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De Beers: Positive Consumer Demand Growth and Strong Long-term Fundamentals Despite Challenging Trading Conditions

Interim Results For The Six Months Ended 30 June 2012

Jul 20, 2012 2:36 AM   By De Beers
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Press Release:
Financial Summary – US Dollar millions

                                                            H1 2012      H2 2011      H1 2011

Total sales                                                3 346         3 491         3 887
EBITDA                                                       626            538         1 183
Profit before finance
charges and taxation                                    502             403        1 019
Free cash flow                                              326             265           469
Net interest bearing debt
(excluding shareholders’ loans)                      980         1 259         1 450

  • Total sales decreased 14 per cent to US$3.3 billion (2011: US$3.9 billion).
  • Sales of rough diamonds by the Diamond Trading Company (DTC) in H1 2012 were US$3.1 billion (including those through joint ventures).
  • Despite challenging trading conditions, DTC price levels remained relatively stable.
  • Diamond production totalled 13.4 million carats (2011: 15.5 million carats).
  • EBITDA of US$626 million decreased 47 per cent vs H1 2011 (US$1,183 million) and is 16 per cent ahead of H2 2011.
  • De Beers’ third party debt reduced significantly to US$980 million (December 2011: US$1.259 billion), and third party gearing to 16 per cent (December 2011: 21 per cent).
  • Free cash flow of US$326 million decreased 30 per cent vs H1 2011 (US$469 million) and is 23 per cent ahead of H2 2011.

DIRECTORS’ COMMENTS


Safety
While De Beers continued to have some success in the first half of 2012 in reducing its lost-time-injury frequency rate (LTIFR) (0.14 H1 2012 v 0.16 H1 2011), it sadly experienced three fatalities on its southern African mining operations. Safety remains our first priority. Subsequent to a slope failure at Debswana’s Jwaneng Mine, management suspended all production operations in the pit to conduct a comprehensive review and address procedures and risks. Operations will resume in the pit over the next few days.

Demand
DTC H1 sales decreased to US$3.1 billion (H1: 2011 US$3.5 billion) as a result of lower demand and changing product requirements from Sightholders. After a very strong H1 2011, the difficult trading conditions experienced during Q4 2011 continued, as expected, during H1 2012. While overall consumer demand for polished diamonds remained relatively healthy, Sightholder demand was impacted by increased stock in the cutting centres, tightening liquidity and challenging conditions in India. However, early indications are that the US market continued to perform well, and the Chinese market, while slowing considerably, still showed positive growth.

Production
In the first six months of 2012, De Beers’ production totalled 13.4 million carats (H1 2011: 15.5 million carats). In light of prevailing rough diamond market trends, and in keeping with De Beers’ stated production strategy from Q4 2011, operations continued to focus on maintenance and waste stripping backlogs. This strategy has enabled De Beers to meet Sightholder demand for rough diamonds while gradually positioning the mines for future increases in demand.

Projects
Debswana’s Jwaneng Mine Cut-8 extension project is progressing satisfactorily, on schedule and on budget with infrastructure construction now 98 per cent complete.

In South Africa, De Beers Consolidated Mines’ (DBCM) Venetia Underground project is progressing through final approvals and regulatory assurances.

In Namibia, Namdeb’s Elizabeth Bay Mine is now ramping up production.

In Canada, the Gahcho Kué project permitting process is on schedule.

Brands
In downstream activities, Forevermark (the diamond brand from the De Beers Group) continues to grow, particularly in the core markets of China, Japan, India and the USA. The brand has also launched in South Africa, Canada and the UAE this year, and is on track for the ambitious growth targets planned.

During H1, De Beers Diamond Jewellers saw growth in its core jewellery market, but saw a decline in the high-end market reflecting overall retail trends. De Beers’ retail network expansion continues, with plans to open three new stores in Mainland China before the end of the year.

Agreements
In May last year, DBCM announced the entering into of an agreement with a Trans Hex subsidiary, Emerald Panther Investments 78 (Pty) Ltd, in respect of Namaqualand Mines. The long-stop date has been extended to 31st July 2012.

In the United States, the agreement De Beers entered into in 2006 to settle all outstanding class actions against it finally became unconditional, and fully effective in May 2012. Since 2006, US$295 million of settlement funds have been held in an escrow account, and it is anticipated that these funds will be released in accordance with the court-ordered plan of distribution. The settlement is part of De Beers’ clear strategy of being legally compliant in all the jurisdictions in which it operates, and allows De Beers to do business in the USA in future.

Shareholders
All regulatory consents have been granted, in unqualified form, in relation to Anglo American’s proposed acquisition of Central Holdings Ltd’s (representing the Oppenheimer family interests) 40 per cent interest in De Beers. The Government of the Republic of Botswana will indicate its intention regarding its pre-emption rights within the next few weeks. The shareholders continue to anticipate that the transaction will close during Q3.

Outlook
De Beers expects trading conditions in the mid-stream to remain challenging during the second half of 2012. De Beers will continue to produce in line with Sightholder demand and invest in stimulating and capturing consumer demand growth.

Provided there are no unforeseen economic shocks, De Beers expects to see moderately positive growth in global diamond jewellery sales for the full year 2012, albeit at relatively modest levels, especially when compared to the exceptional growth levels seen in 2011. In the short term, the USA, China, the Gulf and Japan are expected to contribute the bulk of the growth, while India and Europe are expected to remain weak.

In the long-term, the fundamentals of the diamond industry remain strong as demand will continue to outstrip supply.

Rapaport News is not responsible for, and does not endorse, the content of any press release. Press releases are not written by us and are provided only as additional information for our clients.
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