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De Beers Profit and Revenue Soar in 2014

Feb 13, 2015 4:27 AM   By Avi Krawitz
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RAPAPORT... De Beers underlying earnings jumped 74 percent year on year to $923 million in 2014, according to Anglo American’s share in the diamond company, as growth was driven by higher rough diamond prices and lower operating costs.

“For this type of performance, we needed the market and the diamond market was pretty good in 2014,” said Philippe Mellier, CEO of De Beers (pictured). “We saw that the second part of the year was weaker and the selling season around Christmas was slightly lower than expected, but the U.S. performed very strongly overall. China was a bit on the low side, while India has started to pick up again after a challenging two years.”

Mellier noted that the diamond market was robust until around September, after which demand weakened due to a lack of liquidity in the diamond pipeline. He added that similar weak conditions continue in early 2015, but the company expects the market to rebound in the second quarter of the year.

De Beers is 85 percent owned by Anglo American and 15 percent by the Botswana government.

Sales & Prices

Anglo American’s share of De Beers revenue rose 11 percent to $7.11 billion in 2014, while rough diamond sales increased 12 percent to $6.5 billion. The remaining $614 million was generated mainly by the company’s Element Six industrial diamond business, as well as some consulting revenue and the De Beers Forevermark brand. Forevermark increased its retail presence by 20 percent to more than 1,500 retail outlets, while its laboratories graded 50 percent more diamonds than the previous year, Mellier stated.

Bruce Cleaver, De Beers executive head of strategic and corporate affairs, explained that revenue growth was driven by a higher volume of sales and better prices. The company’s average rough price index increased 5 percent, although realized prices remained flat at $198 per carat due to a marginally lower product mix.

The company noted some softness in rough prices toward the end of 2014 and in early 2015 and estimated that polished prices ended 2014 broadly in line with where they started the year.

On a 100 percent basis, the volume of sales increased 15 percent to 34.4 million carats, while Anglo American’s share of sales grew 12 percent to 32.73 million carats. During the year, De Beers supplied more goods to the Botswana government for its own independent sales program, which was launched in late 2013 by Okavango Diamond Company.

Production Growth & Costs

De Beers production rose 5 percent to 32.6 million carats during the year and the company expects production to stay in the range of 32 million to 34 million carats in 2015. De Beers has mining divisions in Botswana, which accounts for about two-thirds of its total production, as well as in Canada, Namibia and South Africa.

Cleaver stressed that the company’s profits are largely being reinvested in future production. Funds are predominantly being filtered to develop the Gahcho Kué mine in Canada and toward expanding the Venetia (pictured) underground mine in South Africa and the Jwaneng Cut-8 project in Botswana. Approximately $850 million has been earmarked for these projects in 2015, compared to $700 million invested in 2014.

De Beers reported that operating costs in 2014 benefited from a favorable exchange rate as the South African rand and Canadian dollar weakened against the U.S. dollar. Cleaver added that operating costs improved due to greater efficiencies at the mines, particularly in Botswana, while the sharp reduction in oil prices had only a marginal effect as the decline came toward the end of the year.

He said lower oil prices would likely have a greater impact on reducing costs in 2015, although these would be partially offset by higher electricity costs in southern Africa and a lower benefit from currency movements than in 2014.

Anglo American’s share of De Beers underlying earnings before interest, taxation, depreciation and amortization (EBITDA) grew 25 percent to $1.82 billion, while earnings before tax and interest (EBIT) rose 36 percent to $1.36 billion.

New Contract & Outlook

De Beers is currently negotiating new three-year contracts with its sightholder clients that will begin in March 2015. The company has stressed that sightholders will have to comply with more rigorous financial and governance criteria to be eligible for supply.

Cleaver noted that applications have not been affected by the new requirements or the current softness in the market.

“We’ve been pleasantly surprised by the level of applications, and by the cooperation by sightholders to transition to a more transparent and robust business,” he said. “It’s no secret that it’s been a tough time for manufacturers, but we’re pretty confident that we’re going to come out of this with a very strong list of clients.”

Cleaver added that sightholders’ profitability is taken into account by the company as it considers its supply and price structures on a sight-by-sight basis. As a result, prices were reduced by an estimated 4 percent at the January sight, while supply has been relatively low in the past two to three sights. Still, Cleaver noted that the company ended the year with relatively normal inventory levels and that the weaker market has not affected its operations.

He added that while liquidity levels remain weak, they have not deteriorated further in 2015 and that the outlook for the year is still positive. “We’re expecting a solid but a slightly tighter year than last year as the combination of forex tailwinds and prices level off from 2014,” Cleaver said.

De Beers accounted for 23 percent of Anglo American’s revenue and 42 percent of its underlying earnings. The diamond division achieved a return of capital employed of 15 percent, in line with the target set by Anglo American for 2016.  
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Tags: Anglo American, Avi Krawitz, Botswana, Bruce Cleaver, De Beers, diamonds, Jwaneng, Mellier, Rapaport, Sightholders
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