The past year was another banner one for the diamond industry, highlighted by strong demand for rough diamonds from cutting centres.
Against this backdrop,
Rough diamonds are sourced by the DTC through some 20 mines De Beers owns and operates in South Africa and in partnerships in nearby Botswana, Namibia and Tanzania. In addition, De Beers has been purchasing rough stones from Russian diamond producer
De Beers estimates that global retail sales of diamond jewelry for 2004 were about 6% higher in local currency than in the previous year, or 8% higher in U.S. dollars. Christmas season sales were brisk in the U.S. last year — specifically 35% higher than in the previous year. As well, growth in India and the Asia-Pacific region was “outstanding,” says Ralfe.
Ralfe describes the polished exports from the cutting centres through to the retail market as robust, with 15-20% growth. The polished inventory held by the cutting centres is down 5.2%, to US$4.2 billion, but the debt level has continued to rise and now stands at US$9 billion. “This is clearly the result of the cheap U.S. interest rates that have been available,” says Ralfe.
A strong second half of the year more than compensated for a shortfall in production in the first half. Group production for the year reached a targeted 47 million carats — a 7% increase over 2003. The Debswana operations in Botswana accounted for the lion’s share, producing a record 31.1 million carats, up 2% over 2003. The Debswana Diamond Company’s four mines accounted for 66% of the De Beers group’s output in 2004. Debswana is a 50-50 joint-venture with the government of Botswana.
At year-end, the Botswana government agreed to renew the Jwaneng mining lease for another 25 years, and, at the same time, extend the Orapa, Damtshaa and Letlhakane mining leases for a similar period. The Jwaneng mining lease had expired mid-year. In return, De Beers agreed that a 15% equity stake in De Beers’ ultimate holding company, DB Investments, previously owned by Debswana, should instead be owned exclusively by the Botswana government.
The shareholders of the ultimate De Beers entity include
“We believe this has been a satisfactory outcome, and a reassurance of the important partnership between ourselves and the Botswana government,” says Oppenheimer.
Ralfe concurs: “It’s an important de-risking of our business going forward, [providing] long-term security of those mining leases.”
The South African operations of De Beers Consolidated Mines (DBCM) churned out 13.7 million carats in 2004, up 15% over 2003. “There is an ongoing cost squeeze, which will make life difficult and challenging in the year ahead here in South Africa,” says Oppenheimer. Venetia, far and away, was the leader, cranking out 7.2 million carats for a 9% gain over 2003. The Kimberley mines had their best year since 1914, producing 2 million carats. The improved performance of Kimberley is due mainly to the new combined treatment plant, which is designed to re-process old dumps. The plant has had to overcome some teething problems but is now operating at capacity (20,000 tonnes per day).
The weakening of the U.S. dollar has continued to put pressure on De Beers’ older and more marginal South African mines, with five of its seven mines operating at a loss, despite an overall 7% reduction in costs per carat.
To ensure that those mines survive, De Beers has embarked on a “suite of new strategies,” including a voluntary early retirement process at Cullinan (formerly known as Premier) and a compulsory redundancy consultation campaign at Koffiefontein, which is nearing the end of its life. “There are 10,000 men and women who rely on DBCM for their livelihoods,” says Ralfe. “We need to ensure the company operates profitably and in a way that is sustainable.”
De Beers has spent the past year re-organizing the assets of DBCM as it prepares for a black economic empowerment transaction in 2005. “This is seen by government as the most important manifestation of the transformation of De Beers,” says Ralfe.
The Namdeb joint venture in Namibia had a particularly good year: production was up 28% over 2003 at 1.9 million carats. A lot of the new production was generated from the marine operations, which accounted for 800,000 carats, or 31% more than 2003.
“The marine operations are a pretty-well infinite resource that Namdeb has in the Atlantic,” says Ralfe. “With the depletion of the land-based resources, it is clearly where Namdeb is looking for its future.”
Namdeb brought two new ships into operation in 2004.
The aging, 75%-owned Williamson mine in Tanzania also showed good growth, producing 230,000 carats, up 38% for the year. Measuring 1.5 sq. km in surface area, the Williamson Mwadi kimberlite is the largest pipe in the world ever to be mined. Discovered in 1940 by Canadian geologist John Williamson, this multi-phase kimberlite has been mined continuously by open-pit methods for more than 60 years.
Inferred minable resources at the end of 2000 stood at 114 million tonnes grading 5.7 carats per 100 tonnes, equivalent to 6.5 million carats. While the pit limits are modelled to a depth of only 70 metres, based on a bottom stone cutoff of 1.5 mm and a carat value averaging US$106, the Mwadui kimberlite pipe extends to a depth of at least 500 metres.
“In the Williamson pipe, we have a major long-term resource in the De Beers group,” explains Ralfe. “Our great technical challenge is to find a way to put this extremely low-grade deposit to economic use.”
In May, De Beers’ board of directors is expected to approve construction of the Snap Lake underground mine in Canada’s Far North. The project is 220 km northeast of Yellowknife, just south of the tree line.
De Beers proposes development of a 3,000-tonne-per-day (1.1-million-tonne-per-year) underground diamond mine on the shallow-dipping (12-15) Snap Lake kimberlite dyke. The project would have an operating life of at least 22 years and deliver upwards of 1.5 million carats of diamonds annually. These estimates are based on a revised minable resource of 18.3 million tonnes grading 1.46 carats per tonne, equivalent to 26.7 million recoverable carats. The in situ grade of Snap Lake averages 2.18 carats per tonne.
As a result of pre-development underground work, De Beers is seeing a slightly coarser diamond frequency than expected. The Snap Lake diamonds have been recently re-valued at US$109 per carat, up substantially from a previous estimate of US$76 per carat. Based on projected revenue of $212 per tonne of kimberlite and an operating cost of $130 per tonne, Snap Lake is expec
ted to generate $226 million in annual revenue. Project capital costs have risen by 28% and are now estimated at $625 million.
“Like many projects in North America, we’ve seen significant increase in costs over the past few years, mostly related to fuel, cement and steel prices,” says John McConnell, De Beers’ vice-president of operations in the Northwest Territories.
The 2.5-metre-thick kimberlite dyke will be mined using room-and-pillar methods. The pillars will be systematically extracted and replaced with a backfill made of processed kimberlite and cement. Testing of the mining technology has been taking place since May 2004, when De Beers received final regulatory approval for construction of the mine.
The geology and minability of the dyke have been an ongoing concern for De Beers. In the early days, the dyke was thought to be quite uniform, hole to hole. “Although reasonably continuous, the dyke pinches, swells and rolls, and in some areas there are large granite inclusions of waste rock,” said McConnell during a presentation at the Mineral Exploration Roundup held recently in Vancouver.
To gain a better understanding of the dyke, De Beers developed a down-hole geophysical tool using a radar system, which helps predict the dyke’s movement. In addition, the company is conducting an extensive underground development program, which will outline two years’ worth of ore ahead of production.
The project faces several concerns relating to water. About 40% of the deposit sits beneath Snap Lake. To reduce the risk of lake water seeping into the mine through joints and fractures, De Beers is carrying out extensive hydrogeology tests, drilling holes above the dyke into areas of structural concern. The second issue deals with the treatment and discharge of connate water, which is water that has been in the rock for millions of years. There are questions related to salinity, which must be addressed.
The Snap Lake project, which represents De Beers’ first mine outside of southern Africa, will employ as many as 450 people during construction and create upwards of 550 permanent positions. Work in 2005 will focus on preparing the mine site, and will include major earthworks and the installation of foundations. Contracts and purchase orders awarded in the first quarter of 2005 are expected to translate into total expenditures of $72 million this year. Construction will start in the fall of 2007, followed by nine months of ramp-up to full production.
De Beers is also involved in joint exploration programs with juniors in Quebec, Ontario, Manitoba, Saskatchewan, Nunavut and the Northwest Territories. Two of the more advanced programs are under way at Fort la Corne in central Saskatchewan and Gahcho Ku in the Northwest Territories.
De Beers is the operator and 51% owner of Gahcho Ku, 80 km southeast of Snap Lake.
A $25-million updated technical study of the project is nearing completion, and “that project is looking more and more capable of coming to fruition as a mining project,” says Ralfe.
De Beers is also preparing to build the $860-million Victor project in northern Ontario, where it awaits the outcome of a revised environmental assessment. After seven months of public consultation, De Beers hopes to receive approval in the first quarter of 2005, and permits to operate by mid-year. De Beers is currently negotiating an impact benefit agreement with the Attawapiskat First Nation and is in discussions regarding participation agreements with neighbouring communities on the James Bay Coast.
Should the project proceed to mine development, it will employ 600 people during construction and create 380 permanent jobs. De Beers has proposed a 7,000-tonne-per-day (2.5-million-tonne-per-year) open-pit mine. The operation would produce as much as 600,000 carats per year over a lifespan of 12 years, based on a minable resource of 28.7 million tonnes grading 0.22 carat per tonne (22.3 carats per 100 tonnes). The Victor diamonds are incredibly high-value, in the range of US$300 per carat, which translates into revenue of $117 per tonne of kimberlite. Operating costs are pegged at $39 per tonne.
De Beers found 48 kimberlite bodies worldwide in 2004. “Among those 48 are one or two that are attracting our attention,” says Ralfe. This past year, the company farmed-out some of its less important targets to juniors.
De Beers spent US$111 million on global exploration last year, and is seeking partners for several projects.
This approach has resulted in nine new agreements with Canadian-listed companies covering land and data in Canada, Brazil and Madagascar. Deals were reached with
“The quickest means to liberating the potential of some of these projects is through partnerships,” says Richard Molyneux, president of De Beers Canada. “Our aim is to identify areas of mutual interest with Canadian exploration companies who can take these projects forward.”
In India, De Beers holds prospecting licences in Karnataka, Andhra Pradesh and Chhattisgarh, where new kimberlites have been discovered. The Hindustan Diamond Co. (HDC), which lacks technical expertise in exploration, has acquired a 26% interest in De Beers’ India exploration subsidiary by investing US$3.7 million. HDC was established in 1978 as an equal joint-venture partnership between De Beers and the government of India. The joint venture is involved in the buying and selling of rough diamonds in the Indian diamond market. “Effectively, we have the government of India as our partner in that prospecting venture,” says Ralfe.
During the course of the year, De Beers reached a settlement in its arbitration case against Endiama (Angolan State Diamond Mining Co.). Ralfe says his company is making progress in its negotiations to return to Angola. The country is regarded by De Beers’ geologists as highly prospective. Negotiations are also continuing with Minire de Bakwanga (Miba) with respect to the Democratic Republic of Congo (DRC), where De Beers is already active on several concessions.
De Beers’ made a profit of US$477 million in 2004, up 27% over the previous year, whereas “headline earnings,” which take into account the company’s share of Debswana and Namdeb, were up 11% at US$652 million. Operating cash flow was US$985 million, compared with US$1.5 billion in 2003.
Net interest-bearing debt was reduced during the year by US$174 million, to US$1.59 billion. De Beers paid out US$450 million in dividends in 2004.