Diamonds

Financial highlights
US$ million (unless otherwise stated)
2010 2009
Operating profit 495 64
EBITDA 666 215
Share of Group operating profit 5% 1%
Group's associate investment in De Beers1 1,936 1,353
(1) Excludes shareholder loans of $358 million and preference shares of nil (2009: $367 million and $88 million respectively)
Sorters at DTC Botswana

Sorters at DTC Botswana, the largest and most sophisticated diamond sorting operation in the world.

De Beers ownership structure

De Beers ownership structure diagram

Business overview

Anglo American’s diamond interests are represented by our 45% shareholding in De Beers. The other shareholders in De Beers are Central Holdings Ltd (an Oppenheimer family owned company), which owns 40%, and the Government of the Republic of Botswana (GRB) with 15%.

De Beers is the world’s leading diamond business and with its joint venture partners operates in more than 20 countries across six continents, employing around 16,000 people. The company produces around 35% of the world’s rough diamonds by value from its mines in Botswana, Canada, Namibia and South Africa.

De Beers holds a 50% interest in Debswana Diamond Company and in Namdeb Diamond Corporation, owned jointly with the GRB and the Government of the Republic of Namibia (GRN) respectively, and a 70% shareholding in De Beers Marine Namibia.

In addition, De Beers has a 74% shareholding in South African based De Beers Consolidated Mines Limited, with a broad based black economic empowerment consortium (the Ponahalo group) holding the balance.

De Beers owns 100% of The Diamond Trading Company (DTC), the sales and rough diamond distribution arm of De Beers. It also has a 50% interest with the GRB in DTC Botswana and a 50% ownership, along with the GRN’s matching shareholding, in Namibia DTC.

De Beers and LVMH Moët Hennessy Louis Vuitton have established a high-end retail jewellery joint venture, through De Beers Diamond Jewellers, with stores in the most fashionable areas of some of the world’s great cities, including New York, Los Angeles, London, Paris, Tokyo and Dubai.

De Beers, through Element Six, is the world’s leading supplier of industrial diamond supermaterials. Element Six operates internationally, with 10 manufacturing sites worldwide and a comprehensive global sales network. It is the leading player in the markets in which it operates.

Consumer demand forecasts

Operating profit
(2009: $64 m)

$495m

share of group operating profit
(2009: 1%)

5%

EBITDA
(2009: $215 m)

$666m

Industry overview

Up to two-thirds of the world’s diamonds by value originate from southern and central Africa, while significant sources have been discovered in Russia, Australia and Canada. Most diamonds come from the mining of kimberlite deposits. Another important source of gem diamonds, however, has been secondary alluvial deposits formed by the weathering of primary kimberlites and the subsequent deposition of released diamonds in rivers and beach gravels.

Rough or uncut diamonds are broadly classified either as gem or industrial quality, with gem being overwhelmingly (>99%) the larger of the two markets by value. The primary world market for gem diamonds is in retail jewellery, where aspects such as size, colour, shape and clarity have a large impact on valuation. De Beers, through the DTC, and its partners in Botswana, South Africa and Namibia, supplies its clients – known as ‘Sightholders’ – with parcels of rough diamonds that are specifically aligned to their respective cutting and polishing needs.

Strategy and growth

De Beers introduced Five Strategic Levers in 2010 to drive business growth while permanently capturing the efficiencies gained during the global economic crisis. The company is focused on:

  1. Sustainably maximising the price received for its rough diamonds through its distribution system
  2. Finding, operating, optimising and investing in those mines that generate superior risk adjusted returns
  3. Retaining and investing in downstream opportunities that ensure real value creation
  4. Ensuring 2009 cost and capital efficiencies become entrenched
  5. Investing in and protecting De Beers’ reputation and diamond equity.

In February 2010, the shareholders of De Beers agreed, as part of the De Beers group’s refinancing, that additional equity was required by De Beers. The shareholders, accordingly, all agreed to subscribe, in proportion to their current shareholding, for $1 billion of additional equity in De Beers. Our share of such additional equity, in line with our 45% equity holding, amounted to $450 million.

In March 2010, De Beers successfully refinanced all of its international and South African debt. The tenor of all debt facilities was extended to August 2013. At the end of 2010, net debt amounted to $1.76 billion compared with $3.20 billion at the end of 2009, a reduction of 45%.

Financial overview

Anglo American’s share of operating profit from De Beers increased significantly to $495 million. DTC sales of rough diamonds totalled $5.08 billion, a 57% increase (2009: $3.23 billion), due to improved consumer demand and better prices during 2010.

Markets

The first half of 2010 saw a strong recovery in demand for rough diamonds from DTC Sightholders against the low levels seen in early 2009. This recovery trend continued through the second half of the year following improved demand from retail markets, particularly in the eastern markets of India and China. By the end of 2010, DTC rough diamond prices had returned to pre-recession levels.

Since launching two years ago, De Beers’ proprietary diamond brand, Forevermark, has continued to establish itself in China, Hong Kong and Japan. Forevermark jewellery is now available in 348 stores globally, a 40% increase on the beginning of 2009. Expansion, particularly across China, is progressing rapidly with five new cities added in 2010 and further locations planned for 2011.

Operating performance

Revenue from sales of rough diamonds by the DTC, including those through joint ventures, increased by 57% compared with 2009, in response to increased consumer demand. Approximately 33.0 million carats were recovered from wholly owned and joint venture operations in 2010, compared with around 24.6 million carats in 2009, an increase of 34%.

The business has remained focused on prudent cash management and has continued to tackle costs aggressively. While costs necessarily rose due to increased production levels, exacerbated by a weaker US dollar, De Beers was able to maintain savings from the restructuring of the cost base in 2009, contributing to improved margins. In Botswana, Debswana commenced a comprehensive operations and cost review that identified many efficiency improvement opportunities which will be delivered over the next three years.

De Beers has an uncompromising focus on the safety of its employees and the security of its product. Regrettably, Debswana experienced a fatality late in the year, and De Beers’ 2010 LTIFR was 0.24 versus 0.21 for 2009. This deteriorating trend is being addressed through the continued roll-out of the Safety Risk Management Programme (SRMP).

In 2010, a review of the impact of the illicit diamond trade on De Beers demonstrated that there were a number of criminal syndicates behind the systematic theft of product from the operations. This resulted in the development of a new Global Security Strategy, which called for an organisational restructuring, with security specialists being recruited to both the centre and operations. A baseline of security control effectiveness for each operation was also established, forming the basis for improvement targets. Going forward, De Beers will be driving a loss prevention programme as a key pillar to improve product security.

Projects

Debswana commenced the Cut-8 expansion project at Jwaneng mine during 2010. Cut-8 represents the largest ever mining investment in Botswana and is expected to extend the life of mine to at least 2025.

De Beers continued to take an active leadership role in protecting consumers’ confidence in diamonds. As it has done since its inception, De Beers continued to support the Kimberley Process, offering guidance to DTC Sightholders on the identification of potentially illegal and unethical exports from Zimbabwe’s Marange region. De Beers continued to support increased producer country participation in the diamond pipeline, a key element of further empowerment. The 2010 De Beers Shining Light Awards, focused on promoting young, undiscovered designers in southern Africa, was the largest to date, comprising 30 pieces of diamond jewellery from Botswana, Namibia and South Africa.

Outlook

The near term market outlook has been improved by the strengthening demand for rough diamonds throughout 2010 and the robust retail performance during the year end gifting season, which extended from the traditional Thanksgiving and Christmas period, to cover Diwali and the Chinese New Year, reflecting increasing growth in eastern markets. It is likely that some of the price and volume increases were driven by retailer restocking and the business therefore expects 2011 to produce positive growth, albeit at a slower rate than 2010. While starting from a low level, growth is expected to continue to be strong in the emerging markets of China, India and other Far East markets. Production of approximately 38 million carats is expected in 2011, reflecting increasing demand from Sightholders and growing consumer demand.

Jwaneng’s superpit

Work is already under way to extend the life of Jwaneng, the world’s richest diamond mine.

At Jwaneng, the existing mining operation is expected to have depleted ore by 2017, at which time the mine would have effectively closed down. In 2009, however, Debswana’s shareholders agreed to fund a stay-in-business $3 billion project, named Cut-8, to extend the mine’s life to at least 2025.

The extension is a huge undertaking as the amount of overburden to be removed to expose the same quantity of diamonds as is being mined at present is almost three times the current 40 million tonnes per annum. During this operation, which is due to take six years until 2016, around 658 million tonnes of waste material will be removed – with the open pit almost doubling in depth from 330 metres to 624 metres.

By 2017, approximately 91 million tonnes of ore will be available for processing, and the mine will be able to maintain a minimum flow of 10 million tonnes of ore a year through its treatment plant. During its seven-year extended life, this is expected to yield a further 100 million carats of mainly high quality diamonds. Cut-8 represents the largest single investment in Botswana’s mining industry, boosting the country’s standing as one of the most successful African states in transforming its natural resource endowment into a more prosperous and sustainable future for all of its people.

Stuart Brown
Joint acting CEO – De Beers

Stuart Brown

Bruce Cleaver
Joint acting CEO – De Beers

Bruce Cleaver

World's leading diamond business

No.1

Carats expected to be produced in 2011

38m

Mine life extended at Jwaneng, the world's flagship diamond
mine, to

2025