Philippe Mellier Addresses Sightholders in Gaborone

RAPAPORT...  The following speech was delivered today by Philippe Mellier, the CEO of De Beers Group, during a cocktail reception for sightholders in Gaborone, Botswana.

Your honor the vice president, honorable ministers, permanent secretary to the president, attorney general, the governor of the Bank of Botswana, heads of international organizations, permanent secretaries, captains of industry, all protocol observed. Ladies and gentlemen, good evening. Welcome to our annual January sightholder cocktail event.

As you will recall, this time last year we were celebrating a new start to life for our global sightholder sales after the relocation from London to Botswana. And by November, we were celebrating the completion of our first 12 months in Gaborone. Looking back, we are now so at home that it feels strange to think that we have been here for only just over a year.

The success of bedding down our sightholder sales and the seamless transition is testament to all the hard work put in by the government, by the local community, by sightholders and by the men and women of the De Beers Group of Companies. Thank you all for making this such a success.

Of course, last year was also a year of other anniversaries. We celebrated the 20th anniversary of Namdeb, our partnership with the government of Namibia. And we were delighted to commemorate the 45th anniversary of Debswana, a shining light in the history of both Botswana and of De Beers.

All of these milestone anniversaries got me thinking about what it is that has enabled us to achieve so much in the area of resource development, where history has so often told a sad story instead of a success story.

And I concluded that we have been able to celebrate these impressive anniversaries thanks to our investment in long-term success and to the effective sharing of responsibility between De Beers and the governments with which we work. We and our partners understand we have mutual objectives around creating long-term diamond value and we each carry out the appropriate role to achieve these goals.

And when I look ahead to the future of the diamond industry more broadly, I believe that those of us directly involved in the trade can employ a similar approach to delivering sustained success.

But in order to do so, we must identify what objectives we all share. What is it that will deliver long-term success to all participants in the diamond trade?

The answer to this can be found by examining the nature of the industry.

The product we mine is finite; the trade is capital intensive; and consumer attitudes and preferences continue to evolve. As such, maintaining success depends on the sustainability of supply, the sustainability of finance and the sustainability of demand. If we each play the right role in supporting these three areas, then all parts of the value chain will benefit.

Looking first at the sustainability of supply, we at De Beers are investing to secure future production capacity.

And I am pleased to say that we are progressing very well in this area. Here in Botswana, we continue with our hugely important investment in the Cut-8 project at Jwaneng which, we estimate, will deliver over 100 million extra carats from one of the world’s richest diamond mines.

In South Africa, our Venetia underground project will extend the life of South Africa’s largest diamond mine to 2044. Significant progress has been made in the main constructions throughout 2014 and the project will deliver over 80 million further carats from this deposit.

In Canada, progress at Gahcho Kue, one of the largest new developments in the diamond world, is very positive and we are eagerly looking forward to receiving the first production from this leading new mine within a couple of years.

And in Namibia, we have recently opened the Sendelingsdrif mine following the development work undertaken over the preceding two years. This mine forms an important part of the extension of the lifespan of Namibian operations and further bolsters our production capacity in the years ahead.

Of course, implementing multi-billion dollar capital projects requires sustainable financing and we recognize that this is equally important to you, our customers, in such a capital-intensive industry.

So, turning next to the sustainability of financing, there is a shared responsibility for investment. At De Beers, we have invested time, money and effort in developing a new, fit for purpose distribution approach that introduces more rigorous financial transparency and strength requirements for the new global sightholder sales contractual period.

And I am proud to say that the sightholder community is embracing the updated requirements by making any necessary structural and financial changes.

A great deal of progress is already being made in this area and I encourage you to retain a sharp focus on this, because increased financial transparency will better position De Beers customers when seeking to benefit from the available finance.

And as we work in a seasonal industry, financial robustness is equally as important as transparency. The profile of demand for diamonds is not smooth throughout the year and as such it is vital that we are able to bridge through the periods of lower demand without undermining the value of our inventories.

If all parts of the value chain are more financially robust, then the real underlying value of the product – that based on consumer demand, which is the true source of value for diamonds – can more effectively be captured at each stage of the pipeline. Well-capitalized businesses will be better able to avoid the risk of having to sell their inventory below its true value, simply as a result of seasonal cash pressures.

Turning finally to the sustainability of demand, it is clear that we all have a responsibility to invest appropriately. Essentially, sustaining demand throughout the value chain for the long term requires us to build and maintain what we call diamond equity.

Put simply, diamond equity is the value that people perceive in diamonds. It is made up of financial value, emotional value, ethical integrity and product integrity. If all industry participants work to reinforce the emotional appeal of diamonds and to maintain consumer trust in the product and the trade, then we all stand to benefit from an expanding industry.

This clearly emphasizes how important it is for us to avoid complacency around issues such as undisclosed synthetics. If we lose the confidence of consumers in the integrity of the industry, then no amount of marketing spend will repair the damage. This is why we at De Beers have invested in developing detection technology that enables all synthetics to be detected. And it is why midstream businesses must continue to invest in their systems and processes, ensuring that all risk areas are covered.

We must also be acutely aware of the increasing challenges to consumer confidence presented by differing grading standards at the various grading laboratories. This issue has captured a lot of attention in recent months, especially with consumers in the U.S., and we must all display the leadership required to reassure the public that they can rely on the integrity of the diamond industry.

And alongside our responsibilities when it comes to consumer confidence, there is also an important role for the sightholder community to play in terms of investing in business improvements and maintaining demand at each stage of the pipeline. Whether your focus is on economies of scale, improved use of technology or more efficient distribution, sustainably capturing value in the midstream requires ongoing investment so that your own customers’ demand remains strong and reflective of the true value of your product and service proposition.

But in addition to the actions we take to protect consumer confidence and to maintain value throughout the pipeline, we also need investments to drive desire at the consumer level. As noted in our "Diamond Insight" report published last year, brands are one of the most effective vehicles for this and I am pleased to report that De Beers investment in Forevermark has enabled the brand to see impressive growth in 2014.

And while it is too early to provide a definitive analysis, initial indications are that Forevermark was not the only growth story last year. It looks as though 2014 will have delivered global growth in consumer demand for diamond jewelry over the previous year, and this is a notable achievement when considering that 2013 itself was a record year for diamond jewelry consumption.

With regards to the end of year season, most commentators agree that the largest market for diamond jewelry sales, the U.S., experienced a decent level of growth of around 3 percent to 4 percent. And while there have been mixed reports relating to performance in the increasingly important markets of India and China, some retailers have still shown healthy growth in these markets.

Whatever the final analysis of performance over the end of year season shows, continued growth in consumer demand implies that we should still see a desire from retailers to restock inventories as the year progresses.

However, we recognize that there may be something of a delay in this restocking demand as a result of a number of structural issues and we have therefore offered sightholders with an additional deferral option at this week’s sight. This will give you the opportunity to re-phase your supply from De Beers in the first quarter of the year.

But once this short-term dynamic has been resolved, we remain optimistic for the opportunities in the year ahead.

Early forecasts from leading economic analysts predict that global economic growth in 2015 will out pace the rate of growth seen over last three years.

One of the star performers in the global economy is expected to be the U.S., which is clearly good news for diamonds as this is the major destination for diamond jewelry sales. Expectations are for the acceleration of 2014 growth in the U.S. to be maintained on the back of a strong recovery across the major areas of domestic demand.

The recent downtrend in oil prices is also expected to be important an important factor in 2015. This should benefit the U.S. economy, but also the emerging markets as the price changes have had the effect of transferring benefit from oil exporters to importers. India is expected to be among the bigger beneficiaries of this trend and its growth is forecast to increase to around 5.5 percent in 2015.

It is also noteworthy that the development profile of the consumer landscape in India means that the diamond industry should see direct benefit as more consumers enter the middle class.

And this also holds true for China. While China may be seeing a deceleration in its growth rate, the reduction of the pace of growth should not be sharp and there is expectation that the slowdown will be effectively managed. On top of this, we must bear in mind that China will still see among the fastest rate of growth in the world. And as the economy continues to rebalance toward greater reliance on consumption rather than infrastructure investment, diamonds should perform well in each of the major consumer markets.

All of this shows that there is ample opportunity for the industry. The question for all of us to ponder is how we best unlock this opportunity for the benefit of our own businesses.

At De Beers we are investing in our future production capacity to deliver sustainability of supply. We are investing in our distribution strategy to ensure we have the most efficient ways of bringing this product to market. We are investing in the sustainability of financing so as to help support our customer-base and strengthen the prospects for the diamond industry. And we are investing in the sustainability of demand through Forevermark, which is delivering impressive growth as its message resonates ever more strongly with consumers around the globe.

Ladies and gentlemen, we believe the future of the diamond dream is absolute.

We believe that the industry is approaching one of the greatest periods of opportunity in living memory and we are committing to major investments across the pipeline so that we can unlock the full value presented by the industry’s outstanding fundamentals.

We have celebrated some amazing anniversaries in recent years – 125 years of De Beers, 45 years of Debswana and 20 years of Namdeb. But despite our pride at this history, if we all choose to invest in long-term growth then it will be the diamond industry’s future that becomes the real success story.

Thank you.

---Ends---