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INTERIM FINANCIAL RESULTS 2016

 

 

Production volume   Sales volume   Price   Unit Cost   Revenue   Underlying EBITDA   Underlying EBIT   Capex   ROCE  
  ’000carats ’000 carats $/ct $/ct $m $m $m $m  
De Beers 13,314 17,210 177 65 3,270 766 585 240 7%
Prior period 15,628 13,323 206 82 3,021 792 576 363 12%
Debswana 10,512 - 146 24 - 283 270 43 -
Prior period 11,545 - 171 25 - 260 248 46 -
Namdeb Holdings   740 - 519 240 - 131 121 19 -
Prior period 893 - 593 244 - 113 96 11 -
South Africa 1,753 - 114 50 - 150 111 83 -
Prior period 2,178 - 131 56 - 192 143 146 -
Canada 309 - 370 207 - 50 18 89 -
Prior period 1,012 - 292 189 - 104 58 144 -
Trading - - - - - 186 181 1 -
Prior period - - - - - 151 147 1 -
Other - - - - - (34) (117) 5 -
Prior period - - - - - (28) (116) 15 -

Financial and operational overview

Underlying EBIT increased by 2% to $585 million (H1 2015: $576 million). This was the result of higher revenues from stronger rough diamond demand, tight operating cost control and favourable exchange rates. As a result of cost-saving programmes and portfolio changes, supported by favourable exchange rate movements, consolidated unit costs declined from $82/carat to $65/carat.

Total revenue increased by 8% to $3.3 billion (H1 2015: $3.0 billion), mainly driven by higher rough diamond sales, which increased by 11% to $3.1 billion. This was due to a 29% increase in consolidated sales volumes to 17.2 million carats (H1 2015: 13.3 million carats), partly offset by a 14% decrease in average realised rough diamond prices to $177/carat (H1 2015: $206/carat) which reflected the 16% lower average rough price index for the period.

Markets

Preliminary data indicate that during H1 2016, the US market showed positive growth overall, while the Chinese market was broadly stable. Japan demonstrated modest growth in local currency, whereas consumer demand in India was hampered by a month-long jewellers’ strike in March 2016 against new government regulations.

Sentiment in the Midstream improved during the period under review, as good year-end holiday sales, particularly in the US, necessitated retailer inventory restocking, which enabled the cutting centres to rebalance their polished stock. At the same time, rough inventories in the midstream were lower, after materially restrained buying in H2 2015. The significant midstream restocking, when combined with the contribution of positive holiday sales, resulted in positive growth in demand for rough diamonds in H1 2016.

Operating performance

Mining and manufacturing

Rough diamond production decreased by 15% to 13.3 million carats (H1 2015: 15.6 million carats), reflecting the decision to reduce production in response to prevailing trading conditions in H2 2015.

Debswana’s production decreased by 9% to 10.5 million carats, with Orapa down by 25% compared with H1 2015 and Damtshaa (a satellite operation of Orapa) placed on care and maintenance from 1 January 2016. Jwaneng Cut-8 continues to progress and, by the end of June 2016, 77% of the 500 million tonnes of waste stripping required to expose the ore had been mined. The first Cut-8 ore to the processing plant remains scheduled for 2017.

Production at Namdeb Holdings decreased by 17% to 0.7 million carats, with reduced output at Debmarine Namibia (as a result of the Mafuta vessel undergoing extended planned in-port maintenance) and lower grades at Namdeb’s land operations. In South Africa, production declined by 20% to 1.8 million carats, mainly due to the completion of the sale of Kimberley Mines in January 2016. Construction of the Venetia Underground mine continues to progress, with the decline advanced to more than 1,550 metres. First production from the underground operation is scheduled for 2022. In Canada, production fell by 69% to 0.3 million carats owing to Snap Lake being placed on care and maintenance in December 2015. In early July 2016, approval was granted to flood the Snap Lake mine. Production at Victor was 8% lower than in H1 2015 (0.3 million carats in both periods). The Gahcho Kué project in Canada is progressing according to plan. The project is 96% complete and remains on track for first production during H2 2016, with commercial production expected to be reached in Q1 2017.

Owing to continuing depressed markets in key industrial sectors (principally oil and gas), Element Six experienced a challenging first six months. The reduction in contribution arising from lower sales has been partially offset by a comprehensive cost-reduction programme.

Brands

ForevermarkTM continues to expand its retailer network and is available in 1,874 outlets (a 6.5% increase since the end of 2015) in 38 countries, including the new markets of Hungary, Thailand and South Korea. In June 2016, ForevermarkTM announced the launch of the Black Label collection (an innovative collection of fancy-shape diamonds with unrivalled sparkle in every cut) and announced a Q4 2016 US national television campaign featuring the Ever UsTM two-stone diamond collection. In Q1 2016, De Beers also invested in additional Chinese New Year marketing campaigns to further stimulate diamond jewellery gift giving, which was received positively by the industry.

De Beers Diamond Jewellers maintained its focus on fast-growing markets, with 35 stores in 16 key consumer markets around the world. Growth in mainland China sales helped to offset the significant impact of lower Chinese tourist levels in Europe.

Namibia sales agreement

In May 2016, the Government of the Republic of Namibia and De Beers signed a new 10-year sales agreement for the sorting, valuing and sale of Namdeb Holdings’ diamonds. This represents the longest sales agreement ever concluded between the parties.

Outlook

Macro-economic conditions underpinning consumer demand for diamonds remain broadly stable in aggregate, but with persistent downside risks looking into H2 2016 (including recent social and political instability). Rough diamond revenues are expected to be weighted towards H1 2016, consistent with prior years and typical of the seasonal drivers.

In the Midstream, caution in rough diamond buying is expected to prevail, as the supplies bought by diamantaires in H1 2016 are gradually converted into polished.

Forecast diamond production (on a 100% basis) for 2016 remains unchanged and is expected to be in the range of 26-28 million carats, subject to trading conditions. Consistent with this level of production, plans are in place to deliver approximately $200 million of cash savings in production costs, overheads, capital expenditure and disposal proceeds in 2016.

Production volume   Sales volume   Price   Unit Cost   Revenue   Underlying EBITDA   Underlying EBIT   Capex   ROCE  
  ’000carats ’000 carats $/ct $/ct $m $m $m $m  
De Beers 28,692 19,945 207 104 4,671 990 571 697 6%
Prior year 32,605 32,730 198 111 7,114 1,818 1,363 689 13%
Debswana 20,368 - 178 34 - 379 352 101 -
Prior year 24,237 - 172 31 - 604 579 114 -
Namdeb Holdings   1,764 - 553 273 - 147 120 30 -
Prior year 1,886 - 581 283 - 207 177 37 -
South Africa 4,673 - 131 81 - 282 174 279 -
Prior year 4,634 - 155 89 - 344 243 296 -
Canada 1,887 - 275 229 - 154 65 254 -
Prior year 1,848 - 312 279 - 178 77 186 -
Trading - - - - - 107 100 2 -
Prior year - - - - - 579 572 4 -
Other - - - - - (79) (240) 31 -
Prior year - - - - - (94) (285) 52 -
Production volume   Sales volume   Price   Unit Cost   Revenue   Underlying EBITDA   Underlying EBIT   Capex   ROCE  
  ’000carats ’000 carats $/ct $/ct $m $m $m $m  
De Beers 28,692 19,945 207 104 4,671 990 571 697 6%
Prior year 32,605 32,730 198 111 7,114 1,818 1,363 689 13%
Debswana 20,368 - 178 34 - 379 352 101 -
Prior year 24,237 - 172 31 - 604 579 114 -
Namdeb Holdings   1,764 - 553 273 - 147 120 30 -
Prior year 1,886 - 581 283 - 207 177 37 -
South Africa 4,673 - 131 81 - 282 174 279 -
Prior year 4,634 - 155 89 - 344 243 296 -
Canada 1,887 - 275 229 - 154 65 254 -
Prior year 1,848 - 312 279 - 178 77 186 -
Trading - - - - - 107 100 2 -
Prior year - - - - - 579 572 4 -
Other - - - - - (79) (240) 31 -
Prior year - - - - - (94) (285) 52 -

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