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De Beers Generates Strong Cash Flow, Continues to Lower Debt and Expands Project Base Despite Challenging Trading Conditions

Overview

• Total sales decreased 16 percent to US$6.1 billion (2011: US$7.3 billion). Sales of rough diamonds decreased 15 percent to US$5.5 billion (2011: US$6.5 billion)
• Between 1 January and 31 December rough diamond prices decreased 12 percent, in line with polished diamond prices
• Diamond production totalled 27.9 million carats (2011: 31.3 million carats)
• Continued strong cash flow generation with free cash flow of US$697 million (2011: US$816 million), and net debt reduced to US$722 million (excluding shareholder loans) (2011: USD$1177 million)
• Migration of London-based sales function to Botswana continued ahead of schedule, with relocation of aggregation, quality assurance and Sight preparation activities during 2012
• Jwaneng Mine Cut-8 infrastructure complete
• Venetia underground project has received final regulatory clearances, and will commence in 2013
• Stores licenced to retail Forevermark diamonds grew by 40 percent to more than 900 independent jewellers worldwide
• Anglo American plc completed its acquisition of a further 40 percent interest in De Beers, bringing total shareholding to 85 percent

Directors’ Comments

Safety

In 2012, De Beers sadly experienced three fatalities. Operating safely remains our number one priority, and the roll-out of our safety programme has improved the lost-time injury frequency rate at 0.13 (2011: 0.15) while we strive towards a Zero Harm environment. Following a slope failure and tragic loss of life at Debswana’s Jwaneng Mine in late June, pit operations were suspended. A comprehensive geotechnical review of the pit was undertaken in the subsequent seven week period before the pit re-opened. The company continues to drive improvement in safety performance through the on-going integration with the Anglo American safety management systems aimed at embedding a safety culture across the business.

Market overview

After an exceptional first half of 2011, the macroeconomic uncertainty that triggered difficult trading conditions in the fourth quarter of 2011 continued, as expected, into 2012. Demand for diamond jewellery in the key markets of the US, China and Japan grew, albeit at a slower pace than in 2011. This, together with higher polished stock levels, resulted in a decline in polished prices particularly in the third quarter of 2012. Although rough diamond prices remained broadly stable in the first half of 2012, a combination of weaker polished prices, high levels of cutting centre stock and tightening liquidity in the midstream resulted in a rough diamond price correction during the third quarter. By the end of 2012 however, rough diamond prices stabilised, reflecting a modest improvement in consumer demand during the holiday sales season in most major diamond jewellery markets.

Sales

The decrease in rough diamond sales was largely a result of diminished demand, changing product requirements from Sightholders, and reduced availability of some goods. In March, De Beers announced its new Sightholder list and began a new three-year Supplier of Choice contract period. Sales of rough diamonds via De Beers’ auction platform decreased to US$356 million in 2012 (2011: US$405 million), due to subdued buyer activity. 

Production

In light of prevailing diamond market trends as well as operational challenges, the company’s stated strategy of producing to demand was maintained, with 27.9 million carats recovered in 2012 (2011: 31.3 million carats) while operations continued to focus on maintenance and waste stripping backlogs.

• Debswana produced 20.2 million carats, down 2.7 million carats (2011: 22.9 million carats), mainly as a result of the Jwaneng Mine slope failure
• In Canada, production remained relatively steady at 1.6 million carats (2011: 1.7 million carats). Of total carat recovery, Victor Mine delivered 0.7 million carats (2011: 0.8 million carats) and Snap Lake Mine produced 0.9 million carats (2011: 0.9 million carats)
• Namdeb Holdings production increased to 1.7 million carats (2011: 1.3 million carats). Of that total, Debmarine Namibia produced a record 1.1 million carats (2011: 1.0 million carats) off-shore despite adverse weather conditions. Namdeb land operations doubled to 0.6 million carats (2011: 0.3 million carats)
• De Beers recovered 4.4 million carats (2011: 5.4 million carats) in South Africa. The reduced output was partly due to the sale of Finsch Mine which completed in September 2011, which contributed 0.9 million carats during 2011

Projects

In Botswana, construction of the infrastructure at the Jwaneng Mine Cut-8 project is complete. Cut-8 will provide access to approximately 95 million carats of mainly high quality diamonds and extend the life of the world’s richest diamond mine to at least 2028.

During 2012, De Beers successfully relocated its aggregation, quality assurance and Sight preparation functions to Botswana ahead of schedule. As part of the 10-year Debswana sales agreement between De Beers and the Government of the Republic of Botswana, De Beers will complete the migration of its London-based sales activities to Gaborone by the end of 2013. Thereafter, the sale of De Beers’ worldwide production to international and Botswana-based Sightholders will be carried out in Gaborone.

In South Africa, the Venetia Mine underground project was approved by the De Beers and Anglo American Boards. Environmental authorisation was granted in July and the Environmental Management Plan was approved by the Department of Mineral Resources in October. The final outstanding regulatory clearances were obtained in February 2013 and the project will commence shortly. De Beers will invest approximately US$2 billion in capex to build the new underground mine, which will extend the life of the resource until 2042 and replace the open pit as South Africa’s largest diamond mine.

In Canada, the Environmental Impact Review documentation for the Gahcho Kué project, in which De Beers has a 51 per cent interest, has been submitted for review, and the Review Panel is expected to issue a decision report in 2013. 

Exploration

De Beers spent US$59 million (2011: US$46 million) on exploration work programmes in Angola, Botswana, Canada, India and South Africa. In October, De Beers signed an Option and Subscription Agreement with Peregrine Diamonds Ltd, in respect of early stage work on the Chidliak diamond project on Baffin Island in Canada. This prospect contains 61 diamondiferous kimberlites, and the agreement enables De Beers to start mineral exploration and development work in 2013 to assess the project’s techno-economic viability. Results will determine whether or not De Beers exercises its option to earn in, ultimately becoming the majority owner in a new joint venture with Peregrine Diamonds.

Brands

Forevermark continued to grow strongly in 2012, particularly in the core markets of China, Japan, India and the US, and was launched in two new licensee markets - Canada and the UAE. Forevermark is now available in more than 900 retail partners - an increase of 40 percent vs 2011 - in 12 markets. Since the launch of Forevermark, more than 500,000 diamonds have been inscribed with a unique identification number indicating that they have met the brand’s high standards of quality, ethical integrity and provenance.

De Beers Diamond Jewellers (DBDJ) faced challenging market conditions experienced by most high-end jewellers in 2012, but continued to focus on expanding its store network in China, a market of significant opportunity for high-end jewellery brands. New stores were opened in Shanghai and Nanjing, giving DBDJ five stores in China with an additional store scheduled to open in 2013. Franchise partners will open further stores in Kuala Lumpur, Baku and Vancouver in 2013. DBDJ currently has 43 stores in leading diamond consumer markets around the world.

Technology

Performance varied across Element Six’s four divisions, with a small decrease in sales year on year, reflecting weaker demand and volatility in a number of key end-user industries. Element Six made significant progress during the year in developing its geographic reach, manufacturing excellence and track record of product innovation. In addition, construction of the world’s largest diamond supermaterials research and development facility in the UK began in May, scheduled to complete in mid 2013.

Other

The agreement entered into by De Beers in the US in 2006, to settle all outstanding class actions against it, became unconditional and effective in May. The US$295 million settlement, plus interest, held in escrow since 2006, is now being distributed in accordance with the court-ordered plan. 

Board Changes

In August, Anglo American announced the completion of its acquisition of a 40 percent shareholding in De Beers from CHL (representing the Oppenheimer family interests), thereby increasing Anglo American’s shareholding in De Beers to 85%. As a result of the acquisition, Nicky Oppenheimer stepped down as Chairman of De Beers with effect from 16 August 2012. On 28 September 2012 Cynthia Carroll, Chief Executive of Anglo American, was appointed Chairman of De Beers. Also appointed to the De Beers Board on the same date were two members of Anglo American’s Group Management Committee – Brian Beamish, Group Director, Mining & Technology, and Peter Whitcutt, Group Director, Strategy & Business Development.

Joseph Iita, former Permanent Secretary of the Ministry of Mines and Energy for the Government of the Republic of Namibia, stepped down as a director of the De Beers Board on 26 November 2012. The following day Kahijoro Kahuure, the new Permanent Secretary, was appointed to the De Beers Board.

Outlook

De Beers expects moderate growth in diamond jewellery demand in 2013. This will be supported primarily by a more positive picture emerging from China and India compared to 2012. Some upside is possible in the US, while trading conditions in other developed markets are likely to be challenging. The rough diamond manufacturing sector closed 2012 with high levels of inventory, particularly in the higher-end categories of diamonds, and faces continued pressure in terms of midstream liquidity. In the medium to long term, industry fundamentals are expected to strengthen as diamond production plateaus and demand continues to increase.

Contacts

Lynette Gould

O: +44 20 7 430 3509

M: +44 774 039 3260

[email protected]

About De Beers Group of Companies

De Beers is a member of the Anglo American plc group. Established in 1888, De Beers is the world’s leading diamond company with unrivalled expertise in the exploration, mining and marketing of diamonds. Together with its joint venture partners, De Beers employs more than 23,000 people across the diamond pipeline, and is the world’s largest diamond producer, by value, with mining operations in Botswana, Canada, Namibia and South Africa. As part of the company’s operating philosophy, the people of De Beers are committed to Living up to Diamonds by making a lasting contribution to the communities in which they live and work, and transforming natural resources into shared national wealth. For further information about De Beers visit www.debeersgroup.com.

2012 snapshot (US Dollar millions)
	2012	2011 *	Variance %
Total sales	6074	7262	-16
EBITDA	1075	1763	-39
Operating profit Underlying earnings¹	815 506	1491 993	-45 -49
Free cash flow	697	816	-15
Net interest bearing debt (excluding shareholders’ loans)	722	1177	-39

* Comparatives have been restated following changes in accounting policy for joint ventures and employee benefits.

¹ underlying earnings is profit for the financial year attributable to equity shareholders of the Company before special items and remeasurements.

De Beers Group Production
	2012	2011
Tons Treated 000s: Mining South Africa (DBCM)	13691	15525
Debswana	21873	22889
Mining Canada	3967	3545
Namdeb Holdings	12809	8288
	52340	50247
Carats recovered 000s
Mining South Africa	4432	5443
Debswana	20216	22890
Mining Canada	1560	1660
Namdeb Holdings	1667	1335
	27875	31328