ANGLO AMERICAN DE BEERS SEMINAR – 3 NOVEMBER 2014
MARK CUTIFANI, PHILIPPE MELLIER, BRUCE CLEAVER,
PAT LOWERY, GARETH MOSTYN
Mark Cutifani
Ladies and gentlemen, very good to see you here. Quite a good turnout actually. I’m very pleased
to see you this afternoon. I am going to be relatively short because I think it is most important to
get the De Beers team up under Philippe. I’m just going to make a few very quick observations.
Firstly, to answer the first question, De Beers fits the Anglo American portfolio like a glove. It’s a
firm and determined hand. Our relationship has been a long one and we do know each other like
an old married couple. So if I could say that our most recent transaction, the 40% stake purchase,
is a bit like renewing one’s marriage vows. Today you will hear how the relationship is continuing
to develop and improve, mature. And if I could say, based on the results we’ve seen so far we’re
very pleased that we have renewed those vows and certainly very happy with the progress the
team has made.
Anglo American’s value proposition to shareholders is a relatively simple one. We are the mining
industry’s diversified miner. We believe our portfolio mix will outperform our peers through the
cycle as we focus on quality assets across ten commodities. Some may get nine, some may get
11; if you throw palladium in you will get ten. A mix of commodity, geography and downstream
market diversity is unique in our industry, helping us manage risks and recognise opportunities
not available to other industry players. Our focus on mine to market value opportunities will help
us reduce cost and realise prices to support margin growth. And we have certainly seen that in
the relatively short time that we’ve been working on both of those areas. And in De Beers you will
see that story play out in a slightly different way, but nevertheless a very consistent approach in
terms of what we’re doing across the business.
Supported by a capital discipline that we have been articulating in terms of our five key steps.
Very focussed on value delivery, and of course in De Beers with the new investments that we’ve
been talking to – really incremental additions to the portfolio – we see a very exciting story. So the
reason why we believe the mix works is we understand the market and the nature of the diamond
business. That is as Anglo American with our team. We operate in complementary jurisdictions
and the breadth of the Anglo American reach supports De Beers in its strategic positioning. The
new Anglo American operating model and the technical depth we are building with De Beers will
support their improvement and our own improvement across the group. And if we look at the
significant savings that we’ve made already in terms of the integration I think the value
proposition is a compelling one.
Right across the board the depth that we’re building in the talent pool will certainly support De
Beers achieve its objective. And as a final comment, Philippe reminds us with his executive
committee that diamonds is not a commodity. Our involvement with De Beers does give us a
unique perspective in terms of markets, and an extra string to our bow, in our view, in making
sure that we are taking the learnings that they have developed over the years back into our longterm relationship model that we think is also another key differentiator that we are building in this
industry. Looking at the realised prices and how we are doing against our peers in met coal and
other commodities we think that relationship model is a very important one.
To simply demonstrate how far we’ve come in a very short period of time, De Beers has delivered
a material and improved contribution to our first half earnings, as you would have seen. The De
Beers team is well on the way to hitting its and our 2016 ROCE target for the group even after
taking into account the price paid for the 40% stake. So at the De Beers level I’m very impressed
with the progress they’ve made. Certainly across the board good progress on all fronts. We have
seen a number of value opportunities that will help us exceed that potential we first saw back in
2012. So, again, making sure that that investment is a very strong one, or certainly one that will
enhance both groups. So, without further ado, I will pass over to Philippe. I know you as well as
we are very keen to hear the De Beers story.
Philippe Mellier
Thank you Mark. Now we are going to switch from a slight Australian accent to a very strong
French one now. I hope you can understand what I am going to say. We are going to present and
after that we will have around half an hour for Q&A at the end of the presentation.
I’d just like to make some introductory comments to set the scene, and after that with the team we
will move into more detail. Here I am with key members of my team, Bruce Cleaver, who is the
Executive Head of Strategy, Pat Lowery, our Executive Head of Technical, and Gareth Mostyn,
our Finance Director. Bruce will cover the industry and the midstream part of the business, and
Pat will be covering the upstream part of the business and the financials will be with Gareth.
We all believe at De Beers that we are very well positioned for growth. In the next one hour and a
half during our presentation we will try to give you a sense of why we are of this opinion. I hope
that many of you have been reading very carefully the 2014 diamond insight report we recently
published. I have seen that some have it. And we have provided some spare copies on your left
here. I think it is going to give you a good flavour of why the industry is looking at the future and
where the opportunities in the diamond pipelines are lying ahead of us. We will be very happy to
take any questions you may have at the end of the presentation.
As you may have heard before, and Mark has already said, diamonds are different and diamonds
are not a commodity. But they fit the profile of commodities in some ways. There are many
important distinctions to be made when we compare diamonds to other products in the portfolio of
Anglo American like iron or platinum. The fact that diamonds are not homogenous is one obvious
example, as it means that there is inimitably more complexity in the selling and marketing of our
product and an attendant requirement for more specialist knowledge when looking to maximise
value of every diamond we sell.
Perhaps the most significant difference to consider today relates to motivation to buy them.
People really don’t need to buy diamonds in the same way as they need to buy iron for largescale manufacturing activities like cars or infrastructure, or platinum for automotive reasons. For
many reasons this insight has been the cornerstone of De Beers’ and the diamond industry’s
success in the past and today, and we have been able to employ our marketing expertise to
establish a uniquely powerful emotional niche for diamonds, the famous diamond dream.
So although people may not need to buy diamonds in the same way as they need to buy iron or
platinum, telling your beloved that she doesn’t need a diamond engagement ring is not really an
option certainly for the males that are present here today. What this means is that consumers’
desire for diamond jewellery is the only true source of value in the diamond industry. And
understanding the consumer is therefore crucial to sustainable success in the diamond industry.
Over the course of the afternoon for the next one hour and a half we will give you an overview of
the assets and the activities within De Beers. We believe this represents the investment highlights.
We believe that the value of De Beers is driven by a unique combination of tangible assets,
intangible assets and a highly favourable industry outlook, and our ability to capitalise on this fully
as a result of our full range of activities and operating structure. We will cover that in more detail
with Bruce later on.
Of course one of the most important of our tangible assets is a portfolio of mines well positioned
on the cost curve with long life reserves. Pat will be going through that in much more detail.
Intangible assets include our rough diamond trading expertise, our iconic brand strength – the De
Beers brand is clearly one of the most well-known brands around the world – and outstanding
relationship with key stakeholders. Each of these is fundamentally important to our ability to thrive
today, as well as our potential to grow. And our growth prospects are further enhanced by a
favourable industry outlook that sees growth in supply outstripped by growth in demand even in
the most pessimistic outlook.
As this demand is expected to be driven substantially by the growth of middle classes in
emerging markets such as China and India today, potentially Indonesia or Philippines tomorrow,
this represents an important point of difference for the Anglo American portfolio. Diamond
demand has spiked later in the economic cycle than other commodities, and this significantly
mitigates some demand side risks. We will address each of these areas in more detail, but one
more important point to make at this juncture is that when it comes to De Beers the whole is more
important than the sum of the parts.
De Beers’ strategy is focussed on sustainably capturing the maximum value of each carat mined.
This is something I repeat with the team many times a day. As consumer desire for diamond
jewellery is the only true source of value in the industry we put the consumer at the start of the
pipeline and then develop a holistic strategic approach to support this insight with our activities
elsewhere in the value chain. And we cover most of the points in the value chain.
De Beers’ activities span the diamond pipeline, and this differentiates De Beers from other
companies in the diamond business, providing a unique competitive advantage in many areas.
For example, understanding consumer trends, different diamond jewellery markets, trading in the
marketplace like credit terms, inventory and so on and so forth, and how to best mine and sell
rough diamonds. And on the other side, understanding upstream trends and the capabilities of
midstream players supports the development of effective strategies for downstream activities with
Forevermark and De Beers Jewellery.
The process of De Beers’ integration with Anglo American has provided a number of benefits in
many upstream areas. For example, technical expertise from Anglo American has been
instrumental in the improvement at the Snap Lake mine in Canada. Clearly Pat will be covering
much more of that a little bit later. So this is it for my very short introduction. I will be back here to
talk about the company structure. I would like to invite Bruce on stage to talk about the industry
overview.
Bruce Cleaver
Thank you Philippe. Before I start I think it is probably important to spend a bit of time placing the
industry in context. Hopefully at the same time this will help explain to you why we think the
diamond industry is such an attractive industry, and why we think De Beers’ position in the
diamond industry is such an attractive place, so why we feel so well positioned in this industry for
the future.
I also touch in this section – although it is not the principle purpose of today’s presentation – on
just a few future trends that we see in the world that faces us. A lot of that is contained in the
Insight Report that Philippe mentioned. But I think it is very important to note that we think hard
about the future consumers and the future world into which we will be selling diamonds.
To start with an obvious point, I think it is very important that we bear this point in mind as we go
through this presentation. Diamonds are an end consumer product only. Polished gem diamonds
set in jewellery account for effectively 100% of all diamond value. So I think it is important to bear
this in mind along the way through this presentation. Other precious metals such as gold and
platinum, as you all know, have other uses too, be they for investment purposes, industrial
purposes or even in the autocatalyst industry. But there really is no other use for polished gem
diamonds than end consumer demand.
It is probably also worth bearing in mind as we go through this that there are a number of reasons
consumers buy polished diamonds. Probably the two most important are firstly an extremely
important emotional need. So people do feel the desire very strongly to express emotions by
purchasing polished diamonds. And secondly, they represent, in a not insignificant amount, a
financial store of value. So those are the key reasons why people will buy diamonds ahead of any
other product when they are in this area of purchasing.
Another thing to bear in mind on the right-hand side of that slide is no two diamonds are the same.
This to some extent explains why it has been so difficult to create an investment class in
diamonds. Those pictures on the right-hand side of the picture are to some extent obvious, but it
is worth remembering this. On the top you have one diamond worth $500,000. That could be 50
to 100 carats for example. You have a smallish parcel of diamonds in the middle worth the same
amount. And at the bottom you’ve got quite a big bucket of diamonds. These will be less that 0.1
of a carat. So thousands and thousands of them which collectively will be valued at $500,000. So
no two diamonds are the same.
Growth in demand for diamonds is very strongly correlated with greater economic activity. So
there are two pictures on this slide. They both represent indexed polished diamond consumption
in the US against two obvious measures. One is real GDP growth and one is personal disposable
income. Generally speaking when people feel positive they are inclined to spend more. It’s not
unusual in the luxury world. When they feel negative they are inclined to spend less. When we
touch later on about why we feel De Beers is so well positioned in the industry we bear this in
mind, because our core markets are markets that are performing very well.
Touching on that now, the two main markets for polished diamond sales are the US and China.
And our analysis leads us to think that they will remain the key markets for diamond consumption
for the considerable future. So, on the left-hand side of this picture, diamond consumption as at
2013. The US represents about 40% of global diamond consumption, greater China about 16% and we include Hong Kong which is a considerable venue for the purchase of diamonds – India
8%, Japan 6%, the Gulf (largely Saudi Arabia, but not only) about 8% and the rest of the world
22%. So you will immediately see from that that the US and greater China, which are economies
that are, relatively speaking, in good shape and growing quite well relative to the rest of the world,
are our two core markets.
And if we flip to 2018, our forecast, you will see that that analysis remains largely the same. So
we say that the US in 2018 will represent about 40% of the then diamond market. China will have
grown to 19%. India will have grown a little bit to 9%. I think India may of course grow much more,
but it is a complicated country to predict. A slight tail-off in Japan and the Gulf. You will see that
our principle markets, the US and China, are very well positioned. That is why we feel so positive
about the industry going forward over the next few years.
Continued Asian purchasing, particularly Chinese middle class growth, really do make us feel
positive about the emerging world. This slide shows you projected growth in middle classes in
emerging markets. This is the reason why we feel on the non-US side (remember the US is our
most important market and will continue to be so) there is considerable upside for us. The lefthand pie chart there shows projected growth of middle classes in emerging markets from 2013 to
2018. And you will see in China the current projected rate is 129%, India 72% and very good
growth in other emerging market countries too. So in Indonesia, which is at this point not a big
market, a significant amount of growth.
The right-hand side of the slide shows you what this means in absolute terms. So the bar chart
there shows the number of new projected middle class households in 2018 from today. You will
see in America already 75% of US households are described as middle class. Another 13 million
homes will be added to that. But on the right-hand side is the really interesting piece. Up to 100
million middle class homes to be added in China over this period and 27 million in India. Frankly,
even if China’s growth is slightly slower than that we are still talking about considerable numbers
of new entrants into the middle classes.
Diamonds are also an aspirational purchase, so it plays very neatly into the emerging middle
classes. It is also important to remember that the US, which is a much more mature market and
where the buying characteristics are quite different to India or China, will remain our core market.
That is also encouraging given the economic developments in the US.
Turning now to the supply of rough diamonds in 2013. I will touch a bit on demand and why we
feel we are in such an attractive industry. In 2013, by our analysis, about 146 million carats of
about $18 billion in value at the rough level...the numbers on the previous slides were different to
this because that is what we call polished wholesale prices, which is the price at which polished is
sold on the wholesale market. The production of the world’s supply in 2013 on the left-hand side
of this picture we have broken down by geography. You can see some big differences in volumes
as opposed to values. So in volume terms Russia is the biggest producer. It produces about 25%
of all of those carats. In volume terms on our analysis the DRC was the second biggest at 19%.
A few points on this. The DRC is a producer of a large number of very low-value alluvial
diamonds. So the average dollar per carat in the DRC is about $10 to $12. Those who follow the
Kimberly Process will know that the Kimberly Process numbers are different to ours and are
slightly lower than ours. The one area where there is a considerable difference is in the DRC.
Their number is quite a lot lower than ours. We are still analysing their number before we decide
whether we make any changes to ours. Ours are based on a number of historic databases. But in
terms of value, which is what this is about, it is actually largely at the margin. Botswana is the
third biggest. And then you will see the other countries on that graph on the left-hand side.
When we look at this in relation to value – so now we’re going to look at the value of rough
diamonds sold – this we have done by company, not by country. So we say that about $18 billion
of rough diamonds was sold in 2013. These are all done at what we call SSV, which is the De
Beers terminology for standard selling value. That is the value at which rough diamonds are sold
to rough customers. A lot of the analysis you will see later will be based on this context of
standard selling value. De Beers in 2013 was the biggest producer of diamonds by value. The De
Beers Group produced about 33% of global supply in 2013. Alrosa, the now listed Russian state
entity, is the second biggest. Rio is 5%, quite a lot bigger in terms of volume but not that high in
terms of value. And then all of the juniors that many of you might know about are at 14%. And
then a few others making up the pie chart. You will see this is another reason why we feel De
Beers is so well positioned. We have a very strong market position, 33% of the diamond wealth
by value.
The other side of this is then to look out at what our view on the future production of the world will
be. And this is part of the exciting supply demand dynamic that you heard Philippe and Mark both
refer to. This is a chart produced by McKinsey which models all committed projects, all possible
projects and all probable projects. It does discount a few of those which have not got past the
permitting or financing stage. But you will see that what is really attractive for us about the future
of this industry is that supply will continue to grow quite slowly and peak in about 2017 and then
gradually tail off. That is of course one of the reasons we think this is such an attractive industry.
It is very unlikely that there will be a glut of supply coming onto the market.
The projects that are not modelled in this graph are really in terms of global diamond production
at the margins. Between them even if they were to get financed they wouldn’t make any real
change to the dynamics in this slide. This is one of the things that is so attractive for us. This is
not an industry with a considerable amount of marginal production which can easily be brought on
stream should there be an increase in price. So we feel very comfortable that the production
portfolio of the world will look largely like it has over the next ten years.
On the other side of that is the so-called supply demand curve. What we do here is we model
projected growth in diamond demand. And that is very much correlated to growth in GDP, growth
in spending, and in the particular markets in which we are strong, against the growth in
production. What this slide says to us is that however this all plays out there is a considerable gap
between growth in demand and growth in supply, and that again is very attractive for us.
There are many things that could fill this gap – and it is a complicated question as to what it is –
but for us certainly one of those we would be hoping is price. There is a healthy position generally
for us in both the industry and our market position in the industry.
Before I turn back to Philippe to start getting into a little bit of detail on De Beers, the future
industry trends which are set out in the diamond Insight Rooklet Philippe mentioned, as I say it is
very important that we think very deeply about the future because this is all ultimately about
consumer demand. And we do spend a lot of time thinking about the future and trying to position
ourselves best for the future. We launched the Report in Hong Kong a couple of months ago. It is
really aimed at the midstream, downstream and producer governments, all these key partners
who we work with. But it has insights which are interesting for all of us.
Here are some key insights. Obviously we can go another time into more detail on this, but these
are some of the key insights we left that audience with. Firstly, diamond production we expect to
decline slowly after 2020. Secondly, producer governments will seek increased value chain
participation. We have certainly seen that a lot in De Beers over the last ten years or so.
Secondly, technology will transform all phases of the value chain. That is not just exploration and
mining where technology is fundamentally important to the future, but in all the other areas.
For example, in the midstream, technology has already assisted diamantaires, cutters and
polishers in improving their yield, in other words the amount of polished they get out of a diamond
when they cut it. There are considerable advances in technology in the downstream. I will touch a
little bit later on about synthetics. There is another area that we keep a very close eye on. And
our fight against undisclosed synthetics is being won by our investment in technology.
Really important for us are the shifting needs of new consumers and the increased importance of
brand and ethical sourcing. Philippe will talk in a little while about brands, but brands are
becoming even more important in the future in the luxury world. And of course we are extremely
well positioned with both the De Beers name and the Forevermark brand. So we are well
positioned for that. The context of ethical sourcing is becoming more important. We would see
that becoming a bigger trend in the future. And our Forevermark brand, which Philippe will talk
about, plays very well into that.
Online has become a much more important tool in both researching and purchasing diamonds.
Not something you might expect on a purchase like a diamond. In the US last year one in six
diamond purchases were done online. Not necessarily at the high end, as you would expect, but
in terms of pieces one in every six purchases was done online. And 40% of consumers did their
research online before going into a store in order to make their purchases. Even in China 25% of
purchasers last year researched their purchases on the internet before they went in store and
made their purchase. That’s a significant trend that retailers need to be aware of and understand
how to deal with.
For us competition comes not only from our own direct competition but from other luxury
categories, because after all we are all chasing a share of wallet from consumers in the luxury
end. And we are dealing with some very significant luxury businesses with significant marketing
budgets. And then lastly, and I will touch on this on a later slide, the question of undisclosed
synthetics and how that will be dealt with. That’s the wrap up of the industry overview. Philippe,
my colleagues and I will now talk a little bit more about De Beers itself.
Philippe Mellier
Thank you. I just wanted to spend a few minutes to talk about the structure of the company before
we go into more detail. This is the slide with the whole detail. We go from the retail on the righthand side up to exploration on the left-hand side. Pat is going to cover the left part, what we call
the upstream. Rough diamond sales will be covered by Bruce. I’m going to come back to talk
about the downstream part of the business and the Element Six subsidiary we also have in our
portfolio which is quite an important one.
So clearly this is the full structure of the company. I have to say that, since the integration when
Anglo American bought the 40% of the Oppenheimer family, we have derived a significant benefit.
And we now have access to a global talent pool. Gareth and Pat coming from Anglo American
here today are a good example of what I’m just saying. We have also access to the latest mining
technology. That is very important in what we do in the upstream part of the business. It is a
substantial benefit to have access to a common supply chain and asset optimisation techniques
which have been very helpful. And you see that the numbers from Pat are looking pretty good in
that regard.
The 15% shareholding from the government of the Republic of Botswana – we are always going
to make reference to it as GRB – is clearly showing the strength of our relationship, which is a
longstanding relationship between the GRB and De Beers. It spans over 45 years and started in
1969. So as you can see if you look at what we have on the upstream part of the business most
of our activities are centred in Southern Africa, South Africa, Namibia and Botswana. So we are
going to focus more on this part of our business right now.
So, for the last 45 years, we have enjoyed an extraordinary relationship with the GRB. It is maybe
one of the most famous PPPs in the world. The name of this partnership is Debswana, our 50/50
joint venture between De Beers and the GRB. It has been extremely successful from its creation
in 1969. And we can see if you have been in Botswana recently the full extent of what we have
been achieving together, because in 2013 diamonds represented 26% of Botswana’s GDP and
76% of the export value in Botswana. 40 years ago Botswana was one of the poorest African
countries and maybe one of the poorest countries in the world, and today it has reached the
status of middle-income nation. And we can say today very proudly that diamonds have been
contributing a great deal in switching that result.
Thanks to our relationship we have benefited from a long-term sustainable supply of the world’
leading diamond producing country by value, i.e. Botswana. Today Debswana is the biggest
producer of rough diamonds for the group, producing 22.7 million carats in 2013. And our current
sales agreement, which is a ten year sales agreement, runs until 2020 with the current mining
license running until 2029.
Ever since we began the partnership 45 years ago we have always renewed the sales agreement
and the mining licenses, and our industry-leading beneficiation activities in Botswana, including
establishing a sorting and valuation JV with the government, and relocating recently our
international sight sales, have strengthened the partnership further. And we are supporting the
GRB in achieving its economic and social objectives. So, exactly one year ago, we migrated all
the rough sales activities from London down to Botswana. And last month we had the tenth Sight
this year in Botswana celebrating the one year anniversary there. It has been extremely
successful, and the government is very happy there with what we have been achieving together.
That’s very important. We have been working together in achieving that.
If we move to Namibia we are enjoying a similarly strong relationship with the GRN - the
government of the Republic of Namibia. It is also a very long-term partnership because we
established the very first company in Namibia called CDM at that time in 1927. So, even earlier
than in Botswana. And we created our first JV in Namibia in 1994. Today we have two 50/50 joint
ventures in Namibia with the GRN. One is Namdeb Holdings, running both land and marine
operations in Namibia for mining, and we have Namibia DTC for sorting and valuation in Namibia.
In Namibia our current mining license has recently been extended up to 2035. So we have a huge
visibility in front of us in Namibia.
If we switch to South Africa, in South Africa we own 74% of our operations. The remaining 26%
are owned by our empowerment partner, Ponahalo Holdings, in line with South African legislation.
We operate Venetia, South Africa’s leading diamond mine, and we are currently undertaking a
project to extend the life of mine to 2040 at a cost of around $2 billion. Similarly to Botswana and
Namibia we are undertaking there the sales of rough diamonds to in-country cutters and polishers.
And we are assisting the downstream industry in South Africa in close cooperation with the local
government.
This combination of industry-leading mining expertise and outstanding partnership through
beneficiation activity in all the countries where we work provides us with what we believe is a very
strong and sustainable relationship with some of the major diamond producing countries around
the globe. In my presentation we have not included our Canadian operation because in this
country it is a wholly-owned operation and we don’t have an in-country sorting operation. We are
just mining and exporting down to Botswana what we mine there. And we will cover the Canadian
operation in Pat’s presentation.
So this is the overview of the De Beers structure as it is today. I didn’t cover in all the detail, but I
think the slide is pretty comprehensive and gives you a good look at what we are made of today. I
would like to call Pat to talk about our upstream operation for De Beers. Thank you Pat.
Pat Lowery
Afternoon everybody. I’m going to try to achieve four things this afternoon. One is a recap of
geography of our operations, provide you with some detail of the more critical De Beers assets,
share with you some of the operational performance initiatives that we have been undertaking of
recent, and then have a look at three of the key projects that we are currently undertaking.
Just to recap, the Canadian operations are 100% owned. Snap Lake in the Northwest Territories
and Victor mine in Ontario. In Botswana, a 50/50 JV with the GRB, we have four operations there,
Jwaneng, Orapa, Letlhakane and Damtshaa. In Namibia, a fairly unique operation. For techno
buffs in the room it will be the most interesting part of the discussion. 50/50 shareholding with
GRN. And very interestingly Elizabeth Bay in the north on the land, right the way down to the
Orange River, and then the marine operations offshore which I will talk to in some detail later on.
If you can just picture in your mind the Orange River and the geography of Southern Africa, all of
these diamonds according to our exploration geologists emanated from the Witwatersrand area
which was probably 1.5km higher in altitude than it is today. All of that material ended up in the
west coast off Namibia. And this is a natural sorting environment which has created a larger,
higher-quality deposit in the southern region and natural progression of finer diamonds up into
Elizabeth Bay. That material we see on the land today is actually wind-blown and water-blown
onto land over many thousands of years.
In South Africa the partnership is as Philippe described. There are three operations, Venetia,
Voorspoed and the Kimberley mines. To provide you with a little bit more detail, Jwaneng is
definitely the jewel in the crown, probably the richest diamond mine in the world by value, a tierone operating mine with typical shovel and truck method. It’s a very large operation with a strike
of about 3km. The average price is at $249 a carat. There are three pipes in Jwaneng and a
grade of 124 carats per 100 tonnes. The current life of mine at Jwaneng is 2031. That includes
the Cut-8 project which we are busy with at the moment. I will describe that in more detail later.
And there are tailings treatment opportunities at the main treatment plant that is currently under
commissioning as we speak.
Orapa, similarly, consists of three mines, Orapa, Letlhakane and Damtshaa. Another tier-one
operation. It is not three independent pipes at Orapa. There are two which are two volcanic
conduits which came up simultaneously. A very significant area of 117 hectares. The current life
of mine there is at 2030.
Our Canadian operations. Snap Lake, I think it is only fair to describe Snap Lake as complex. It is
not your typical open pit operation. It is a basaltic intrusion of the kimberlite which runs around
underneath the Snap Lake. It is not easy mining by any stretch of the imagination. It is one area
where in collaboration with Anglo over the past couple of years we have been able to bring in
some really solid mining expertise to get on top of dilution and turn around operations at Snap
Lake. A significant underground operation, 220km north-east of Yellowknife in the North-Western
Territories of Canada. And I can recommend to you, if you really want to get cold, February is the
best time to visit. Philippe and I went up there. It was minus 52 degree centigrade. It is a really
interesting place. The current life of mine there is 2028.
Victor is also a nice little gem of an operation. Unfortunately a short mine life, only to 2018. As
you can see there a very healthy average price per carat at $560 per carat with a relatively low
grade.
De Beers Marine Namibia is where all the techno buffs would be very interested. We have a fleet
of five mining vessels offshore Namibia supported by exploration vessels and other support
services. An inferred resource of one million square kilometres in the Atlantic 1 concession. As
you can envision that’s a very large area. If you can picture a vessel about 175 metres long
supported on 2km long anchor trains. The mining is done by moving the anchors. Beneath the
vessel sits a 250 ton tank, crawler-driven suction device which is pulling the material off the 35m
deep bed of the ocean, pumping it up onto this vessel, and it is a completely self-contained
diamond plant. The residue goes back over the side and back from whence it came.
So it is a very, very interesting part of the business. Exceptionally high pricing. All of these
diamonds that have moved over the years down the Orange River and ended up either in the
ocean or on land, obviously any weaknesses have been removed by nature. So they are typically
very nice quality stones. Very low grade, but we will talk about the operational improvements we
have been able to achieve there just now.
On the land-based operations, again very high quality diamonds just under $600 per carat. You
can see on the slide. But again very low grade and very patchy in the way it has been...as I
described earlier it is wind-deposited and sea-deposited, so it is alluvial mining at its best. Lots of
overburden to be stripped. But once you find the bedrock with the pockets of diamonds in them
they are extremely valuable.
South Africa, again as Philippe described. Venetia is the jewel in the crown in South Africa. An
average price there of $156 a carat. 47 cpht. Before I get asked the question why there was such
a jump between H1 2013 and H2 2013 you would have heard of the flooding that we had towards
the back side of 2012 in the Venetia pit. That prevented access into the higher grade areas of the
mine, which we then caught up in H2. So it was balanced out for the 12 months.
At 90km west of Messina, for those of you who are familiar with South Africa, and just over 3
million carats in 2013. Current life of mine to 2044. As Philippe mentioned we are busy taking
Venetia underground. We should start producing from our underground operations in 2021. And I
will describe in a little bit more detail the Venetia underground project shortly.
I think one of the key things to bring across to you in this presentation is that following getting
together with Anglo there has been a very significant matching of technical talent. The technical
sustainability group that Mark and Tony O’Neil have put together has yielded significant benefits.
You heard Mark in his introduction talk about the new operating model. This is some of the work
that we’ve been doing at Jwaneng. I just wanted to very briefly explaining one of these control
charts. Knowing Mark I think you’re going to see these control charts quite frequently in the
coming months and years.
Typically what you see there is a statistical chart. I can’t unfortunately show everybody
simultaneously. This chart would show in the early part a huge variation in the tonnes treated
through the Jwaneng plant. You can see it is very inconsistent. What we are aiming for here is
consistent delivery from the mine and stability of operation of the treatment plant so that we’re
getting the maximum value out of the current assets that we have within the company.
We analyse exactly where the areas are of constraint or bottleneck. This lower period at the
bottom is where we have stopped the operation now to perform maintenance or typically to
change our whole crusher circuit. And then we re-start. Where you see the red circles that is
showing you that a change in behaviour, a change in activity, a change in process, has given you
a marked increased in your output. When you get a solid red dot it means you’ve been achieving
that consistently for at least five measurement periods and you’re busy entrenching the capability
in the new operation.
Over and above the trend it is quite clear. What we are seeing at Jwaneng is we’ve not only been
able to improve the throughput through the Jwaneng plant somewhere around 10%, but typical
the stoppages that we are getting are more routine and more planned. So the blue dots at the
bottom are now showing the system under significant improvement in control.
A similar thing at Orapa. We were advised last year that Orapa one plant had to be taken off line
for a considerable period of time for maintenance. That plant has recovered very nicely. At plant
two we are focussing on maintenance and consistency of material coming out of the pit, and also
seeing a considering improvement in the performance of the Orapa plant.
If clarity of improvement is difficult to see on these graphs, here it is very clear. This is what we
have been doing on the underground crawlers. In 2010, which is the left-hand side of the graph,
we were moving about 400 cubic metres of material per hour through the crawler system. And
through various technical innovations – we have a very small team based in Cape Town and R&D
centre that work hand in hand with our colleagues in Namibia who operate the vessels – they
have been able to improve throughput through the crawlers from 400 cubic metres per hour to
1,200 cubic metres per hour over three to four years. It has had a significant impact on production.
We are now actually in the situation where the process pant is the bottleneck rather than the
mining system. We are working very hard now to eliminate that.
Exploration. No technical presentation would be complete without some mention of exploration. A
very important part of our future, as you saw from Bruce’s supply graph. We spend approximately
$50 million a year on exploration. De Beers has a long history of global diamond exploration, so
we are able to be quite selective in terms of where we do explore. We’re in five regions at the
moment. Canada, specifically around the Ontario area. India, where it has been quite difficult to
get licenses. We have recently been issued with two licenses in India which we are going to start
work on shortly. Angola, a very prospective area in the world. We are in advanced stages of
negotiations with the Angolan authorities in terms of licenses. South Africa and Botswana.
Some time on the projects. Jwaneng Cut-8 is increasing the life of the Jwaneng operation to 2031.
For the mining people in the room, when we are talking about a cut it is not actually stripping off
material to yield ore. You can imagine the kimberlite pipes are actually cylinders in the ground.
What we have to do is mine downwards and get a route for the trucks down into the system. So it
is more about opening up than it is about stripping off. We still use the same terminology but for
very different reasons.
In Cut-8 we have some 660 million tonnes of material to move. That will give us 96 million tonnes
of ore and allow us to produce an additional 112 million carats from Jwaneng at an average grade
of 117 carats per 100 tonnes. The infrastructure is built in at a cost of $400 million. So that is
money already spent on trucks, shovels and various other pieces of equipment to be able to
achieve this. The first ore will come out of the Jwaneng pit as a result of Cut-8 in 2017. We have
a JV running the mine for us between a local Botswana company and an Australian company
called Leighton Mining. They have formed a JV called Majwe. And we are about 46% complete
on moving the material.
South Africa, the Venetia underground project is extending the life of Venetia mine to 2044. We
have about 128 million tonnes there to mine which will yield 94 million carats at an average rate
of 73 carats per 100 tonnes. We should be going underground or will be going underground in
2021. And we will continue mining to 2044. Expansion capital around $2 billion. We are putting
down two vertical shafts that we are going to start sinking shortly. We are putting in a decline to
allow more rapid contact with the material. We have got two sub-level caves that we are going to
be putting down there. The decline is 285m advanced. The collars, the gantry and other
equipment for starting to sink the shafts is in place and we should start pre-sink in January 2015.
It is around 12% complete.
Gahcho Kué, the largest new diamond mine being built in the world. It is 80km away from Snap
Lake so it is not going to be that much warmer, I would hazard a guess. I think with the
experience gleaned from the complexities of Snap Lake and Victor we are well positioned to
derive maximum value from this project. This is a JV between Mountain Province and De Beers,
51% De Beers and 49% Mountain Province. We will mine about 31 million tonnes. A relatively
short life of mine of 11 years, but at very good return on the back of 48 million carats, 154 carats
per 100 tonnes. The first production will be in H2 2016. In terms of progress to date all of the
permitting and everything we need to get the mine up and running is in place. And we are looking
forward to the first really big new diamond mine within the next couple of years.
Bruce Cleaver
So continuing the journey through the De Beers operations, the next piece is on the midstream.
This is the section that I will show you later that deals with the purchase by De Beers of the
diamonds from all of our operations and the sale of De Beers of these rough diamonds to the
world’s leading diamanteers we have a sophisticated, integrated two-channel distribution system
which serves both different customer types with differing needs as well as our own overall needs.
So the bulk of our business and the absolute core of our distribution system is our business called
Global Sightholder Sales. That’s the old DTC. And that is the business through which we
distribute about 90% of what we sell on long-term contracts to Sightholders. Sightholders are 70
or 80 of the world’s leading diamantaires, hand-selected to be the best people for us to sell our
goods on long-term contract to.
We sell goods ten times a year, so-called sights, in Botswana mostly. I will touch on that a little bit
later. But pretty much all of the Sights now happen in Botswana, part of the move that Philippe
spoke about earlier. And we have substantially beefed up a number of the criteria around
admission for sightholder status in the course of this year while we are implementing the next
contractual phase. That has had a significant amount of financial governance introduced into it,
and a significant amount more transparency required from our sightholders in order to qualify as
sightholders. Many of you would have heard and know about the ongoing liquidity issues in the
midstream. This is one way where we think we can help to address that a little bit by making
sightholders more bankable.
We have also introduced a system where accredited buyers who are not Sightholders have the
opportunity to purchase goods that sightholders may not purchase at a particular time. The other
part of our business is what we call auction sales, which is based in Singapore where the Anglo
American commercial hub is. This is an industry-leading online auction platform that we
established in 2008 which uses a variety of sophisticated auction techniques auctioning not just
single units but multi units to a whole lot of other customers who are both sightholders and not
sightholders. Up to 400 different customers come to our auctions. This is a spot market much
more than a long-term market.
The role of auction sales is really twofold. The one is to test spot market prices, and we have
been extremely successful in doing that. And secondly, to allow new entrants and smaller players
to get into the diamond business. We have a system that is advanced enough to allow over time
participants in the auction sales who are successful to migrate to sightholder status. So these two
sides of the business work very closely together on both price discovery and developing new
customers in the market. We have also introduced recently in the auction sales side auctioning
forward contract sales. That is an example again of the industry-leading innovation that goes on
in the auction sales business.
Philippe touched a little bit on sales agreements. We purchase the output of just about all of the
mines from our joint venture partners as well as our controlled companies under long-term sales
agreements. The principle one is Botswana where we entered into a ten year sales agreement
with the government in 2011. That was the agreement, as Philippe mentioned, that resulted in the
transfer of the old DTC from London to Gaborone in 2013. You have also heard that this
agreement introduced for the first time a limited window allowing the GRB to purchase 10%,
rising to and capped at 15%, of Botswana’s run of mine production. That number is currently at
13%, rising by 1% per year. That is also for price discovery purposes. The agreement also
contained continued commitment on our side to support local beneficiation, which we have been
involved in for many years.
Namibia, the other producer in partnership with the government, we have a seven year sales
agreement with Namdeb Holdings and the government. That expired at the end of last year. It
was extended on a temporary basis and we are in fairly advanced negotiations with the
government of Namibia for a new sales agreement at this point. In South Africa we have a longterm sales agreement, but as I said the businesses there are controlled, and Canada is whollyowned.
It is also worth spending a second or two on rough diamond conversion and also some of the
seasonality of both rough and polished sales. You will see when Gareth talks later that there is
usually a distinction between production and sales in any one half in De Beers, and there is a
reason for it. This slide touches on the rough diamond conversion cycle, and it shows you that it
can take 16 to 20 weeks before the ore comes out the ground at the mine, has been processed at
the mine, has been sorted and valued and then been aggregated by De Beers and sold in these
sights which take place every five weeks.
So the pipeline of when a diamond comes out of the mine until the day in which it is sold to a
client in De Beers Global Sightholder Sales is 16 to 20 weeks. And then obviously you’ve got to
add the period that that rough then gets turned into polished jewellery to see the full extent of this.
So it takes about nine months on average from the time the rough comes out the ground until it
gets in the store. That I think is important to bear in mind as you think about our production in
different halves going forward.
I touched on aggregation. One of the absolute core advantages of being in the De Beers group is
what we call aggregation. What we do with aggregation is we put together a mix or blend of all
the rough diamonds from our producers around the world once we’ve bought them. And we mix
them into bespoke boxes for our sightholders. We have found over time – and our clients have
certainly agreed with us – is that this has a significant benefit in that it smoothes out the peaks
and troughs in mining and produces a much more consistent mix of goods for sightholders who
are planning their business on what they can turn the polished into and how quickly they can do it.
So you will be aware that there can be volatility in things like carat delivery based on where a
mine is in its life, and carat quality because you don’t get the same quality of carats out of
different pipes for example. This simple graph tries to show that. Each of these lines that are not
dotted represents some of the volatility in carat production by volume in a particular year. And the
dotted line, which is the aggregated mix, shows you that in general the aggregated mix produces
a more consistent and a more balanced mix for clients. So we find sightholders are particularly
interested in this, and we think it is one of the particular value-adds than we have over and above
others.
The next slide is unfortunately quite a busy slide, but if you bear with me I will take you through it
is a little detail. It shows schematically how a diamond goes in the group from once a diamond is
produced until it is sold. Gareth will touch on the financial and accounting consequences of this. If
you look at the bottom below the bottom line there are our four producer companies, Debswana,
Namdeb Holdings, DBCM and Canada. In each of the countries other than Canada there is an
intermediate company, which in Botswana and Namibia is a joint venture. These businesses are
generally sorting and valuing businesses owned 50/50. In Debswana’s case 100% of the output is
sold to DTC Botswana for sorting and valuing. That business is owned 50/50 by De Beers and
the government. 87% of that is sold by DTC Botswana to De Beers Global Sightholder Sales.
13% goes off to the window.
In Namibia, Namdeb Holdings, which owns both land and sea, sells 100% of its output to Namibia
DTC, also a 50/50 JV, which sells 100% of its output to Global Sightholder Sales. South Africa, a
similar arrangement. DBCM sells 90% of its output to Sightholder Sales South Africa. That’s a
wholly-controlled business. Ponahalo is 26% of that. 10% is required to be sold under the South
African diamond legislation to the State Diamond Trader. Canada sells 100% of its output to De
Beers. This is where aggregation takes place. So Global Sightholder Sales now aggregates these
goods, mixes them, blends them etc. and then sells them in Sights.
The principle Sights are in Botswana where the Sightholders would come to the sight ten times a
year and purchase the goods in boxes. The goods are sold to them in the format, the quantities
and qualities that they have asked for when they put in applications for goods in a sight period. In
Namibia we do sell in Namibia a small amount of unaggregated Namibian goods at the request of
the government and a small amount of aggregated goods. So we do have local sales taking place
in Namibia. And similarly in South Africa we sell a small portion of unaggregated goods and
aggregated goods in South Africa. And this is part of our commitment to ensure that local
beneficiation in these two counties can succeed.
In many senses these are at the margin in that they are smallish volumes and goods, but
obviously important for beneficiation there. The principle sales are by De Beers Global
Sightholder Sales in Botswana. There is a requirement to sell some goods in Canada. We
actually do sell a very small amount in Canada, but it is a very small amount. The bulk of the
Canadian goods are also sold in Botswana in the international sights.
I mentioned earlier seasonality, and the importance of sales, and sometimes the difference in
production and sales of rough. Remember that they then get turned to polished. This is a slide
about seasonality of consumer demand in our main markets in polished diamond jewellery. We
can immediately see from the slide that there is quite a lot of seasonality in the market. We put
our three main markets here, the US, India and China. The US is the big blue line. Polished
diamonds are generally sold to consumers at particular times. So in America times like Valentines
Day, Mother’s Day, the wedding season, which is summer, but by far the most important season
in America up to 30% of all of American purchases are made in the period between Thanksgiving
and New Year. That is why we are so focussed on America in the last quarter and in particular in
the last month. At the end of this Philippe will show you our latest advertisement in America now.
It is all about making sure that demand is at an optimum in that period.
You will appreciate that this period of Christmas in America, if successful, will set the tone for the
following year because that will create considerable liquidity back down the pipeline if ultimately
polished consumers have bought polished jewellery in the quantities that we would expect. A lot
of diamonds are sold by the diamanteers to retailers on credit. All that gets repaid. The money
flows through the system, and so the cycle starts again. So this is our most important period and
it is one we are very focussed on.
You will see in our other two main markets, India and China, also there are issues of seasonality,
but not quite as pronounced. There are big events and seasons in India, which is the wedding
season in the first half of the year, and Diwali, around about now. China has two golden weeks,
Chinese Valentines Day and Chinese New Year. So there is quite a nice blend of seasonality
across our main markets. But the American market after Thanksgiving is particularly important.
I will just wrap up by talking about synthetics. It would be remiss of us not to. Synthetics as you
know can represent a considerable threat to us. There are various companies out there that do
have the ability to manufacture these gem-quality synthetic diamonds using different technologies,
mostly high pressure high temperature or chemical vapour deposition. Our position has been and
remains that we have no issues with people selling disclosed gem synthetics. But we have a real
issue with people selling undisclosed gem synthetics.
Our research indicates that consumers would much prefer to buy a natural diamond made in the
earth 4 billion years ago than a manufactured diamond. A lot of our advertising and research is
built around ensuring that differential. So we have no issues with people who sell gem synthetics
disclosed. Our issue is with people who sell gem synthetics undisclosed. We have invested a
very considerable amount of money, more than $60 million, developing detection machinery
which allows us to detect with almost 100% accuracy gem synthetics in the pipeline. We have
deployed these with the assistance of our sightholders and most of the major bourses and law
enforcement around the world to maintain the requirement that gem synthetics are sold as
disclosed.
The latest piece for us with this machine here which is known as the AMS or automated melee
screening device. There was a bit of a rumpus towards the end of last year about whether
potentially very small pieces of diamonds, melee diamonds as we call them, were finding their
way into the pipeline undisclosed. And we didn’t have a machine that could detect diamonds of
below a certain size, so we manufactured this machine. This was done in conjunction with our
colleagues at Element Six who are already industry leaders in this technology. I am going to ask
Philippe to talk a little bit about the downstream and Element Six and then Gareth will do the
finances.
Philippe Mellier
Thank you Bruce. I would like to focus a few minutes on the downstream. I just wanted to repeat
what I said before. Consumer desire for diamond jewellery is the only true source of value in the
diamond industry, and this is clearly very important to understand. So the first thing I would like to
focus on is the rise of brands. We can see on the left-hand side in 2014 the demand for branded
diamonds in the US – which is as Bruce said the biggest market for diamonds – has been
growing exponentially. And now around 36% of diamonds sold in the US are branded diamonds.
It is very important to understand that.
We think that branded diamond jewellery is an attractive approach because it is commanding a
higher margin. And the Far East especially, which is the fastest-growing market, is really
focussing on brands. So it is very important that we focus on creating branded diamonds. In the
past there was not much success in creating a successful brand in the diamond world.
Forevermark, which we will talk about a bit later, is clearly becoming more and more successful.
De Beers was very successful in the last 100 years. A Diamond is Forever was a very successful
tag line, and has been voted the most successful tag line of the 20 th century, all brands included,
not only in the diamond business.
But today things have been changing and we are evolving with the latest trends. So we are
focussing today on Forevermark. Forevermark is a diamond brand. It is not a jewellery brand.
And it is replacing today the generic effort we made for many years under the tag A Diamond is
Forever. It is a proprietary marketing programme which takes into account the fact that we are no
longer an 80% player in the marketplace but a 33% share player. So we are focussing on our
own proprietary brand. This brand started in 2008.
When I joined the company in 2011 we had around 100 stores, mainly in the Far East and Japan
and China. Since then the number of stores has grown exponentially. Today we will be closing
2014 with around 1,500 doors in 34 markets. And I’m very happy to discuss that with you later,
but we are going to launch the Forevermark brand in the UK, so I’m sure we’re going to expect a
lot of visits from you there. We have now reached the famous critical number of one million
diamonds which have been inscribed since the beginning of the Forevermark brand.
So 1,500 stores in 34 countries and one million diamonds being inscribed. So clearly it is for us
the biggest vehicle to communicate the diamond dream in the downstream market at the retail
level. So a very successful programme. I think today we are among the top three brands in the
world. And clearly our aim is to become the most desirable and most well-known diamond brand
in the world with Forevermark.
De Beers Diamond Jewellery is an independently managed JV with LVMH. It is really this
business which enables us to capitalise on the iconic De Beers brand name associated with A
Diamond is Forever. This brand is now being sold in around 35 stores around the world. It is
really focussing on the top-end part of the business. The biggest business is in solitaires and high
jewellery, but we are also working on developing the design collection, and this is what we are
doing these days with the new launch of diamond watches we are doing right now.
So we are clearly trying with the De Beers brand to capture the growing demand for the top-end
luxury diamond jewellery. And, mostly focussing on the Far East, mainly in China, Hong Kong
and Japan. We are fully behind it with our partners LVMH, and this is steadily growing. I would
like to remind you that it is not a big operation. We focus on high-end, so it is not for the main
street retailers.
I would like to say a few words about Element Six. It is not a downstream jewellery business. As
Bruce was saying, we are focussing here on man-made synthetic diamonds. But it is an important
part of the group and it has a huge future potential because these products are aimed at the
industry at large. This is close to a $500 million business and has been growing very steadily, and
its contribution to our bottom line is now quite substantial. We have in Element Six two
businesses, the abrasive business and the technology business. You can see the application of
abrasives and technology on the slide here. And we are covering the full scope of industries in
terms of precision grinding and cutting applications. We can go from the basic wood application
up to the latest technologies to cut solar panels or screens for telephones and these types of
things.
Through our technology division we are creating with the carbon vapour deposition technology an
application for the top-end of high-tech products in the world. We are working with top electronic
manufacturers, top-end military applications in the future for very high electronics which are
based on diamond wafers. So this has a lot of potential. We have put here in the middle an
example of tools which have been created only for evaluation purposes. To cut through extremely
strong composite material you need very hard material so we have developed this new series of
tools which are very successful.
We are also one of the key providers for the oil & gas industry through partnership and we are at
the top end of technology for the drilling in oil & gas. So Element Six is not very well known but
has a lot of potential. And the fact that we are working together between Element Six and the De
Beers Research Centre is enabling us to make sure that we can be at the top end of technology
for high pressure high temperature production so that we can detect any manmade diamond
which could potentially enter the pipeline in the future. This is very important to safeguard and
protect the diamond dream. So just a few words about Element Six, because it is not very well
known but it is very important in our business.
Now I would like to ask Gareth to talk about the financials because I am pretty sure you have
been waiting for this part of the presentation. And Gareth is going to go through that right now.
Thank you.
Gareth Mostyn
Good afternoon everybody. Merci Philippe. My young boys are convinced that the only reason I
worked for Rene for three or four years at Anglo American, and the last three years at De Beers
for Philippe, is that I can just about understand French accents. Children can be quite perceptive.
I am going to take you through some numbers. Before I do I’m going to come back to the group
overview. My colleagues have already talked through all the constituent parts of our group. I
would just like to touch on how we account for those different parts of the group.
The upstream part of the business we fully consolidate our Canadian and South African
operations. Although we have a BEE partner in South Africa, Ponahalo, that owned 26% of
DBCM, the South African mining company, we fully consolidate with no minority interest because
of the financial arrangements around the Ponahalo joint venture. For Debswana the master
agreement gives us a 19.2% economic interest on a pre-tax basis. Although Debswana paid full
tax and royalties in Botswana we proportionately consolidate our 19.2% of the pre-tax profits with
no tax and royalties on our income statement to reflect the underlying economics of the master
agreement. With Namdeb Holdings, a more typical joint venture, we proportionately consolidate
50% including tax and royalties.
For the midstream we fully consolidate our sightholder sales business in Botswana and our
auction sales business in Singapore. That’s the Singaporean flag I hope. And we proportionately
consolidate our 50% interest in the Namibian and Botswana partner diamond trading companies
in the midstream.
And finally on the bottom line you have the downstream business. As you have heard from
Philippe the De Beers Jewellers business is 50% owned and we equity account for that business.
We fully consolidate Element Six but provide for the 40% minority interest in the abrasives
business, which is by far the majority of that Element Six business.
Touching on a financial overview before getting into a little bit more detail. In 2013 we saw sales
grow by 4% year on year to $6.3 billion of which $5.8 billion were sales of rough diamonds. In the
first half of this year sales both on a total basis and in rough diamonds grew by 15% with rough
diamond sales at $3.5 billion. It is very typical in our business for the first half of the year to see a
stronger selling performance than the second half due to some of the demand cycle reasons that
Bruce was explaining to you just now.
That reflects through into the margins as well. you can see that overall in 2013 we had a 16%
operating profit margin and a 23% EBITDA margin with stronger margins in the first half of the
year reflecting stronger sales performance and stronger pricing trends.
The first half of 2014 was as you know a particularly strong performance and margins were about
2% ahead of the equivalent period in 2013. The underlying earnings figure as you see here is
shown as reported in Anglo American’s results, so therefore after the 15% minority for the
government of Botswana.
Free cash flow at the bottom of the page. You heard Philippe in his introduction talk about the fact
that over the last 18 months we’ve generated over $1 billion of free cash flow. I will touch on that
in a little more detail in a few slides’ time.
Turning to the balance sheet on the right-hand side of the page, our overall attributable capital
employed incorporates a step-up to include the purchase price allocation or PPA – you will see it
referred to a lot of times in these slides – following the acquisition of the additional 40% interest
by Anglo in 2012. Inclusive of that PPA impact the return on capital employed was 11% in 2013
and grew to 13% in the year to the end of June. If you exclude that PPA adjustment from both the
balance sheet and the income statement the base business saw a return on capital employed
roughly double that, so 26% at the end of June.
There is an inventory figure which we show there which includes the diamonds held for sorting
and selling in our midstream business, goods owned by the mining companies awaiting
processing, sorting and valuation, and also a relatively small amount of finished goods for our
Element Six inventory.
Let me dig into sales in a little bit more detail. I’ve already said that this first half of this year we
saw a 15% growth in our sales, both rough diamond sales and total group sales. The Element Six
business had sales of $240 million in the first half of the year, 10% year on year growth, showing
very strong growth in the first half of this year.
In the bottom left-hand corner of this page we dig into the rough diamond sales volumes. After
selling about 30 million carats in 2013, in the first half of this year we sold approximately 19
million carats. That includes sales to the Government of Botswana’s selling arm that Bruce was
talking about earlier. Because the sales to that business is made through the 50/50 joint venture
in Botswana, DTCB, we only recognise 50% of the sales in our consolidated sales figure. Hence
the 18.1 million carats you see on the slide is what we consolidate. The 19 million is the gross
figure if you include 100% of the sales through that Government of Botswana selling window.
Over to the right-hand side of the page we have some price analysis. You can see in 2013 overall
about a 2% increase in our own internal rough diamond price index with stronger pricing growth in
the first half of the year and then some softening in the second half. Again a fairly typical cyclical
trend. In the first half of this year a very strong selling performance with our average rough price
index up 7%. The average price index that we saw over the full six months was about 4% higher
than the average last year.
When you look at the bottom right-hand side again in the first half of this year our average
realised selling price was about 3% lower. So although the index had gone up by 4% we saw a
softening in the mix that we were selling relative to what we sold last year. Nothing of concern for
our business this year. It is down to some market characteristics we saw during 2013. Some
weakness in the Indian market reduced demand for a period of time for some of the lower-end
goods, hence pushing up the average selling price that we experienced last year.
The production mix coming out of Venetia at the moment is slightly lower than it was last year
with an impact on our average price of about 1% to 2%. The production figures you will already
be familiar with having been announced in previous results and quarterly production reports. Last
year we produced 31.2 million carats. In the first half of this year a production of 16 million carats
was 12% up on the first half of last year with production improvements across all of our mining
businesses. For the full year we are expecting production of about 32 million carats. And we are
currently expecting slightly higher production into 2015 of 32 million to 34 million carats subject to
market demand.
On the bottom right again you have another graph which shows some of the typical sales
seasonality that we see through the year. In both the first half of last year and this year you can
see that we sold more carats than we produced. And again it is following that typical seasonal
trend that Bruce was talking to you about earlier on. You can see in the second half of last year
we produced 2.5 million carats more than we sold. That was more than offset in the first half of
this year where sales were about 3 million carats higher than what the production was.
We have a unique blend of mining and trading in the business. Bruce took you through a fiercely
complicated slide which he has tried to explain to me many times about the flow of goods from
our mining businesses and through the different midstream entities that we have. Because of the
way that we consolidate our joint ventures, we proportionately consolidate our joint ventures in
mining and trading in Botswana and Namibia, our margins only reflect a portion of the margins
from those businesses. If we take Debswana as an example we only consolidate 19.2% of the
pre-tax and pre-royalty profits made by Debswana. Whereas with DBCM in South Africa we fully
consolidate the mining profits.
Similarly the middle bar is the local midstream trading business. Now in Botswana and Namibia
we will consolidate half of that. In South Africa we will fully consolidate. Clearly the final portion is
our ultimate selling business in Botswana and Singapore, 100% owned, selling an aggregated
mix of all of our production. And so we consolidate all of that.
So when you look at the final bars on the right-hand side, the consolidated margin, what it can
mean is because of the way the results are consolidated the apparent final margin isn’t really
representative of the underlying mining margin in all cases. So let me put some numbers on that.
Focussing on our 2013 results, I first of all take our consolidated share of our four mining
businesses. In 2013 they accounted for $0.9 billion of operating profit at an average margin of
about 40%. As I say that represents our consolidated share, not an aggregate of all four of those
businesses.
The midstream or the trading part of the business is more of a fixed margin business with the cost
price that that midstream business is paying linked very much to the ultimate selling price that is
set out in our price book. In 2013 that midstream trading business generated an average margin
of about 6%. So that was operating profit of nearly $350 million from that part of the business.
And in the first half of this year the midstream margin was a couple of percent higher than that,
reflecting some of the positive pricing momentum that we saw in the first half of the year. And that
range of 6% to 8% is fairly typical in that midstream trading business.
And when you blend together the mining and the trading and also bring in the other parts of the
portfolio, including the amortisation of the purchase price allocation adjustment, that is what
brings you to the overall profit margin of 16%. As I said that number in the first half of this year
was about 20% higher than in the first half of 2013.
It is worth me at this point saying that we won’t be disclosing mine by mine cost information. Apart
from some commercial sensitivities we also have confidentiality restrictions with our joint venture
partners. When I show you the overall mining picture we won’t be unpacking the mine by mine
costs.
Let me turn to an overview of our income statement. In the revenue in the top half of the page I’ve
already touched on you will see there is a very small amount of ancillary revenue shown in the
other line. Looking at the cost base, predominantly it is around production costs, which include
Element Six manufacturing costs as well as mining costs, and then the purchases of diamonds.
So that is the cost to our trading business of buying the production that we don’t consolidate,
effectively buying the diamonds from our joint venture partners.
On the production cost figure that you see there about 20% of that is Element Six manufacturing
costs, the balance being mining costs, with labour being the biggest portion at about 40% and
fuel and power around 20%. You will see a different element to our overall income statement. The
purchase of diamonds is the biggest single line item in our income statement. Last year just over
$3 billion. That is effectively linked to the ultimate selling price and is denominated in dollars.
As that cost line moves with the revenue line it effectively means that the pricing movement that
we see is somewhat reduced in terms of its impact on our overall profitability. As a result we
estimate that other things being equal a 1% movement in price is about a $30 million impact on
our operating profit.
The depreciation and amortisation charge that you see includes the impact of purchase price
allocation amortisation which was about $150 million in the full year 2013 and about half of that in
the first half of this year. And again worth reiterating, because of the way we consolidate
Debswana, accounting for no tax or royalty charge, it means that the apparent effective tax rate
for our business is relatively low, lower than it would otherwise be in the mid-20s.
Moving on to capital expenditure. Last year our total capital expenditure was $550 million with
$250 million of stay in business capex, $200 million in capitalised waste and the balance in
expansion project spend, largely the ramping up the Venetia underground project. In the first half
of 2014 the capex figure was up to $320 million, and we expect a figure of around $700 million for
this year, largely driven by the ramping up of spend on Venetia underground and Gahcho Kué.
Both of those projects have been through the full appraisal and approval process and have full
board approval.
We expect capex for 2015 of between $800 million and $900 million largely due to the increase of
project capex on those projects that Pat was explaining to you earlier on. And for the next two to
three years we see the stay in business and waste capitalisation running at similar levels before
the levels of waste movement come down at Venetia and Cut-8. They decline in around 2017 or
2018. Also worth saying that on the capex side these figures include our proportional share in
Debswana and in Namdeb Holdings.
Philippe talked about the overall free cash flow for the last 18 months being just over $1 billion.
You can see how that comes together here after the capex spend and after the tax payments.
Again that tax payment is relatively low because we don’t account for the very significant tax
payments in Debswana. If I touch on Debswana cash flow, and you see that on the right-hand
side of the page, clearly this is a very significant cash flow for De Beers.
Debswana distributes its cash profits after allowing for certain appropriations like capital
expenditure and working capital requirements, and then distributes those cash profits to
shareholders. We at De Beers receive our 19.2% share through dividends. The government
receives is 80.8% share through dividends, tax and royalties. Debswana funds its own capital
expenditure and its own working capital from its normal operating cash flows and then pays out
the rest as dividends. Typically ten times per year. And you can see the figure there. In 2013 our
dividend receipts from Debswana were about $400 million, and in the first half of this year it was
about $300 million.
To summarise on the numbers, the first half of this year saw exceptionally strong performance on
the back of price increases and very full volume sales. Profit was up 34% and EBITDA up 25%.
EBITDA nearly $1 billion for the first half alone. You have heard that our business is typically
geared towards the first half, and you can see that from the size of the bars from 2013. Cash flow
has been strong. We saw a 47% improvement in first half cash flow. And De Beers contributed in
2013 an attributable ROCE of 11%. That increased to 13% for the first half of this year. And we
as a management team and all of our colleagues are absolutely focussed on that target of 15% in
2016. Mark doesn’t need to keep reminding us, but he does. And with that I will hand over to
Philippe.
Philippe Mellier
Thank you. I think we have seen today that we are today with an enviable portfolio of mining
assets and we will continue to develop and improve these assets, and we are working on the new
ones like Gahcho Kué. As Gareth has just said, we are on track to meet the 2016 ROCE target
of 15% and we will focus on doing even more thereafter when Gahcho Kué comes on-stream. In
fact, we have a positive outlook long into the future. You have seen the view that from within the
industry there are extremely favourable supply and demand dynamics in the medium- to longerterm, given the lack of new discoveries of diamond deposits and rapidly growing demand from
middle classes in emerging markets, not emerging markets of today, but also the ones for
tomorrow, as I said before, like the Philippines or Indonesia.
I hope that we have also been able to give you the sense of the importance we place on our
partnerships with diamond-producing countries, mainly in Southern Africa, but also in Canada,
and how we are undertaking activities that no other company in the industry can match in order to
strengthen this outstanding relationship which we have been nursing for many years before us.
We have also given you some insight on how our huge experience and depth of expertise in the
selling of diamonds is supporting our success in both the midstream and downstream elements of
the value chain and also the Element Six contribution with the whole industry outside the diamond
industry.
And you have seen De Beers as a clear leader, a recognised leader in its industry, represents an
important differentiator for Anglo American as it offers excellent exposure to late cycle consumer
demand. All in all, we believe that De Beers is a very strong business with a very strong team
with an outstanding medium- and long-term outlook. But this is what I wanted to say as a final
highlight, to conclude, I would like to share with you the latest advert we are going to launch for
the end of the year US sales campaign. We have always been at the very top end of emotional
advertising for diamonds with A Diamond is Forever and now with Forevermark. So let's have a
look now at the latest edition of what is going to be on-screen in a few weeks from now. [Plays
video]. We are launching Forevermark in the UK a few weeks from now so this is the right time. .
So I think now we would like to call back Mark on stage for the conclusion. Thank you.
Mark Cutifani
I think it was appropriate that I spoke about the reaffirmation of our values after that. What's
interesting is, as part of the marketing strategy, and Philippe and the guys have given a very good
overview of the key elements of the business, for those that understand some of the sensitivities,
we’re not able to talk to all parts but certainly from our point of view I think this is the most we've
given out as part of this conversation.
I did want to make an observation though, as part of the training programme for Anglo American
executives we were taken through New York, through A&A, on separate days which culminated in
us walking down 47th Street looking at the second-hand market for diamonds. It's quite an
interesting experience and the time taken by the team, and you’ll understand the market in its
various elements and guises, very important in terms of the strategy and how we think about the
future and positioning ourselves in terms of the future and I think that’s very important and
certainly something that’s very hard to describe in the short time that we have here today.
And from my point of view it's a significant of the value-add that the guys can create in terms of
the business. The second point, the three charts that Pat showed about what we’re doing within
the business and those three charts all showed improvement, somewhere between 10% and 20%
and that’s without a lick of capital. That’s basically looking at the spending on intellectual capital in
improving the business and we see a lot more potential in terms of improving the business, even
to the point where Philippe was telling me last week that they have implemented their operating
model or are in the process of implementing the operating model in Forevermark and I think we’re
up 20% already in terms of the efficiencies.
And so there's a very strong focus on the running of the business well, to continue to improve our
margins and give our services more flexibility in terms of the markets that we’re operating within.
With that we think carefully about the market and our positioning in the market and we think very
carefully about volume, quality, price and the trade-offs therein to ensure that we’re delivering
value for the long term and I have to say in our industry at the moment there are certain groups
operating in commodities that can't say that. From our point of view it is about making sure that
we protect the value proposition and manage those things we can manage, we manage them well,
and there's certainly a lot more improvement that we can see ourselves delivering.
As an overview, again supporting Philippe and the team, we have a business that has strong
markets under metals, quality world-class assets with improving potential, a unique industry
structure witness favourable supply dynamics in particular, and we’re not about to replicate, as I
said, other behaviour in markets where we do have these types of advantages. We are cautious
about growth and quality opportunities but certainly from our point of view the development of
Gahcho Kué and the quality opportunities and life extensions available through Jwaneng, Orapa
and Venetia give us again a very, certainly differentiate position in the market, with a strong
technical and financial focus that supports the strong marketing focus and business positioning
focus that really is about how we look at margins and improving our returns.
That investment in intellectual capital is something that we’re looking at right across the group
and there are certainly many things we can learn from the De Beers teams and we’re also
transferring in terms of the technical aspects across the group, particularly in our projection. I
think that’s a real win-win for the group and don't underestimate what we've learnt as a group
from the De Beers team as part of that process. So we’re building on each other’s strengths and
that’s what's making, I think Anglo American a very different proposition in terms of where we’re
going compared to where we've been.
And so for us we’re very excited to be part of the De Beers story and for Philippe and the team
they’ve made a real contribution to the Anglo American group and I think that’s what the position
we think is quite unique in terms of the industry and where we’re going and in particular the
nature of our portfolio. It positions us very uniquely in this business and I think the De Beers story
is a very simple example of how we see a different business, how it creates value across the
group and how we’re positioning the business on a broader basis. So with that, Paul, I think I’ll
hand over to yourself.