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De Beers South Africa Unit Eyes Firm on Profitability

Jul 2, 2008 11:20 AM   By Avi Krawitz
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RAPAPORT... The De Beers Group has positioned itself away from controlling diamond supply towards focusing on profitability, a move which is expected to be reflected for the first time towards the end of 2008 through 2009.

By then, the company would have completed the hand over of its “non-profitable assets,” in particular that of the Cullinan mine to Petra Diamonds, expected to take effect in the coming months, and a number of recently launched new mines would be operating at full tilt.

Most of the assets sold off in the group’s restructure, including the Cullinan, Koffiefontein and Kimberley Underground operations, were from its South Africa portfolio, and while the company says production will likely stay the same for now, you can expect to see a more efficient operation with a long term game plan.

“We’re able to focus our resources on the assets that give us the return that we want, thereby positioning ourselves in a place where we are better able to grow,” Dieter Haage, head of operations at De Beers Consolidated Mines (DBMC,) the group’s South African unit, told Rapaport News in a recent interview. “Where in the past we would mine every resource to the last diamond, I think we have a much healthier focus that has come in to say, what’s the sensible asset portfolio to ensure growth in shareholder value and profitability.”

DBMC’s production grew 3 percent to 15 million carats in 2007 (see table at end of story for Group's full production figures.) While 964,000 carats were from Cullinan and will impact the total this year, or at least from the second half of 2008 when the mine leaves the De Beers stable, Haage is confident the move will enable the company to ramp up production at other assets, in particular at its Venetia, Finch and Voorspoed mines.

De Beers is looking to extend the life of Venetia as it prepares to mine cut-5 in an open pit and then potentially shift to underground mining. Production at Venetia rose 12 percent to 9.08 million carats in 2007 and more importantly, Haage explains, Venetia is now looking at potential mining life of up to 2030.

At Finch, where production fell 2.6 percent to 2.33 million carats last year, Haage explains DBMC recently invested in a treatment plant upgrade aimed at making the plant more profitable and extending its life to around 2024.

In addition, the Peace of Africa mining vessel operating in the South African sea areas launched in 2007 and is now fully operational, while the Voorspoed mine in the Free State is expected to be operational by the end of the year.

Operating in South Africa doesn’t come without its challenges and production was certainly affected in March when the entire mining sector was shut down for six days due to the country’s electricity crisis. After power was restored, electricity supply was initially reduced to 80 percent consumption for the mines, which was subsequently raised to 90 percent. Haage reports that DBMC is currently operating at 95 percent of full consumption and is able to operate all its mines at full throttle through its own power generation.

Since introducing its restructure program, DBMC has maintained that while its own production may be affected, South Africa’s total will not be and in fact may increase as new owners find new profitability in old mines. Mining at Koffiefontein, for example, had been stopped by De Beers, and re-launched by new owners Petra Diamonds where production is currently on the rise. A similar ramp-up is expected at Cullinan.

Haage insists, however, that DBMC’s production will not be too badly affected.

“I think on balance, if I look at South Africa for the whole of this year, production will be kind of less, but not by a large percentage at all, because you have some new mines coming in slower than say Cullinan is going out,” Haage says. “So it will be a little trough and then we will be looking up in a year’s time.”

“We are not going to increase significantly until we find the next mine, then you will see a significant step up,” he adds.

Power shortages and the transfer of mines aside, Haage says the shortage of skilled personnel in the industry is amongst its biggest challenges, as are rising input costs such as fuel and steel, and political considerations as the South African government seeks to transform the industry to play a broader role in economic growth.

As the De Beers restructure program comes to fruition, Haage is confident it created a win-win for all parties affected.

“We’ve honed our resources of assets which give us a return, which our shareholders are happy with and we’re a much leaner, slimmer, athletic organization,” he says. “Having done that, we’ve also given other players opportunity to move from small to mid-tier companies which is clearly good for the industry, and it’s good for transformation because there’s a significant empowerment shareholder stake in each of those transactions.”

“So it’s a win-win situation,” he adds. “It does mean fewer carats but it also means better and improved profitability.”

De Beers Production Statistics
          Carats recovered (thousands)
200720062005Notes
 Cullinan9641,150 1305  Transfer to Petra expected by end of July
 Finsch2,3342,275 2216  
 Kimberly and Contractors1,6381,945 1897  
 Koffiefontein  124  Stopped mining in 2005, sold to Petra in 2006
 Namaqualand and contractors767 9781014  
 The Oaks94103 86  Mining ceased in April 2008, Mine to close in 2009
 Venetia9,0818,117 8515  
 South Africa Sea Areas(SASA)121   
 Voorspoed    Production expected to start in 2009
 De Beers Consolidated Mines14,998 14,56815,157 
 Land999 1,035798 
 Sea1,177 1,050977 
 Namdeb2,176 2,0851,775 
 Orapa18,708 17,33814,890 
 Letlhakana1,113 1,0891,097 
 Damtshaa341 228303 
 Jwaneng13,47615,63815,599 
 AK-06    Production expected to start end of 2009
 Debswana33,63834,29331,889 
 Snap lake81   Full production expected mid-2008
 Victor    Production expected to start mid-2008
 De Beers Canada81   
 Williamson Diamonds220189190 
 Grand Total51,11451,13549,011 
 * Figures for 2005 to 2007 as presented in the De Beers 2007 annual report
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Tags: De Beers, De Beers Canada, Debswana, Government, Namdeb, Petra Diamonds, Production, South Africa
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