Diamonds

Diamonds

Philippe Mellier

Philippe Mellier
CEO – De Beers

$659m

Operating profit
(2010: $495 m)

6%

Share of group operating profit
(2010: 5%)

$794m

EBITDA
(2010: $666 m)

Financial highlights

US$ million (unless otherwise stated) 2011 2010
Share of associate’s operating profit 659 495
EBITDA 794 666
Share of Group operating profit 6% 5%
Group’s associate investment in De Beers(1) 2,230 1,936
  • (1) Excludes outstanding loans owed by De Beers, including accrued interest, of $301 million (2010: $355 million).

Business overview

Anglo American's diamond interests are represented by our 45% shareholding in De Beers. The other shareholders in De Beers are Central Holdings Ltd (representing the Oppenheimer family interests), which beneficially owns 40%, and the Government of the Republic of Botswana (GRB) with a 15% beneficial interest.

De Beers is the world's leading diamond company and, with its joint venture partners, employs approximately 16,000 people around the world. The company produces approximately 35%, by value, of the world's rough diamonds from its mines in Botswana, Canada, Namibia and South Africa.

De Beers is a 50/50 partner with the GRB in the Debswana Diamond Company, and a 50/50 partner with the Government of the Republic of Namibia (GRN) in Namdeb Holdings. Namdeb Holdings owns 100% each of Namdeb (land mining) and De Beers Marine Namibia (marine mining).

In addition, De Beers has a 74% shareholding in South Africa-based De Beers Consolidated Mines Limited (DBCM), with a broad based black economic empowerment (BEE) consortium (Ponahalo) holding the balance.

De Beers owns 100% of De Beers Canada, which operates the company's first two diamond mines outside the African continent.

De Beers owns 100% of The Diamond Trading Company (DTC) – a division of De Beers UK, the rough diamond distribution arm of De Beers. It also has a 50% interest in both DTC Botswana and Namibia DTC, with the GRB and GRN holding matching respective shareholdings.

Diamdel, wholly owned by De Beers, is the market leader in the sale of rough, uncut diamonds using innovative online auction techniques, to small, mid-tier and large manufacturing, retailing and trading businesses.

De Beers, through 100% owned Element Six Technologies, is the world's leading supplier of industrial super-materials. Element Six operates internationally, with 10 manufacturing sites worldwide and a global sales network. It is a leading player in the markets in which it operates.

At the consumer end of the value chain, De Beers' proprietary diamond brand Forevermark, offers a differentiated proposition for consumers based on quality and integrity. Forevermark diamonds are available in select jewellers in markets including China, Hong Kong, Japan, India, South Africa and the US.

De Beers and LVMH Mo√ęt Hennessy Louis Vuitton are 50/50 partners in the high-end retailer De Beers Diamond Jewellers (DBDJ). DBDJ has stores in the most fashionable areas of some of the world's great cities, including New York, Beijing, Hong Kong, London, Paris, Tokyo and Dubai.

De Beers Family of companies

Industry overview

Up to two-thirds of the world's diamonds, by value, originate from Africa, while significant sources have been discovered in Russia, Australia and Canada.

Most diamonds come from the mining of kimberlite deposits. Another important source of gem diamonds is secondary alluvial deposits formed by the weathering of primary kimberlites and the subsequent deposition of released diamonds in rivers and beach gravels.

Rough or uncut diamonds are broadly classified either as gem or industrial quality, with gem being overwhelmingly (>99%) the larger of the two markets by value. The primary world market for gem diamonds is in retail jewellery, where aspects such as carat, colour, cut and clarity have a large impact on valuation.

De Beers, and its partner DTCs in Botswana and Namibia, supplies its customers – known as 'Sightholders' – with parcels of rough diamonds that are specifically aligned to their respective cutting and polishing needs.

Strategy and growth

De Beers is focused on:

  • Capturing price growth
  • Driving cost efficiencies
  • Delivering upstream mining projects
  • Capturing consumer demand.

Financial overview

Consumer demand forecasts

Anglo American's share of operating profit from De Beers totalled $659 million, an increase of 33%, reflecting De Beers' focus on fulfilling Sightholder demand and capturing the full benefit of significant price growth in 2011.

In May, Nicky Oppenheimer, chairman of the De Beers board, announced that, with effect from July 2011, Philippe Mellier had been appointed chief executive officer.

On 4 November, Anglo American announced its intention to acquire CHL's entire 40% interest in De Beers for $5.1 billion cash. Under the terms of the existing shareholders' agreement between Anglo American, CHL and the GRB, the GRB has a pre-emption right in respect of a pro rata portion of the CHL's interest in De Beers, enabling it to participate in the transaction and to increase its interest in De Beers, on a pro rata basis, to up to 25%. In the event that the GRB exercises its pre-emption rights in full, under the proposed transaction, Anglo American would acquire an incremental 30% interest in De Beers, taking its total interest to 75%, and the consideration payable by Anglo American to CHL would be proportionately reduced.

Markets

In 2011, the DTC achieved its second highest ever level of sales ($6.5 billion), a 27% increase over the prior year (2010: $5.1 billion). The first half of the year saw exceptional consumer demand growth which, when coupled with lower than historical levels of global diamond production, resulted in very strong polished and rough diamond price growth. While reflecting the robust market fundamentals, rough diamond prices in this period included an element of speculative buying in the trading centres.

During the second half of the year, both retail and cutting centre sentiment was impacted by the challenging macroeconomic environment, restricted liquidity in the cutting centres and a slowdown in the rate of growth of consumer demand at retail. As a result, De Beers experienced lower levels of demand for its rough diamonds and prices receded slightly from the highs seen in the middle of the year. However, in total, 2011 was a very strong year on the demand side, with record levels of consumer demand growth estimated at between 11% and 13% over the full year, and DTC price growth of 29%.

DBDJ reported good growth in sales across all regions, with Greater China particularly strong. The China opportunity is a priority for De Beers, with further 2012 expansion plans following the opening of stores in Beijing, Tianjin, Dalian and a second Hong Kong store in 2011. Forevermark continued its expansion both in its existing markets of China, Hong Kong and Japan, and in the second half of the year launched in India and the US. Forevermark is now available in 658 retail stores across nine markets, an increase of 89% compared with 2010.

Operating performance

De Beers reported an LTIFR of 0.15 (2010: 0.24) but, regrettably, there were seven loss of life incidents in the year. Comprehensive safety reviews are being carried out at all De Beers operations.

De Beers' production was 5% lower than the prior year at 31.3 million carats (2010: 33.0 million carats). During the first half of the year, in spite of a number of challenges, including heavy rainfall in southern Africa, maintenance backlogs, poor contractor performance, skills shortages, and protracted labour negotiations, De Beers produced 15.5 million carats, in line with the first half of 2010 (15.4 million carats). During the second half of the year, De Beers produced another 15.8 million carats despite a shift in its operational focus, in light of prevailing rough diamond market trends in the fourth quarter. De Beers utilised this period to address maintenance and waste stripping backlogs in order to better position the mines to increase their rate of production as demand from Sightholders increases. This is likely to continue for several months into 2012.

In 2011, De Beers Exploration spent $40 million (2010: $43 million) on work programmes focused on 11,347 km2 of ground holdings in Angola, Canada, India, Botswana and South Africa, supported by laboratory and technical services centralised in South Africa.

A new $2 billion multi-currency international credit facility was concluded in October, comprising an $800 million term loan and a $1.2 billion revolving credit facility with tenors of March 2015 and October 2016 respectively.

Projects and restructuring

Debswana's Jwaneng Mine Cut-8 extension project is progressing satisfactorily, largely on schedule and on budget. More than 40 million tonnes of waste has been stripped to date, and infrastructure construction is over 90% complete, with the remaining work forecast to be completed during 2012.

The underground feasibility study to extend the life of Venetia Mine in South Africa is under way, and scheduled for consideration by the DBCM board in 2012.

De Beers Canada completed an Optimisation Study at Snap Lake mine in mid-2011, securing a mining solution to economically access this promising long life but challenging orebody, and thereby achieve its forecast 20 year life of mine.

Per the NI 43-101 Technical Report issued by Mountain Province Diamonds Inc. in 2010, Gahcho Kué is identified as commencing in 2013 with production from 2015. The Gahcho Kué Environmental Impact Statement has been submitted and the review process is currently under way and ultimately the final project schedule will be dependent on progress in obtaining environmental permits and regulatory approvals.

In September, DBCM completed the sale of Finsch mine, as a going concern, to a Petra Diamonds-led consortium for a consideration of R1.425 billion ($210 million), plus assumption of rehabilitation liabilities. In May, DBCM announced that it had entered into an agreement to sell Namaqualand Mines to Trans Hex in a transaction valued at R225 million ($33.5 million), subject to the fulfilment of a number of conditions precedent.

In September, a new 10 year contract for the sorting, valuing and sales of Debswana's diamond production was announced by De Beers and its joint venture partner, the GRB. As part of the agreement, De Beers will transfer its London-based rough diamond aggregation and sales activity to Botswana by the end of 2013. From its new base in Botswana, the DTC will aggregate production from De Beers' mines and its joint venture operations worldwide, and sell to local and international Sightholders.

In November, De Beers and the GRN finalised an agreement to increase the GRN's effective shareholding in De Beers Marine Namibia from 15% to 50% through the establishment of a new 50:50 joint venture holding company. This will not change current marketing arrangements and all diamond production from Namdeb will continue to be sorted, valued and marketed exclusively by the DTC together with Namibia DTC.

In December, the DTC announced the provisional qualification of 72 Sightholder applicants for the upcoming Supplier of Choice sales contract period, which begins on 31 March 2012 and runs to 30 March 2015.

Outlook

In spite of uncertainty, and barring a global economic shock, continued growth in global diamond jewellery sales is expected, albeit at lower levels than the growth experienced in 2011. This will be driven by the overall strength of the luxury goods market, improving sentiment in the US (the largest diamond jewellery market), continuing growth in China, and the positive impact of the 2011 polished price growth on retail jewellery prices.

On the production front, De Beers will continue to prioritise waste stripping and maintenance backlogs, and we therefore do not expect a material increase in carat production in 2012. This focus, which began in the second half of 2011 and will continue during the first quarter of 2012, will position De Beers to ramp up profitable carat production as Sightholder demand dictates. In the medium to longer term, the industry fundamentals remain positive, with consumer demand, fuelled by the emerging markets of China and India, outpacing what will likely be level carat production.