Penny: De Beers Leading the Recovery

The following brief appears courtesy of IDEX Online

In the past few weeks De Beers CEO, Gareth Penny, has been holding a series of meetings with senior managers across the family of companies to outline what the next several years will look like for De Beers and how, he believes, it will secure the company’s leadership position for the future. De Beers has kindly shared highlights from these briefings with IDEX Online.

 

Diamond Decade to include next phase of De Beers' strategy, expansion of Jwaneng (above) in Botswana and 16% market share for Forevermark in China, says CEO Penny

While not back to pre-crisis levels, we are seeing encouraging signs in the diamond market that the recovery has gained an important foothold and is continuing to gain traction. After a slightly better than expected Christmas buying period, there has been significant restocking by retailers throughout the first quarter. In addition, U.S. consumer confidence is improving, while China and India continue to show strong growth.

 

This improved demand has translated into a nearly three-fold increase in the DTC’s first quarter 2010 sales versus the same period last year, and the fourth Sight last week has also shown strong demand from the Sightholders.

 

2009 marked the end of De Beers’ 2005-2009 “Chapter 2” strategy, and the company’s strategic direction going forward can now be outlined by five strategic levers that, when pulled, will grow the company. Namely:

1.  Sustainably maximize the value of our rough diamonds through our distribution system

This includes building on established beneficiation successes in the producer countries. The DTC also recently announced an extension to the current Supplier of Choice contract period by one year, enabling Sightholders to focus on recovery and growth. This has been received in the market as a welcome response by the DTC to a unique set of circumstances;

 2.  Operate, optimize and invest in those mines that generate superior risk adjusted returns

After disposing of a number of assets recently, our production levels will likely not reach the highs of 2007 again. After producing 24 million carats last year, we will focus on maximizing the value, and life, of our resources and we expect to produce around 31 million carats this year, and 40 million carats next year.

The recently approved Cut-8 extension at Jwaneng – securing approximately 95 million more carats and extending the life of the mine out to 2025 – is a major investment, and hugely important, for De Beers. The project ensures continuity of supply from the world’s richest diamond mine, and could be worth in excess of $15 billion over the life of the mine;

3.  Retain and invest in downstream opportunities where we can evidence real value creation

Forevermark has been launched successfully in the increasingly important Asian markets. In China, in particular, Forevermark has gained a strong foothold in a market that not only grew strongly during the recession, but that we expect to double in size and account for approximately 16 percent of market share by 2016.

4.  Ensure 2009 cost and capital efficiencies become the ‘new normal’

Last year we achieved a 50 percent reduction in costs across the Family of Companies so, as the market returns to more normal trading conditions, De Beers will be a highly cash-generative business going forward. In addition to the demand and sales recovery, in March we successfully completed our refinancing process, which extends our facilities out to 2013 and improves our capital structure. The $1 billion equity investment in De Beers was a tremendous demonstration of support and confidence from our shareholders. Our improved capital structure now positions us for growth by taking advantage of opportunities across the diamond pipeline. As production levels begin to rise, we clearly have a challenge to institutionalize many of these cost and efficiency savings we made.

5.  Invest in, and protect, diamond equity

Our entire business model depends on our ability to demonstrate to consumers that the product that marks an important symbolic moment in their lives has also created real benefit for the community where it was found. For a diamond business – this is absolutely a commercial imperative. That’s why we are investing so heavily in programs like Forevermark – to enhance consumer confidence.

We have entered a new chapter in the history of our industry which, it must be said, offers great promise, and no doubt challenges, for all of us, but I’m very confident in our product, our people and our passion and I know that we have a hugely exciting diamond decade ahead of us.

 
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