations. Lost Time Injuries (LTI) decreased to 40 in 2009 from 66 in 2008.
2. Maximising Demand Opportunities – Due to the highly volatile levels of rough diamond demand, the Diamond Trading Company (DTC) employed a flexible approach to its sales. The market was affected most acutely in the first quarter, with both volumes and, to a lesser degree, prices impacted. However, as the year progressed client demand improved, which allowed the company to increase prices and sales volumes throughout the second half of the year. DTC sales for the year totalled US$3.23 billion, significantly below last year (2008: US$5.93 billion) but above our half year expectations. On the consumer side, Forevermark. continued to expand in China, Hong Kong, Japan and Macau and the brand is now available in 245 stores across Asia. The Everlon Diamond Knot Collection., which is a De Beers-devised joint marketing campaign with leading retailers, has made a strong contribution to improving Christmas diamond sales in the US.
3. Producing In line with Client Demand – At the beginning of 2009 De Beers dramatically reduced production across its portfolio of mines, in response to and in line with, reduced demand from DTC Sightholders, this resulted in a significant reduction in carats produced compared to 2008. Sightholder demand increased gradually from the second quarter and the De Beers Family of Companies responded by increasing its production to 18 million carats in the second half of the year (2008: 24 million carats), an increase of 173 percent compared with the first half, resulting in a full year total of 24.6 million carats (49 percent below 2008).
4. Driving Cost Reductions across the Business – Across the Family of Companies, De Beers aggressively tackled costs, achieving a US$0.9 billion reduction in production and operating costs, down 45 percent compared to 2008.
5. Enhancing Operating Efficiencies -Through a process of de-layering and de-centralisation of the business, De Beers recorded a 23 percent reduction of its global workforce.
6. Focusing on Cash Management . De Beersf focus on cash management and capital expenditure – which was reduced by US$222 million compared with 2008 – enabled the company to remain cash positive in 2009, in spite of the exceptionally challenging trading conditions.
Given the nature of the assets, the effects of a weak US Dollar and the impact of the global recession on pricing and production levels, De Beers has been required to make a non-cash impairment provision of US$700 million against its Canadian operations.
Projects
In November, Debswana announced a major US$500 million expansion project (Cut-8) at Jwaneng Mine that will ensure continuous and profitable production at the mine until at least 2025. The estimated project cost is likely to total US$3 billion over the next 15 years, and will create access to a further 95 million carats, with a value in excess of US$15 billion over the life of the mine
Additionally, in November, De Beers announced the sale of its effective 70 percent share in the AK06 diamond deposit in Botswana to Lucara Diamond Corporation, a Canadian junior diamond mining company, for US$49 million in cash. In July, Mountain Province Diamonds announced that it had entered into an amended Joint Venture agreement with De Beers Canada on the Gahcho Kue deposit, which has led to the commencement of the Gahcho Kue Feasibility Study, due for completion in the fourth quarter of 2010.
Refinancing
As reported in the interim results, during the first half of the year De Beers commenced discussions with its lending banks to renew its outstanding US$3 billion borrowing facility, of which US$1.5 billion becomes due and payable in March 2010. International and South African financing term sheets have been agreed, and credit approval granted, by the syndicates of lending banks. In addition, the shareholders have shown strong support by agreeing to subscribe for additional equity capital of US$1 billion in proportion to their existing equity holdings, which will enable a reduction in overall debt and strengthen the De Beers Group balance sheet. The detailed documentation of the new financing structure is expected to be concluded before the end of March 2010.
Outlook
2009 presented some of the most challenging trading conditions the diamond industry has experienced. However, as a result of De Beersf actions, our clients have been able to reduce inventory and debt levels, and with better than expected consumer sales in the fourth quarter, sentiment has improved markedly from a year ago. Demand for rough diamonds has been much improved at the first Sight of the year and expectations are for this to continue in the upcoming February Sight. However, De Beers will continue to take a cautious and prudent approach to production and sales levels for 2010. Consumer demand for diamond jewellery is beginning to recover, driven in part by the strength of the developing markets of China and India. However, with the fragility of the world economy and perceived weakness of the global recovery post recession, the company would only expect a gradual increase in production levels, sales and prices.
Desire for diamonds remains strong and, given the improvement of industry fundamentals, the Directors are cautiously optimistic about medium-term prospects.
In the longer-term, the fundamental supply / demand dynamics of diamonds remain highly attractive. Future demand growth for diamond jewellery, driven by the emerging markets of China and India, is expected to outpace what is forecast to be lower levels of diamond supply for many years to come, providing a sound foundation for future profitability.
Management Changes
At the De Beers board meeting on 9 February 2010, it was announced that Group Technical Director Robin Mills will retire at the Annual General Meeting on 24 March 2010. Jim Gowans, currently CEO, De Beers Canada Inc, will assume the position of Group Technical Director and join the board at that time.
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- Namdeb Diamond Sales in 2009 Down 40% ffrom 2008
- De Beers: 83% of Diamdel Auctions to non-Sightholders in 2009 Sold Upon Initial Presentation
