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Interim Financial Results for 2017

 

Production volume Sales volume

Price

Unit cost*

Revenue*

Underlying EBITDA*

Underlying EBITDA margin

Underlying EBIT*

Capex*

ROCE*(9)

 

’000
carats

’000
carats(2)

$/ct(3)

$/ct(4)

$m(5)

$m

 

$m

$m(7)

 

De Beers

16,142

18,434

156

63

3,131

786

25%

548

74

11%

Prior period

13,314

17,210

177

65

3,270

766

23%

585

240

7%

Debswana

11,124

165

26

272

256

36

Prior period

10,512

146

24

283

270

43

Namdeb Holdings

863

568

237

105

92

8

Prior period

740

519

240

131

121

19

South Africa

2,511

133

64

127

54

48

Prior period

1,753

114

50

150

111

83

Canada(8)

1,644

435

67

69

25

(28)

Prior period

309

370

207

50

18

89

Trading

281

278

2

Prior period

186

182

1

Other(6)

(68)

(157)

8

Prior period

(34)

(117)

5

(1) Prepared on a consolidated accounting basis, except for production, which is stated on a 100% basis except for the Gahcho Kué joint venture in Canada, which is on an attributable 51% basis.
(2) Sales volumes on a comparable basis to production were 20.0 million carats (H1 2016: 18.3 million carats). Consolidated sales volumes including Gahcho Kué pre-commercial production volumes were 19.1 million carats (H1 2016: 17.2 million carats).
(3) Pricing for the mining business units is based on 100% selling value post-aggregation of goods. The group realised price includes the price impact of the sale of non-equity product and, as a result, is not directly comparable to group unit costs, which relate to equity production only.
(4) Unit cost is based on consolidated production and operating costs, excluding depreciation and operating special items, divided by carats recovered.
(5) Includes rough diamond sales of $2.9 billion (H1 2016: $3.1 billion).
(6) Other includes Element Six, downstream, acquisition accounting adjustments, projects and corporate.
(7) Includes pre-commercial production capitalised operating cash inflows from Gahcho Kué.
(8) For Canada, price excludes Gahcho Kué contribution, as all profits arising from Gahcho Kué related to pre-commercial production were capitalised. Unit costs include Gahcho Kué contribution following achievement of commercial production on 2 March 2017.
(9) Underlying EBIT used in the calculation of De Beers’ attributable return on capital employed is based on the last 12 months rather than the first six months of performance annualised. This is due to the seasonal sales and underlying EBIT profile of De Beers.

Financial and operational overview

Underlying EBITDA increased by 3% to $786 million (H1 2016: $766 million), primarily attributable to savings resulting from the closure of Snap Lake and a continued efficiency drive across the group. Efficiencies contributed to a 3% decrease in unit costs despite unfavourable exchange rates and an increasing proportion of waste mining costs being expensed rather than capitalised (due to declining strip ratio) at Venetia in South Africa. In addition, underlying EBITDA benefited from a stronger contribution from Element Six.

Total revenue decreased by 4% to $3.1 billion (H1 2016: $3.3 billion), driven by lower rough diamond revenue – as expected, given the benefit of strong midstream restocking in H1 2016. The average realised rough diamond price decreased by 12% to $156/carat (H1 2016: $177/carat), partially offset by a 7% increase in consolidated sales volumes to 18.4 million carats (H1 2016: 17.2 million carats). This reflected stronger demand for lower-value goods in Q1 2017 following a recovery from the initial impact of India’s demonetisation programme in late 2016. The lower-value mix was compensated in part by a higher average rough price index, which was 4% higher when compared with H1 2016.

Markets

Preliminary consumer demand data for diamond jewellery for the start of 2017 showed continued growth in the US and slight improvements in China in local currency. In India, retailer sentiment improved due to a return to more normal trading conditions following the government's demonetisation programme. Underlying US results reflected the broader changes in consumer behaviour affecting the overall US retail environment, with growth in the independent jewellers’ sector contrasting with some weakness from large chains.

Sentiment in the midstream remains positive following a reasonable Q4 2016 retail season, with evidence of Chinese retailers restocking and demonetisation in India having less impact than anticipated. This has supported good demand for De Beers’ rough diamonds. Spot polished prices remained broadly flat in H1 2017.

Operating performance

Mining and manufacturing

Rough diamond production increased by 21% to 16.1 million carats (H1 2016: 13.3 million carats), in line with the higher production forecast for 2017, reflecting stable trading conditions as well as the contribution from the ramp-up of Gahcho Kué in Canada.

Debswana increased production by 6% to 11.1 million carats (H1 2016: 10.5 million carats). Production at Orapa increased by 22%, driven by the ramp-up of Plant 1, following its having been on partial care and maintenance in response to trading conditions in late 2015, together with higher grades. This was marginally offset by Jwaneng, where production decreased 6% owing to lower grades. First ore from Jwaneng Cut-8 was extracted and processed in June 2017. Cut-8 will become Jwaneng’s main source of ore from 2018.

At Namdeb Holdings, production increased by 17% to 0.9 million carats (H1 2016: 0.7 million carats), mainly due to production recovering following Debmarine Namibia’s Mafuta vessel having been on extended planned in-port maintenance in Q2 2016. Debmarine Namibia’s new exploration and sampling vessel, the SS Nujoma, was officially inaugurated in June 2017 and is now fully operational.

In South Africa, production increased by 43% to 2.5 million carats (H1 2016: 1.8 million carats) as a consequence of higher grades at Venetia. Construction of the Venetia Underground mine continues to progress, with the underground operation expected to become the mine’s principal source of ore from 2023. In June 2017, the annual section 74 export levy exemption for DBCM was renewed until March 2018.

In Canada, production increased to 1.6 million carats (H1 2016: 0.3 million carats) due to the ramping up of Gahcho Kué, which entered commercial production on 2 March 2017. Production at Victor increased by 21% to 0.4 million carats as a result of higher grades. At Snap Lake, flooding of the mine, which commenced in January 2017, is now complete, thereby minimising holding costs while preserving the long-term viability of the orebody.

At Element Six, revenue and earnings improved following a modest upturn in oil and gas industry demand relative to the first half of 2016. This was offset partially by weaker demand for abrasive materials for road and mining applications.

Brands 

In March 2017, De Beers acquired LVMH Moët Hennessy Louis Vuitton’s 50% shareholding in De Beers Diamond Jewellers (DBDJ). With full ownership of the business, De Beers has begun to fully integrate the DBDJ brand and network of 29 stores in 16 key consumer markets around the world. DBDJ is a trusted and industry-leading diamond jeweller, with strong brand awareness and diamond expertise, as well as a commitment to acting responsibly.

Forevermark continued to expand its retailer network during the first half of 2017 and is now available in more than 2,080 outlets in 25 markets, an increase of 11% compared with the first half of 2016. In May 2017, Forevermark inscribed its two-millionth diamond, the second million having taken only half the time it took to inscribe the first million.

De Beers unveiled its next-generation automated melée screening instrument (AMS2™) in February 2017. The AMS2™ is significantly cheaper, and screens 10 times faster, than its predecessor. In addition, an industry-first synthetic-screening device for stones in set jewellery (SYNTHdetect™) was launched in June 2017.

During 2017, De Beers expects to invest a total of around $140 million in marketing (approximately 20% more than in 2016) through a combination of proprietary and partnership activity across the US, China and India. De Beers has substantially increased its investment in the Diamond Producers Association (DPA) in 2017. The DPA works to maintain and enhance consumer demand for diamonds by promoting the integrity and reputation of diamond jewellery.

Outlook

Macro-economic conditions underpinning consumer demand for polished diamonds globally remain supportive of marginal demand growth in 2017. The extent of global growth, however, will be dependent upon a number of macro-economic factors, including the effect of US and China government policies on exchange-rate movements. Correspondingly, midstream demand for rough diamonds is expected to depend on the strength of different markets’ restocking requirements.

Forecast diamond production (on a 100% basis) for 2017 remains unchanged and is expected to be in the range of 31-33 million carats, subject to trading conditions.

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