THE DIAMOND INSIGHT REPORT 2014
BRUCE CLEAVER PRESENTATION
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Thank you, Stephen. Good afternoon everyone.

That gives a good overview of what The Insight Report can tell us about the changing trends at the
consumer end of the diamond pipeline.

I would now like to provide some background on what The Report reveals about the other key
parts of the value chain, including the midstream sector – that is, rough diamond distribution as
well as cutting and polishing – and the upstream sector, including mining and exploration.

While these parts of the diamond industry are perhaps less familiar to many of you, they can have
a significant impact on the retail of diamond jewellery to consumers. Without them, of course,
there would be no polished diamonds to sell.

Stephen has just talked about the growing importance of online when it comes to how consumers
research and buy diamonds, but The Insight Report makes it clear that technology investments
will also be needed across the entire diamond pipeline if the industry is to maximise the
opportunities and to safeguard the diamond dream.

We have already seen in Stephen’s presentation that diamond demand growth is expected to
outstrip supply over the medium and longer-term and I will touch on this again later. But one thing
that this trend emphasises is that activities such as exploration become even more important to
our future as they can bring new finds.

With the slowly depleting reserves in existing mines and the search for new diamond deposits
moving to more remote locations, we will increasingly rely on technological advancements to help
us navigate more complex environments. I am therefore pleased to say that there are new
technologies being developed in this area which are providing greater efficiency in the highly
challenging search for new diamond deposits.

A good example of this is SQUID – the Super Conducting Quantum Interference Device. One way to
locate kimberlite deposits is through looking at changes to magnetic fields and the SQUID is a very
sensitive magnetometer which can measure extremely subtle examples of such fields. This
technology has significant benefits over existing exploration methods, especially as it is the first
device of its kind that can operate on a fixed-wing plane.

Tools such as this could help deliver a major step forward in the industry’s ability to identify new
sources of production, but even more investment is needed if the diamond trade is to address the
declining supply situation effectively.

When it comes to mining, technological improvements have a direct impact on things such as
efficiency and safety and security, all of which are extremely important when it comes to
maintaining a sustainable supply of rough diamonds.

By way of example, technology relating to improved surveillance, smart security systems and
access control have delivered a more secure environment for diamond mining and reduced
instances of theft. One particularly impressive example of the use of technology in this area is
Scannex, a system that allows a safe, full-body, low-dosage x-ray to ensure that no diamonds
illicitly leave mining operations with employees. And while this has been of great importance to the
diamond mining industry, it’s also interesting to note that it also has applications in hospitals
through being used to scan patients in a rapid and cost effective manner.

When it comes to mine safety, technology has also helped mitigate risks through the use of
SMARTY cameras in mining vehicles to encourage safe driving, monitor driving behaviour and
fatigue, and enhance overall road safety.

But technology can also deliver step changes in production, such as those achieved by De Beers’
pioneering work in marine diamond mining off the coast of Namibia.

Great strides have been made but even more investment in new mining techniques and
approaches will be necessary to provide the extra supply to meet the rapidly growing demand.

Of course, alongside all of this, consumer confidence is of paramount importance to the diamond
industry and the issue of undisclosed synthetics must not be ignored.

While the global production of gem quality synthetics is miniscule in comparison with the annual
production of natural diamonds, the potential for consumer confidence to be harmed by
undisclosed synthetics is great. Diamonds are a uniquely emotional purchase and the importance
of integrity is heightened in our industry. As such, it is vital that the industry continues to invest in
making sure that people will always be 100% confident that the purchase they make is as
described at the point of purchase.

At De Beers we have spent tens of millions of dollars developing detection equipment that
ensures all synthetics can be distinguished from natural diamonds.

The latest example of this is the Automated Melee Screening Device, or AMS, which enables both
colourless and near-colourless smaller diamonds to be screened very quickly and cost-effectively.
This instrument, along with the other pieces of detection equipment we have developed, can be
seen in action at the International Institute of Diamond Grading and Research stand here at the
Show. I would encourage you to have a look if you haven’t seen them before.

Innovations such as these are vital to the maintenance of consumer confidence, but synthetic
production techniques continue to develop and so the industry must maintain investments here to
ensure that unethical operators cannot cheat consumers.

Turning specifically to the midstream, there are a number of trends that seem established and
likely to continue.

The midstream sector remains fragmented, with thousands of companies operating with a variety
of business models, including wholesalers, rough dealers, manufacturers, polished dealers and
combinations thereof.

In recent years, however, midstream companies have been under increasing pressure for a
number of reasons, including lower carat supply, rising costs in the upstream sector, higher costs
of credit and more pressure from their retail customers and the accompanying price-point
requirements.

Looking at the liquidity pressures faced by the midstream as an example, a culmination of a
number of issues is leading to increased borrowing costs. These issues include tougher
requirements under Basle 3, and a risk premium being applied by lending banks to an industry
they see as less transparent than some of those competing for financing.

Over the last three to four years there has been a marked increase in the effective rate at which
banks lend to diamond businesses. The average interest rate paid by diamantaires to funding
institutions is now more than 5% above LIBOR, putting real strain on the midstream’s ability to
fund its activities in a sustainable manner.

Diamantaires that address this issue via greater financial and corporate transparency, and that
are better capitalised, will be well placed to access finance at a competitive rate. However, others
are likely to struggle.

The quote up on screen here shows that lenders to the diamond industry will take a direct interest
in the financial profile of potential customers. There is a clear incentive for midstream businesses
to make this an area of priority.

With midstream margin pressures from both upstream and downstream, it is also evident that
those businesses with real economies of scale or a value-adding, differentiated offering will be
most likely to thrive.

Certain midstream businesses have seen real success in either developing bespoke diamond
assortments, improving cutting and polishing methods through the use of technology, better
polished diamond stock management systems or developing a compelling consumer brand
proposition.

On the whole, however, the combination of pressures facing the midstream means that
consolidation is a possible outcome in this fragmented sector.

Meanwhile, the geographical footprint of cutting and polishing has also been changing rapidly and
looks set to continue to do so.

The move towards low-cost centres in Asia seems to have peaked and more activity is taking place
in producing countries keen to move into other parts of the diamond value chain.

This is understandable when considering how reliant certain economies are on the benefits
generated by their diamond industries.

Botswana is a prime example of this, with diamonds representing over a quarter of the country’s
GDP and over three quarters of total export earnings.

We have also seen other parts of the value chain move into producer countries – perhaps the
most famed example is De Beers’ recent relocation of its entire Global Sightholder Sales
operations from London to Gaborone in Botswana.

Looking at the upstream trends, there is little doubt that we can expect to see production decline
slowly after 2020. The view we show here is in fact a conservative view and it is unlikely that there
will be a surprise with more production coming on-stream. The data in this chart includes all De
Beers projects, those of third parties, expansion projects and new projects in the pipeline. All
potential sources of production of which we are aware are included, so it seems likely that this is
the maximum production scenario.

In short, this picture encapsulates several truths: existing mines are ageing and it is extremely
difficult and costly to find new deposits. And of course, finding diamond mines in the first place is
far from the only challenge. Diamond mines take several years and a huge amount of capital to
bring into operation after discovery.

Although rough diamond production in 2013 increased by 7% in carat terms over 2012 levels – to
a total of around 145m carats – this remains well below the 2005 peak of roughly 175m carats.

And while there are some new operations due to come on line in the coming years, this will not
deliver a marked increase in production levels.

But the lack of major new deposits is certainly not for the want of trying. Around $7 billion has
been spent on diamond exploration since 2000, yet this immense effort and investment has
yielded relatively meagre results: only one deposit of significant size (Bunder in India) has been
discovered during this period, highlighting just how challenging it is to discover new, economically
viable deposits.

Diamond supply is therefore expected to plateau in the second half of this decade before
declining from 2020 onwards.

Although large diamond companies continue to invest substantial sums in exploration, the
likelihood of another ‘Tier One’ mine (such as Jwaneng in Botswana) being discovered is not high.

To illustrate the point, over the last 140 years, around 7,000 kimberlite pipes have been
discovered. This may sound impressive, but of these only one in seven actually contains diamonds.
And of this number, only around 60 have been sufficiently rich in diamond content to make them
economically viable. Of these, only seven have become so-called ‘Tier One’ mines.

The diamond mining sector therefore represents another area in which the industry must invest if
it is to meet growing demand.

A related challenge is the recent trend of increasing operational input costs for all key production
expenses.

It was interesting to be reminded in a recent visit to Jwaneng mine just how much investment has
to go into recovering diamonds from the ground, often in some of the toughest environments on
the globe.

Picture this - I am over six feet tall. The tyres on our mining trucks at Jwaneng stand at more than
twice my height. So, it stands to reason that replacement tyres for these trucks cost around
$50,000 each. With each truck using six tyres, a $300,000 cost for a new set of wheels makes
me feel a whole lot better about what I got charged to replace the tyres on my car during my last
roadworthy check.

The cost of each of the trucks runs into the millions of dollars and Jwaneng alone has over 100
trucks. The power shovels used at the mine cost upwards of $5 million each.

Costs for all of these vital pieces of equipment continue to rise, but are far from being the only
escalating costs.

When we look at the three major operating expenditure factors in diamond mining, it is startling to
consider how sharply costs of electricity, diesel and labour have risen in the world’s major
diamond producing countries over the last decade. And of course, high costs for these can be
expected to continue.

Just by way of example, between 2002 and 2012 labour costs saw a compound annual growth
rate of 14% in Botswana and 19% in Russia.

Electricity costs experienced a compounded increase of around 11% annually in each of Botswana
and Russia over the same period.

Adding to this challenge is the fact that diamond mining companies now need to develop deeper
and more remote parts of existing deposits to maintain the levels of supply on which the wider
industry depends.

De Beers’ multi-billion dollar investments in the Jwaneng Cut-8 project and the Venetia
Underground mine are good examples of geographies which are suffering from this costly trend.

And new projects that are yet to be brought online tend to be in some of the most inhospitable
places in the world, such as the Arctic. Not only are these operations inherently more complex, but
they also require greater infrastructure investments in order to start up and maintain operations.

Diamond mining has never been easy and it has always been a highly capital-intensive business. It
is clear, however, that complexity – and by extension costs -- will continue to increase and that
further investments will be needed in operational innovation to drive productivity and sustain
profitable production growth.

So, The Diamond Insight Report 2014 shows us that the diamond industry is set to experience a
period of sustained demand growth and we have much to be positive about. We can expect to see
American consumers continue to buy strongly as the economic recovery continues; and we can
look forward to Chinese and Indian consumers showing even greater demand for diamond
jewellery as their middle classes continue to grow.

The industry has shown itself to be resilient and is alive with opportunity.

But the Report makes it equally apparent that we cannot take this for granted. Without a
considered programme of strong investment, a gradual erosion of industry value growth can be
expected.

This investment will be required in all parts of the value chain: in technology; in exploration and
mining; and in branding, marketing and retail standards.

And with the increased competition from other luxury categories being stronger than ever before,
the future is already upon us.

Thank you very much.