Interim Results 2015
|Production volume(1)||Consolidated Sales Volume(2)||Price(3)||Revenue||Underlying EBITDA||Underlying EBIT||Capex||ROCE(4)|
|'000 carats||'000 carats||$/ct||$m||$m||$m||$m|
(1) Represents diamond production on a 100% basis and is not directly comparable to consolidated sales volumes.
(2) Sales volumes (100% basis) were 14.0 million carats in H1 2015 (H1 2014: 19.0 million carats).
(3) Average realised price.
(4) Underlying EBIT used in the calculation of De Beers’ attributable return on capital employed is based on the last 12 months rather than on an annualisation of the first six months’ performance. This is due to the seasonal sales and underlying EBIT profile of De Beers.
De Beers - financial and operational overview
De Beers’ underlying EBIT decreased by 25% to $576 million (H1 2014: $765 million). This was due primarily to softer rough diamond demand, resulting in weaker revenue, which was partly offset by lower operating costs and favourable exchange rates. Unit costs declined by approximately 10% in comparison with H1 2014, with the effects of inflation being more than offset by foreign exchange benefits and cost control.
Total sales decreased by 21% to $3.0 billion (H1 2014: $3.8 billion), with rough diamond sales decreasing by 21% to $2.7 billion. Lower rough diamond revenue reflected a 27% reduction in consolidated sales volumes to 13.3 million carats (H1 2014: 18.1 million carats). Average realised diamond prices increased by 7% to $206/carat (H1 2014: $192/carat) owing to the sale of a stronger product mix, despite a 4% lower average rough price index for the period.
In response to prevailing market conditions, De Beers has utilised operational flexibility at some mines to make marginal adjustments to production plans. Production costs and overheads are being tightly managed in order to minimise the profit impact of the lower sales.
Consumer demand for diamond jewellery (measured in US dollar terms) slowed towards the end of 2014 and into the first half of 2015, driven by slower global economic growth, a weaker than expected Q1 in the US (weather related) and dollar strength. Diamond jewellery retailers experienced lower than expected sales growth over this period, which led to polished stock build-up and, accordingly, weaker polished diamond purchases from the midstream and a decline in polished prices. This, combined with liquidity and working capital challenges, has put pressure on midstream finances, negatively affecting rough diamond sales in the first half of the year.
Rough diamond demand in the second half of the year will be dependent upon the level of retailer restocking that takes place in preparation for the main jewellery selling season in the fourth quarter. In the meantime, working capital concerns in the midstream are likely to cause some short-term volatility in rough diamond demand.
Global demand for diamond jewellery (in US dollar terms) is predicted to be stable in 2015. Downside risks remain, especially related to diamond jewellery demand growth in China, as the country grapples with slower economic growth and asset price challenges.
Mining and manufacturing
De Beers’ half-year production decreased by 3% to 15.6 million carats (H1 2014: 16.0 million carats). This was mainly attributable to lower grades and reduced plant availability at Orapa. In addition, operational flexibility at the Venetia and Jwaneng tailings treatment plants was utilised to reduce production marginally in response to softer trading conditions.
Debswana’s production decreased by 4% to 11.5 million carats mainly as a result of lower production at Orapa, offset by a 17% increase in output at Jwaneng on the back of more consistent production and resultant improved volumes at lower unit costs. Jwaneng Cut-8 waste mining continues to progress well, with 60% of the 500 Mt of waste stripping required to expose the ore now complete. Cut-8 will become Jwaneng's main source of ore in 2018.
In South Africa, production at DBCM increased by 3%, mainly due to higher production at Kimberley as a result of improved plant efficiencies and improved resource performance.
Production in Namibia decreased slightly, as higher grades and throughput at the marine operations were offset by lower grades and throughput at the land operations, largely as a result of short-term industrial action. The construction of a new evaluation vessel for Debmarine Namibia is progressing well, with delivery expected in 2017. In July, De Beers and the Government of the Republic of Namibia announced agreement, in principle, on the terms of a new 10-year sales agreement for the sorting, valuing and sales of all of Namdeb Holdings’ diamonds (production from Namdeb and Debmarine Namibia).
In Canada, productivity improvements were partially offset by reduced grade at both Victor and Snap Lake. Victor’s grade was lower because of the scheduled mining of a lower-grade area in line with the mine plan. Snap Lake’s grade reduced as a consequence of mining through a complex portion of the orebody; the effect of this was accentuated by the challenges of storing water pending amendment of the mine’s discharge-water permit conditions. A temporary amendment to the relevant conditions is now in place.
Element Six experienced challenging trading conditions in H1 2015, due primarily to pressure on revenues arising from the sharp contraction in activity in the oil and gas drilling sector. Other key markets continue to develop well, in particular those servicing the consumer electronics, automotive and aerospace markets. The adverse impact of lower revenue on profitability was partially offset by a cost-containment programme (including a targeted restructuring programme) and favourable foreign exchange rates. The previously announced manufacturing footprint optimisation programme is progressing well and according to plan.
Construction of the Venetia underground mine in South Africa continues to progress well, with the production and services shaft pre-sink both complete. The project is 18% complete and remains on track for first production in 2021. In Canada, the Gahcho Kué project in the Northwest Territories is also making good progress. The project is 62% complete and is on track for first production during H2 2016.
Forevermark continues to expand; the number of retail outlets where the brand has a presence has increased by 13% over the last 12 months and it is now available in more than 1,600 retail outlets in 35 markets. Inscription and grading volumes have also increased as Forevermark increases penetration into the key growth markets of China and India. In March 2015, Forevermark opened a new inscription and grading facility in Surat, India, which has the potential to process up to $500 million worth of diamonds annually.
De Beers Diamond Jewellers maintains its portfolio focus on fast-growing markets, with 36 stores (of which 13 are franchises) in 12 key consumer markets around the world.
Given the challenges faced in the midstream during the first half of 2015, rough diamond demand is likely to remain constrained for the year as a whole, with demand conditions in the second half of the year dependent upon the level of retailer restocking that takes place.
The continued strength of the US dollar, coupled with lower consumer diamond demand growth in China, is likely to lead to stable global diamond jewellery demand for the full year. In the mid- to long-term, the prospects for the industry remain positive as the rise in the world’s middle class is expected to underpin stronger growth in demand for diamonds, outstripping growth in production.
Production guidance for 2015 has been revised to 29 to 31 million carats (on a 100% basis), subject to trading conditions.