DeBeers Rough production registered to 33.5 mn cts
Planning for 34-36 million carats in 2018
Recently Anglo American resented its Year End Financial Report for the year ended 31 December 2017. Here focusing on key areas of Operations review for the year ended 31 December 2017 of De Beers.
Financial and operational overview:
Underlying EBITDA increased by 2% to $1,435 million (2016: $1,406 million) despite lower revenue following the one-off industry midstream restocking in 2016. This performance was driven by improved margins, which benefited from lower unit costs (supported by higher production and efficiency drives across the business), a strong contribution from Canada (driven by Gahcho Kué’s ramp-up and the closure of Snap Lake), and Element Six (which benefited from a recovery in oil and gas markets).
This was partly offset by unfavourable exchange rates, and an increasing proportion of waste mining costs being expensed rather than capitalised, owing to an improved strip ratio at Venetia in South Africa. Strategic report -11- Total revenue declined by 4% to $5.8 billion (2016: $6.1 billion) – as expected, given the benefit of strong midstream restocking in the first half of 2016.
The average realised rough diamond price decreased by 13% to $162/carat (2016: $187/carat) mainly owing to a lower value mix; this was partly offset by an 8% increase in consolidated sales volumes to 32.5 million carats (2016: 30.0 million carats).
This reflected stronger demand for lower-value goods in Sight 1 of 2017, following a recovery from the initial impact of India’s demonetisation programme in late 2016, as well as the ramp-up of production from lower value per carat but high margin operations, including Orapa and Gahcho Kué. The lower-value mix was compensated in part by a higher average rough price index, which was 3% above that of 2016.
Capital expenditure reduced by 48% to $273 million (2016: $526 million), mainly owing to the completion of major projects, including Gahcho Kué; Debmarine Namibia’s new exploration and sampling vessel, the SS Nujoma; and planned lower waste capitalisation at Venetia. The SS Nujoma, which was delivered three months ahead of schedule and under budget, was officially inaugurated in June 2017 and is fully operational.
Markets:
Early signs are that global consumer demand for diamond jewellery registered positive growth in 2017 in US dollar terms, following a marginal increase in 2016. Sustained diamond jewellery demand growth in the
US was once again the main contributor to this positive outcome.
Demand for diamond jewellery by Chinese consumers grew marginally, in local currency and dollar terms. In contrast, consumer demand for diamonds softened in India and the Gulf states, both in local currency and dollar terms, while Japan’s consumer demand growth was flat in local currency and lower in dollars.
Diamond producers’ primary stocks are estimated to have reduced considerably during the first half of 2017, as sentiment in the midstream improved and rough and polished inventories normalised for businesses in this
segment of the value chain.
However, as a result of US retailers tightly managing their inventories and the earlier timing of Diwali in India, there was a slight seasonal build-up of polished inventory in the midstream going into the fourth quarter. Overall, early indications are that additional consumer marketing undertaken during the main selling season had a positive effect on polished demand in the US, China and India in the final quarter of the year, leading to a positive impact on overall polished inventories.
Operating performance:
Mining and manufacturing:
Rough diamond production increased by 22% to 33.5 million carats (2016: 27.3 million carats), reflecting stronger underlying trading conditions as well as the contribution from the ramp-up of Gahcho Kué. Botswana (Debswana) increased production by 11% to 22.7 million carats (2016: 20.5 million carats).
Production at Orapa was 28% higher, mainly driven by planned increases in plant performance and the ramp-up of Plant 1, which was previously on partial care and maintenance in response to trading conditions in late 2015. In June 2017, Jwaneng processed its first ore from Cut-8, which is expected to become the mine’s main source of ore during 2018.
In Namibia (Namdeb Holdings), production increased by 15% to 1.8 million carats (2016: 1.6 million carats), primarily owing to higher production from Debmarine Namibia’s Mafuta vessel, driven by higher mining rates following an extended scheduled in-port during 2016.
At Namdeb’s land operations, production rose by 6%, despite challenging conditions, including grade variability owing to the nature of alluvial deposits, structural cost pressures, and some operations nearing the end of their lives.
In South Africa (DBCM), production increased by 23% to 5.2 million carats (2016: 4.2 million carats), primarily owing to Venetia, driven by higher grades as well as improved operational performance benefiting tonnes treated. Construction continues on the Venetia Underground mine, which is expected to become the mine’s principal source of production during 2023.
In Canada, production increased to 3.8 million carats (2016: 1.0 million carats) owing to the ramp-up of Gahcho Kué, which entered commercial production in March 2017. During the year, Gahcho Kué benefited from higher than expected grades, partly offset by a lower average value of production.
Owing to the differences in lobe characteristics across different kimberlite pipes, the average grade and realised price will continue to vary and will be dependent on the area mined. Production at Victor increased by 21% to 0.7 million carats as a result of higher grades.
Victor, which has been operating successfully since 2008, is due to close in 2019, when the open pit is expected to have been depleted. The closure of Snap Lake, which is currently on care and maintenance, is progressing, with flooding having been completed, thereby minimising holding costs while preserving the long term viability of the ore body.
Other revenue includes Element Six, which grew strongly, driven primarily by a recovery in the oil and gas business but also supported by the automotive and consumer electronics segments.
Brands:
In March 2017, De Beers acquired its joint venture partner’s 50% shareholding in De Beers Jewellers (DBJ). With full ownership of the business (and the De Beers corporate brand), the process of integrating the DBJ
brand and network of 30 stores in 16 key consumer markets around the world is well under way.
Forevermark continued to expand its retailer network and is now available in more than 2,200 outlets in 25 markets, an increase of 10% since the end of 2016. By May 2017, Forevermark had inscribed its two-millionth diamond, the second million having taken only half the time it took to inscribe the first million.
For the peak holiday sales period, the brand launched “Forevermark Tribute™ Collection”, a significant marketing investment across multiple channels in the key US market. The Tribute™ Collection, and its supporting campaign, symbolises and celebrates the many facets of the wearer, and reflects the growing trend for women to self-purchase.
In February 2017, De Beers unveiled its next-generation automated melée screening instrument (AMS2), which is significantly less expensive, screens 10 times faster, can handle stones three times smaller, and has
lower referral rates than its predecessor. In addition, an industry-first synthetic-screening device for stones in set jewellery (SYNTHdetect) was launched in June 2017, along with the roll-out by the International Institute of Diamond Grading & Research of a synthetics-detection training course.
During 2017, De Beers invested more than $140 million in marketing (19% more than in 2016) through a combination of proprietary and partnership activity centred on the US, China and India. De Beers also substantially increased its investment in the Diamond Producers Association, a producer-wide body that works to enhance consumer demand by promoting the appeal, integrity and reputation of diamonds.
De Beers also began the development of a new digital platform for the diamond industry, backed by highly secure blockchain technology, which will provide a single immutable record for every diamond that is registered. Currently in the pilot phase, this initiative is being designed to underpin confidence in diamonds and the diamond industry for all stakeholders, while streamlining existing manual processes and creating new efficiencies in the value chain.
Outlook:
Improving global macro-economic conditions remain supportive of consumer demand growth for polished diamonds in 2018. The degree of global economic growth, however, will be dependent upon a number of factors, including the extent of the positive impact on growth in consumer spending from US tax cuts, the strength of the dollar on consumer demand in non-dollar-denominated countries, and how successfully China
manages its adjustment to a more domestic consumer-driven economy.
For 2018, forecast diamond production (on a 100% basis except Gahcho Kué on an attributable 51% basis) is expected to be in the range of 34-36 million carats, subject to trading conditions.
