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De Beers to Cut 2016 Production Amid Anglo American Overhaul
Dec 9, 2015 3:12 AM
By Rapaport News
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RAPAPORT... De Beers expects diamond production to fall to between 26
and 28 million carats in 2016 from 29 million carats this year as the mining
giant outlined its view of the “stock crisis” affecting the industry.
The decline in rough and polished diamond prices has
stemmed from a build-up of inventory rather than a major drop in consumer
demand, De Beers said, despite the company’s estimates that the global polished
diamond wholesale market contracted by 1 to 2 percent in 2015.
“The crisis is not a demand crisis, it’s a stock crisis,”
said Philippe Mellier, De Beers chief executive officer, in a presentation to Anglo
American analysts on December 8. “We are mindful that the midstream has to
generate profit.”
However, Mellier argued that De Beers has helped open up
profit for manufacturers by reducing rough prices by more than polished. De
Beers reported that rough prices declined 15 percent in 2015, while it
estimated that polished prices fell 8 percent. The company also reduced supply
and enabled greater flexibility for sightholders to help diminish the
prevailing large inventory levels, the executive said.
Mellier added that De Beers will increase its own transparency
by disclosing its sales volume for each sight from 2016 and provide additional
profit and unit-cost analysis in its year-end reporting.
His comments came amid a major restructuring by parent
company Anglo American, which will see De Beers become one of three core business
in the group along with industrial metals and bulk commodities. Anglo American
will also move its London office to co-locate with De Beers
in 2017.
Anglo American has decided to focus on ‘priority’ assets
that will boost cash flow and provide greater returns. Anglo American aims to introduce
cost and productivity improvements amounting to $3.7 billion between 2013 and
2017, and $1 billion of cuts to capital expenditure by 2016. The move will see
the group reduce its assets by some 60 percent and its employee headcount from
135,000 to 50,000. Anglo American also suspended its dividend for the second
half of 2015 and 2016.
For its part, De Beers has slashed its costs of
production from $111 per carat in 2014 to $101 per carat in 2016. Employee
numbers will fall significantly, with more than 1,500 jobs losses across its Canada,
South Africa and the industrial diamond Element Six operations. The Element Six
plant in Sweden will be closed and its South African plant restructured.
In addition, between 2015 and 2017 De Beers capital
expenditure is expected to drop by around $200 million to $500 million, mainly
as it completes its Gahcho Kué mine development in Canada.
De Beers is also capping its exploration budget for 2015
and 2016 at $35 million and limiting exploration activity to Botswana, South
Africa and Canada.
Meanwhile, as the company plans its production program
for next year, Debswana, De Beers joint venture with the Botswanan government,
has revised its production for 2016 to 20 million carats, which will still
account for more than 70 percent of De Beers total production. De Beers this
month announced the sale of its Kimberley mine in South Africa and the closure
of its Snap Lake mine in Canada.
“We have two levers to play with: volume and price. There’s
a time for production decrease, and a time for price decrease if it’s done in a
responsible way,” Mellier said. ”We have opened up the profit gap between
polished and rough.”
Anglo American shares on the London Stock Exchange fell
by over 10 percent December 8 following the announcement.
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Tags:
Anglo American, De Beers, mining, Rapaport News
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