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De Beers Cuts Output Guidance as 1H Earnings Slump 23%

Jul 24, 2015 2:30 AM   By Avi Krawitz
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RAPAPORT... De Beers revised its production guidance for the year as underlying earnings fell 23 percent year on year to $360 million in the first half of 2015, according to parent company Anglo American.  The decline resulted from softer rough diamond demand, which was partly offset by lower operating costs and favorable exchange rates. Production cost per carat declined by 10 percent, while the company did not disclose full cost data.

Highlights pertaining to De Beers performance from Friday’s report included the following items:

• Rough diamond sales fell 21 percent to $2.7 billion;
• Revenue – including rough sales, Element Six and Forevermark – decreased 21 percent to $3.02 billion;
• Sales volume dropped 27 percent to 13.3 million carats;
• De Beers rough price index fell 8 percent during the six-month period;
• Average realized price increased 7 percent year on year to $206 per carat;
• Underlying earnings before interest and tax (EBIT) fell 25 percent to $576 million;
• Underlying EBITDA decreased 19 percent to $792 million;
• Return on capital employed (ROCE) improved to 12 percent from 11 percent last year;
• Capital expenditure grew to $363 million, compared with $311 million in the first half of 2014;
• Exploration expenditure fell 13 percent to $18 million; and
• Production fell 3 percent to 15.6 million carats.

The company lowered its full-year production guidance to between 29 million carats and 31 million carats from its previous forecast of between 30 million and 32 million carats. Bruce Cleaver, De Beers head of strategic development, told Rapaport News that the decrease would probably be implemented across the group’s operations whereas first-half production was primarily reduced at De Beers tailings operations.

Given the challenges faced in the midstream during the first half of 2015, rough diamond demand is likely to remain constrained for the year, with demand in the second half dependent upon the level of retailer restocking, according to De Beers.

Consumer Demand Stagnates

The company expects diamond jewelry demand to be stable in 2015 following 3 percent growth in 2014, with slower demand in China representing the biggest downside risk.  Cleaver noted that retailers were overstocked during the first half as Christmas 2014 was a bit slower than expected. Furthermore, a large volume of goods that was stuck in the pipeline last year was released to the market in 2015.

In particular, Cleaver noted that Chinese retailers held larger inventory than he thought, especially as a slowdown in Hong Kong and Macau further affected sales, with  tourist traffic from Mainland China being weaker and the Chinese government’s anti-corruption campaign on luxury sales in full swing.   Global demand for diamond jewelry was stagnant in the first half, with weaker-than-expected U.S. demand during the first quarter along with the strengthening dollar in non-dollar denominated markets.

With higher-than-expected retail stock levels, polished diamond demand softened in the midstream and polished prices declined during the period. This, combined with liquidity and working capital challenges, has put pressure on midstream finances, negatively affecting rough diamond sales in the first half of the year, De Beers stated.

Tough Time For Everyone 

Cleaver added that if consumer demand remains stable, De Beers expects some improvement in polished demand in the second half of the year, ahead of Christmas. For now, however, rough demand remains low and sightholders rejected up to 65 percent of goods at the recent July sight, which closed with an estimated value of $200 million.

Marc Cutifani, the CEO of Anglo American, cautioned that he expects the diamond market to remain challenging in the second half of the year.

In response to the weak market, Cleaver stressed that De Beers has been flexible in reducing supply and prices, particularly as it has adjusted its production plan for the rest of the year. Cleaver reported that De Beers rough diamond price index has declined by 8 percent since the beginning of the year, although the average price achieved increased 7 percent year on year to $206 per carat during the period due to a stronger product mix.

Cleaver declined to comment on the company’s supply and price considerations at future sights, but stressed that the company will work with sightholders to navigate the weak market.  “We know it’s tough and that they’re having a tough time, but it’s not a time to make short term irrational decisions,” Cleaver said. “We must remember that the long-term fundamentals of this industry remain good and we’re going to listen to their concerns and work with them to try and make the second half a little better.”

De Beers is 85 percent owned by Anglo American and 15 percent by the Botswana government. De Beers accounted for 23 percent of Anglo's total revenue and 40 percent of underlying earnings. Anglo shares rose 2.4 percent in morning trade on the London Stock Exchange.

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Tags: Anglo American, Avi Krawitz, commodities, De Beers, diamonds, Rapaport
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