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Opportunities in Difficult Times

Jan 21, 2009 8:40 AM   By Gareth Penny
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RAPAPORT... The following speech was given by Gareth Penny, managing director of De Beers, at the Diamond Trading Company (DTC) annual Sightholder cocktail party on January 20, 2009.

Varda, thank you for your remarks and for the bold and decisive action the DTC is taking. I am confident that your leadership, and that of the DTC, will provide all of us with the poise and resilience that will be so necessary as we weather and emerge from the global recession. I’d also like to thank you, Nicky. I have often said how lucky I believe the men and women who work at De Beers are to have, in you, our chairman, someone with such continuity, perspective and wisdom. But perhaps now, more than ever, this is particularly true. If you’ve not seen it all, you’ve certainly heard about it all -- and [as] the industry sails into unchartered waters in an uneasy time, we are privileged to have your insight and judgment to guide us.

But of course, Nicky is not the only one in this room whose father and grandfather have helped to shape the businesses that are represented here today. You are leaders of an industry built by families over generations.

Generations that have seen world wars, a depression and too many booms and busts to remember. But none of us have ever seen anything quite like this. I don’t have to tell you that these are difficult times. We see it from Main Street to 5th Avenue. You see it in your orders from clients, you see it in your investments and you see it in your inventory levels. And it is in times of acute change, when we sit firmly on the other side of the looking glass, that uncertainty festers, eventually giving way to fear, which often breeds shortsighted irrational behavior.

But as our forbearers who stared down all those threats all those years ago taught us, and what your attendance here tonight is testament to, is that levelheaded leadership in a time of crisis positions you well to weather the storm.

One of my favorite parts of my job is that I get to interact with the full length of the diamond pipeline. As I travel from Europe to Africa and America to Asia, I meet people from different backgrounds with different skills. And while in this time of uncertainty their circumstances are varied, their concerns are singular. From miner to marketer, and from manufacturer to shop assistant, they all want to know whether their businesses and their jobs will survive the crisis.

Conventional wisdom says that this will be one of the industry’s most difficult periods. I say it will be our proudest moment. Years from now, when they write the history of this period, I believe it will be those who kept their head, those who remembered the intrinsic qualities that make diamonds the most desired product on Earth and treated it how a natural treasure deserves to be treated, who will emerge from this unprecedented period set for long-term growth.

So, how does a natural treasure deserve to be treated?

• First, there is no point in producing or trying to sell it when there is a limited market for it. Which is why De Beers has announced that across our operations we will reduce our ordinary levels of production and produce in line with your needs. While exact production targets will fluctuate up and down as demand changes, I can tell you that our reduction in production will be significant.

• One must also remember the strong long-term fundamentals of the product. Diamonds are rare and getting rarer. With approximately only 20 years of known diamond reserves left in the ground (at 2007 production rates) and with future demand growth in emerging markets, demand is likely to significantly outpace what is forecast to be lower levels of diamond supply for many years to come.

• We must understand how the end consumer feels about and interacts with the product. The major retail chains in the U.S. have thanked De Beers for our recent marketing investment -- our largest ever -- during the U.S. Christmas buying period. Research shows that in uncertain times consumers gravitate towards quality; they buy fewer but better things -- things that last, which are not disposable and that hold their value over time. Clearly diamonds, which -- history tells us -- tend to hold their value -- both financial and emotional -- over time, are uniquely positioned to fill a void for consumers in this new reality.

• We must remember all the progress we have made in providing our consumers with assurance that the diamonds we sell are free from conflict and make an important contribution to the communities where they are mined. We cannot take our eye off the ball and give our consumers any excuse for why they shouldn’t be purchasing diamonds during this period.

• Finally, we must not forget the responsibility we all have to the producer countries. De Beers believes that sustainable and profitable business can only grow in communities that foster stable, secure and predictable environments, which is why we have worked for decades, in partnership with government and community leaders, to create these conditions at our operations in Botswana, Namibia, South Africa and Canada. As the strength of these communities and our joint venture partnerships will be important assets as every country in the world struggles to weather the economic crisis, our long-term commitment to beneficiation is unflinching.

So, in the medium- to long-term, as the supply/demand gap widens and consumers’ behavior matches their changing attitudes, we should all be very excited about the future opportunities for diamonds. But of course, the problem with the long-term is getting there. And getting there won’t be easy, but without action in the short-term there can be no success in the long-term.

So let me say a few things about getting there so that we can all partake in that long-term success. As I tell all of our mine managers and sales managers -- plan carefully. Understand where you sit in the pipeline and what your position can bear. As you plan, understand that we believe our prices remain competitive and you should expect to see -- and as Varda mentioned -- tremendous value in your boxes.

While difficult, we all must ensure that we are running streamlined businesses that are fit for purpose during the economic downturn. Difficult times often present opportunities to take action that we all know we should have taken long ago. Businesses simply cannot expect to sustain themselves at the same cost base that they’ve always had. The world is a different place, and structures must reflect this, which is why De Beers has already begun the process of reducing our capital expenditure, cutting discretionary spend and reviewing staffing levels across our operations worldwide.

Fortunately, De Beers took extraordinary steps during the past several years to reshape its mining portfolio and sales strategy -- putting us in a strong position to weather the current turmoil. Specifically, De Beers has:

• Divested a number of marginal mines while focusing on profitable production growth;
• Streamlined operations to reduce overheads and improve efficiency; and
• Created improved diamond sales and distribution systems.

Generating demand by further uncovering consumers’ shift to “fewer, better things” will be essential if growth is to be restored. I am excited to announce tonight that De Beers will unveil a new big idea later this year to drive demand for diamond category growth. I think you will be impressed by the work of our team and we believe that the concept will serve as a catalyst for sales, like the three-stone ring has been in the past.

In addition, I was in Asia two weeks ago reviewing the rollout of Forevermark. I can tell you from firsthand experience that the material and product look terrific and we are excited about the brand’s growth potential, first in Asia and subsequently in other specially selected markets around the world.

We are also making progress with what has been called “St. Petersburg II,” which is at this stage a concept for an industry body that would both synthesize and generate industry standards and consumer demand. This is a very exciting initiative that you will no doubt be hearing more about in the future.

But there is only so much De Beers can do. The onus is on you, amongst the best diamantaires in the world, to seek out and exploit niche and emerging markets with innovative marketing programs and products such as wedding and engagement rings, which will be buoyant throughout the economic cycle.

In closing, make no mistake, the near-term will be difficult. Nobody knows how long the recession will last or how deep it will go. But it will be difficult for nearly every industry the world over, and, if given the choice, I know what product and which partners I’d bet on for the long-term.

Levelheaded leadership gleaned from generations of experience, treating Mother Nature’s natural treasure as it deserves to be treated and taking bold action in the short-term with unflinching confidence in the long-term will help define diamonds for years to come and will see us through this crisis and leave us standing stronger for the future.

When Nicky began the remarks this evening, he quoted Winston Churchill, so for the sake of symmetry, I would like to do the same. Well over half a century ago, Churchill said: “If we are together nothing is impossible. If we are divided all will fail.”

As we prepare for the year ahead, it is important to reflect on all we have accomplished together, all we have yet to do, and that thankfully...a diamond is forever.

Thank you
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Tags: Consumers, De Beers, DTC, Gareth Penny, Government, Namibia, Production, South Africa
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