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Just Another Diamond Miner

Editorial

Jul 21, 2011 2:33 PM   By Avi Krawitz
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RAPAPORT... De Beers is expected to post strong gains in its interim financial results scheduled for release on Tuesday (July 26, 2011) as diamond mining profits were boosted by the strong rough prices during the first half of the year. Production at De Beers, and at other major producers, is expected to be basically in line last year or slightly up.

The report will show just how dependent De Beers is on the rough diamond market which has shown spectacular growth so far in 2011, but is ever susceptible to risk as the company so harshly learned in the great recession three years ago. De Beers surely has greater long term aspirations and will be looking to enhance its products along the pipeline such as the Forevermark, its retail footprint at De Beers Diamond Jewellers (DBDJ), and its synthetic program at Element 6, as well as introducing some new initiatives to complement its rough diamond offering. De Beers cannot completely aspire to these goals until it has smoothed out its rough portfolio, following the sell-off of “non-profitable” mines, including the soon-to-be-closed Finsch mine deal, and until it has consolidated its rough marketing and distribution strategy.

Therefore, while the financial statements are expected to make for interesting and impressive reading, more attention should be paid to whether the company announces its new marketing agreement with the Botswana government. The release may also provide the first opportunity for De Beers new chief executive officer (CEO) Philippe Mellier, who officially started in the position this month, to make a public introduction to the industry.

The prospective Botswana deal and Mellier are the two forces expected to drive the company forward in the coming year and beyond. While Mellier is unlikely to make groundbreaking decisions so soon, an announcement on Botswana is indeed expected, lest the negotiations, now seven months overdue, have run into glitches which will require the CEO’s hand.

The Botswana agreement will, among other issues, dictate how De Beers sells its Debswana production over the next five to ten years. The government is seeking to expedite development of its beneficiation industry by making upwards of 10 percent of Debswana output available to be tendered in Gaborone.

Debswana, which is an equal partnership between De Beers and the Botswana government, yielded 22.218 million carats in 2010 accounting for about 67 percent of De Beers total production. The contribution of 2 million to 4 million carats will indeed boost the government’s diamond hub program, as explained in the editorial “Living Up To Diamonds,” published on April 7, 2010. For De Beers, however, these volumes will likely cut into the goods made available to sightholders. They may well have a bearing on the company’s DTC sightholder selection process being conducted over the next five months.

De Beers already appears to be moving towards a more diversified sales mechanism, diminishing the role of the DTC supplier of choice program (SoC), as the group has put more emphasis on its Diamdel online auctions. Diamdel customers now compete for goods with sightholders at the auctions, which were traditionally reserved for the non-sightholder market. Furthermore, Diamdel’s non-sightholder customers will be given the opportunity to become sightholders even after the next SoC contract period begins in April 2012, based on their performance at the auctions and if supply warrants it.

There is therefore a clear merging of interests between DTC and Diamdel, or, perhaps a balancing of the scales between the two subsidiaries. De Beers may well be looking to incorporate that strategy in the Botswana agreement.

For now, DTC’s sales continue to contribute the bulk of De Beers revenues. Conservative Rapaport estimates indicate that DTC sales rose 14 percent year on year to approximately $3 billion in the first half of 2011 as average prices rose by more than 35 percent during the period. DTC raised prices another 10 percent on average at this week’s very large July sight, which was valued at an estimated $850 million.

De Beers should continue to show growth in the second half of the year, albeit at a slower pace, as demand is expected to rise again as preparations pick up for the Christmas season, following a short period of consolidation over the next month or two. The second half is generally a calmer period for the rough market, at least based on 2010, with the first half driven by restocking after Christmas, Diwali and the Chinese New Year. Still, increased liquidity in the market driving dealer demand, and the forecasted continued uptrend in retail jewelry sales in the Far East, India and the U.S. should ensure that rough diamond sales by mining companies continue to grow in the rest of the year.

During that period De Beers focus will be on assessing the contract proposal questionnaires (CPQs), which were submitted before the July 7 deadline, to determine the DTC list of sightholders for the next SoC contract period. More significantly, it is hoped the company will be able to move ahead implementing its new Botswana marketing strategy, with the agreement hopefully signed and sealed.

These issues will provide Mellier with sufficient teething time to envision a longer term program for the company. Indeed he will be required to look beyond Botswana and SoC to move De Beers forward through the next “diamond decade.” That strategy, one would assume, will focus on enhancing De Beers position as a leading luxury company, rather than being just another diamond mining company. For now, it remains just that, unless next week’s results announcement prove different.

The writer can be contacted at avi@diamonds.net.

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Tags: Avi Krawitz, Botswana, De Beers, diamond, diamonds, Jewelry, Philippe Mellier
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