EBITDA of US$762 million has more than doubled compared with H1 2009, due to a stabilisation of, and improvement in, trading conditions in H1 2010.
Sales of rough diamonds by the DTC, the marketing arm of De Beers, in H1 2010 were US$2.6 billion (including those through joint ventures), an 84 percent increase compared with H1 2009, as a result of increased demand from retail markets, particularly India and China, as well as restocking by the trade.
Carats recovered in H1 2010 amounted to 15.4 million, more than double those for H1 2009 (6.6 million carats) in line with increased demand from DTC Sightholders.
Production and operating costs were US$699 million (2009: US$479 million) as a result of increased production across the Group. However, the focus remains on cash management and continuing the efficiency improvements achieved in 2009. After having reduced our cost base globally by 45 per cent, and staffing levels by 25 percent in 2009, many of those gains have remained permanent without impacting growth.
In March 2010, together with recapitalisation by its shareholders of US$1 billion, the Group successfully concluded a complex refinancing of all of its international and DBCMfs South African debt. All debt facilities across the world were extended to August 2013.
At the end of June, net debt amounted to US$1.98 billion compared with US$3.20 billion at the end of December 2009.
De Beers‘ third party debt was US$ 1.87 billion (December 2009: US$3.09 billion), and gearing on this debt, was 28.8 percent compared with 45.2 per cent in December. Gearing on total debt, including US$785 million in shareholder loans and US$107 million of preference share capital, was 42.5 percent (December 2009: 57.9 percent).
Review of Operating Activities
H1 2010 has seen a strong recovery against the low comparisons of H1 2009. With demand for rough diamonds increasing strongly, both sales volumes and prices have increased significantly. Together with a continued focus on cost management, this has resulted in a strong recovery in EBITDA, PBIT and free cash flow.
Safety
De Beersf commitment to safety remains the companyfs most important priority. After a fatality-free year in 2009 there have been no fatalities during H1 2010.
Exploration
In Canada, the advanced core drilling for grade assessment continued on the Delta and Tango satellite kimberlites to the Victor mine. In Angola, the large-diameter drill bulk sampling programme of the Mulepe-1 kimberlite cluster is on track for completion by the end of 2010, and early results received to date have been encouraging. Reconnaissance prospecting for new kimberlite discoveries continued in Botswana and India.
Production
In the first six months of the year, De Beers increased production by 133 percent across its operations to 15.4 million carats (H1 2009: 6.6 million carats). This reflects the impact of a production holiday taken in the first half of 2009, and was in response to increased demand from DTC Sightholders following a better than expected Christmas season as well as steady improvements in market sentiment. In H1, Venetia mine produced two million carats (2009: 0.7 million), Jwaneng mine 5.3 million carats (2009: 2.3 million) and Orapa mine 4.3 million (2009: 1.4 million). Debswanafs Cut-8, the major expansion project at Jwaneng mine, has commenced. Having successfully refinanced its debt, DBCM continues to look at ways to enhance its future prospects.
Sales
The increase in DTC H1 sales by 84 percent to US$2.6 billion (H1:2009 US$1.4 billion) is as a result of increased demand from our Sightholders and the market, and reflects an increase in both volume and prices achieved compared to H1 2009. DTC rough diamond prices are now, on average, comparable to June 2008 pre-recession levels.
Downstream Opportunities
H1 saw strong double digit growth in consumer demand from China and India and a modest improvement in demand from the US. Since the 2008 launch, Forevermark (a diamond brand from the De Beers Group) has expanded rapidly across Asia with 289 doors in China, Hong Kong and Japan. Much of this growth can be attributed to mainland China where the brand has been rolled out to 10 cities with plans for further expansion this year. After a difficult 2009, De Beers Diamond Jewellers, De Beersf joint venture with LVMH, has seen a healthy rebound in sales in H1 2010. Element Six had a strong first half with all business lines contributing to the improved performance and profitability. Element Six is also benefiting from restructuring and commercial measures implemented in 2009 and early 2010.
Class Actions
On 13 July 2010, the US Third Circuit Court of Appeals overturned the earlier judgment of the District Court of New Jersey approving an agreement settling a number of class actions against De Beers, and referred the case back to the District Court for further consideration. The District Court is now required, amongst other things, to consider whether or not it can properly approve a settlement comprising a smaller class of plaintiffs. De Beers is considering the opinion of the Third Circuit and evaluating its position. Wefll be in a position to comment further soon. During H1 2010, a further Canadian class action claim was served on De Beers in the Province of Ontario. This class action, together with the existing class action in British Columbia, is following the usual legal process.
Diamond Equity
While De Beers does not conduct any business in Zimbabwe, it has, as part of the World Diamond Council, worked closely alongside governments and civil society to achieve a Kimberley Process-centred solution to the issues surrounding the Marange diamond fields. While De Beers is pleased that the Kimberley Process has proven to be effective in achieving the spirit of its mission, it will continue to monitor the situation closely.
Outlook
While encouraged by the strengthening demand in H1, the global economic climate remains fragile especially in the important diamond markets of the US, Japan and Europe so we look to the remainder of 2010 with caution and measured optimism. A period of market stabilisation is expected in H2. With most restocking activity by the trade now largely completed, further demand growth is dependent on increases in consumer demand, and De Beers remains encouraged by the strength of demand in the emerging markets of Asia, particularly China and India.
Nicky Oppenheimer, Chairman of De Beers Group, commented, “This time last year, in the midst of the global recession, we transformed our business – taking short-term pain for long-term gain. One year later,
our results for the first half of 2010 show the success wefve had in managing costs, creating operating efficiencies and improving our balance sheet. With renewed demand driving significant increases in production, prices and sales, we are now focused on securing the recovery while insulating the business from further market volatility.”
