Faced with the challenges of finding new profitable carats to meet growing demand,
De Beers has begun the consultation process to close its three underground mining operations at Kimberley, affecting 1,000 jobs. In operation for more than 100 years, the Kimberley mines — Wesselton, Dutoitspan and Bultfontein — have been running at a loss since 2003, reports De Beers.
“It’s a matter of great regret, but those Kimberley underground mines are in fact virtually depleted,” explained Gary Ralfe, De Beers’ Managing Director, during a conference call. The company is forecasting a loss of R150 million for these mines in 2005. While the Kimberley operations produced a record 2 million carats in 2004, most of that production was derived from the reprocessing of old dumps and tailings. In 2002, De Beers breathed new life into Kimberley by constructing a new, state-of-the-art 20,000-tonne-per-day, combined treatment plant at a cost of over US$100 million. The closure of the underground mines will have little affect on the operations of that plant as it will continue to reprocess mine dumps, producing about 2 million carats annually for the foreseeable future.
The South African operations of De Beers Consolidated Mines produced 6.7 million carats in the first half of 2005, 9.7% ahead of budget. However, only two of its mines — the flagship Venetia and Finsch — are currently profitable. The other five South African mining organizations — Kimberley, Koffiefontein, The Oaks, Cullinan and Namaqualand, the oldest and most marginal of the company mines, have been severely affected by a continuing weakened U.S. dollar (the currency in which diamonds are sold) and are all operating at a loss.
“Production costs on five of De Beers’ South African mines remain stubbornly high, largely due to the age of these operations,” stated De Beers’ 2004 annual report. Intent on returning these mines to profitability, De Beers has introduced an initiative dubbed Thrive@five, which is dedicated to improving efficiencies to ensure that these mines are viable even at an exchange rate of R5 to the U.S. dollar. The average Rand/U.S. dollar exchange rate applied to the first half of the year was 6.17, down 6% from the same period a year ago.
In July 2004, the reorganized De Beers Consolidated Mines, under new managing director, Jonathan Oppenheimer, became a distinct South African business unit within the De Beers group. This was a necessary prelude to the implementation in 2005 of a black empowerment transaction within the terms of the Mineral and Petroleum Resources Development Act.
“We have made a commitment that this deal should either be completed or well on its way before the end of this year,” said Ralfe. “In South Africa, where De Beers had its beginnings 116 years ago, the theme of partnership lies at the heart of our response to the many and profound changes in the legislative landscape, by the reorganization of the privatized De Beers.”
Production in the first six months of 2005 for the De Beers group was 23.7 million carats, 4.8% ahead of budget. For the year, Ralfe expects production will end some 7% or 8% higher than the 47 million carats produced in 2004. Debswana, the leading mining company in the De Beers group, accounted for 15.3 million carats at the half-year mark, 27% above budget. Debswana is a partnership with the government of Botswana.
De Beers is enjoying some exploration success in Botswana on the AK6 kimberlite, one of 30 kimberlites covered by the Boteti project, a 51-49% joint venture with AIM-listed
The AK6 pipe is estimated at 9.5 hectares, with a preliminary grade of 25 carats per 100 tonnes. Based on a small 21.9-carat parcel of recovered diamonds valued at US$82 per carat, De Beers has modelled a value of US$138 per carat for the pipe. Further delineation drilling has been done this year in conjunction with a large-diameter, bulk-sample drilling campaign, as part of a US$7-million exploration program at Boteti this year.
“It has more and more the makings of a small mine; like Letlhakane rather than the adjacent Orapa,” said Ralfe. Debswana’s Letlhakane kimberlite pipe is similar in size and grade to AK6, but with a diamond valuation approaching US$200 per carat. De Beers can increase its interest in the Boteti project to 70% by completing a full feasibility study.
Six-month production from the Namdeb joint venture in Namibia was close to 950,000 carats, off just 1.4% of budget. It included a record 546,000 carats from marine mining operations. “De Beers Marine is certainly proving that as the on-shore resources of Namdeb decline, there is more and more room to tap the vast resources, admittedly at very low grade, which lie out at sea,” said Ralfe.
The aging, 75%-owned Williamson mine in Tanzania produced around 100,000 carats, down 15% from budget. “Williamson remains a great enigma,” said Ralfe. “We haven’t made any money out of Williamson for a long time but it does remain the world’s largest kimberlite, but one at a very low grade.” With a surface area 1.4 sq. km, the Williamson Mwadui pipe is the largest single kimberlite deposit in the world ever to be mined. The multi-phase kimberlite extends to a confirmed depth of 500 metres. Since its discovery in 1940, open-pit mining operations have concentrated on enriched superficial deposits within, and adjacent to, the pipe. De Beers is undertaking a feasibility study to determine a profitable way of accessing and mining this pipe with the goal of increasing production to at least 1 million carats per year.
“This is all part of our quest for profitable carats, all part of our growth strategy for the next five years,” explained Ralfe.
This year is proving to be a milestone for De Beers in Canada as it has committed to spend $1.6 billion to build its first two mines ever outside of Africa. The Snap Lake project in the Northwest Territories received approval in May for $636 million to finance the construction of an underground mine.
The kimberlite being mined is a shallow-dipping dyke of about 2.5 metres thick that extends from the northwest shore under Snap Lake. A proposed 3,150-tonne-per-day operation is expected to deliver upwards of 1.5 million carats annually over a life of at least 20 years, starting in 2007. The mine will create about 500 permanent jobs during operation. Minable ore reserves stand at 18.3 million tonnes grading 1.46 carats per tonne, equivalent to 26.7 million recoverable carats valued at US$109 per carat.
Work in 2005 is focused on site preparation including major earthworks, road building and the installation of foundations for the future building, which will arrive on the 2006 winter road. Construction work has included providing additional sewage-treatment capacity and power-generating capacity. Accommodations have been expanded to 240 rooms. The number of employees and contractors on-site should peak this year at 240, and, in 2006, at 550.
The green light has also been given by De Beers’ board to construct the Victor mine in northern Ontario at a capital cost of $982 million. This is conditional on approval of the environmental assessment, which is expected this summer, and receiving all necessary permits. In June, De Beers ratified an impact/benefits agreement with the Attawapiskat First Nation after 85% of the community voted in favour of the deal.
The Victor project is in the James Bay Lowlands, 90 km west of the coastal community of Attawapiskat. The project is expected to employ 600 people during construction and 400 once in production. De Beers is proposing to build a 7,000-tonne-per-day (2.5-million-tonne-per-year) open-pit mine, based on a minable resource of 28.7 million tonnes averaging 22.3 carats per 100 tonnes, or 0.22 carat per tonne. The operation would produce as much as 600,000 carats per year o
ver a 12-year mine life, generating $117 million in revenue annually.
Victor is one 18 kimberlites discovered in the project area. The highly complex kimberlite consists of two pipes, Victor Main and Victor Southwest that coalesce at surface. The Victor diamonds are incredibly high-value, in the range of US$300 per carat, more than off-setting the lower-grade and translating into revenue of $117 per tonne of kimberlite. Operating costs are forecast at $39 per tonne.
De Beers hopes the environmental assessment will be approved in time for construction to begin in January 2006.
Elsewhere in the N.W.T., De Beers has approved funding totalling $38 million to begin the environmental assessment and permitting process of the Gahcho Ku project, 80 km southeast of Snap Lake. In addition, further large-diameter drilling and sampling is planned for this winter on the 5034 and Tuzo kimberlites in order to improve resource confidence.
Gahcho Ku is 275 km northeast of Yellowknife and centres on the Kennady Lake cluster of five diamond-bearing pipes, including 5034, Hearne, Tuzo, Tesla and the much smaller Wallace. De Beers Canada is the operator and 51%-owner of the joint-venture project.
In the fall of 2000, De Beers tabled the results of a scoping study of Gahcho Ku that fell short of a minimum economic threshold. The desktop study analyzed the costs arising from conventional open-pit mining of the 5034 and Hearne pipes, along with a higher-grade zone in the upper part of the Tuzo pipe. The results of the original study showed that an increase in diamond revenues of 15% would get the project over the hump.
De Beers spent more than $20 million over the course of the winters 2001 and 2002 conducting bulk-sample drilling on the two best pipes, 5034 and Hearne, and carrying out additional exploration. An updated 2003 desktop study incorporated the latest resources estimates and diamond values, together with knowledge gained from the Snap Lake optimization study and Victor prefeasibility study, but failed to meet a critical 15% internal rate of return.
The updated study projected capital costs of $608 million, slightly higher than that proposed in the 2000 study, but called for increasing production to 2 million tonnes per year (6,000-tonne-per-day) to reduce operating costs to $56 per tonne from $84 per tonne. Based on a plan to mine 20 million tonnes averaging 1.64 carats per tonne, for roughly 33 million carats, the 2003 study forecast production somewhere between 3 and 4 million carats annually.
The three pipes (5034, Hearne and Tuzo) contain overall indicated resources of 14 million tonnes grading 1.7 carats per tonne, equivalent to 23.1 million carats valued at US$56 per carat, whereas inferred resources total 16.7 million tonnes grading 1.4 carats per tonne, or an additional 23 million carats valued at US$51 per carat.
De Beers recently wrapped up an 18-month, $25-million detailed technical review of the project consisting largely of geotechnical and engineering work, along with environmental studies. The results are encouraging enough that De Beers is committed to advancing the project through the permitting process.
Modelled diamond values for the three main pipes at Gahcho Ku have risen 35-40% since the completion of the 2003 desktop study. Based on the June 2005 DTC price book, the 5034 pipe is valued at US$85.70 per carat, Hearne is worth US$70 per carat, and Tuzo, US$56 per carat.
“We are pleased at the positive outcome of the study and our decision to advance the project,” says Richard Molyneux, president of De Beers Canada. “Our intention is to make this our second diamond mine in the Northwest Territories, and believe the timing of the project is ideal for the long-term sustainability of the diamond industry in the north.”
“We expect to be producing US$1 billion of diamonds a year from our Canadian projects by 2015,” states De Beers’ 2004 annual review.
As De Beers enters a new growth phase, it has replaced a US$2.5-billion revolving line of credit, with a US$3-billion multicurrency revolving facility, on more favourable terms, split into two equal tranches of US$1.5 billion at 5- and 7-year terms. It is the latter that will be used to finance the Canadian projects.
De Beers has signed an agreement with Endiama, a state-owned Angolan diamond mining company, that takes it back into Angola. “It was important for De Beers to get back to Angola,” said Ralfe. The Central African Craton, which is considered prospective for diamonds, underlies Angola and the Democratic Republic of Congo. “That’s an important area for us to be in,” said Ralfe, noting that De Beers has acquired a lot of ground in the Congo.
“If we are to plan for the future then we need to be very prominent in prospecting and mining in Central Africa,” said Ralfe.
De Beers carried out grassroots prospecting in Angola between 1970 and 1975 in a joint venture with Diamang (Condiama), and between 1978 and 1984 under a mining and technical agreement with the new Angolan government. Subsequently, De Beers commenced negotiations to renew prospecting in Angola in the early 1990s and was awarded three concession areas — Lundas, Quela and Mavinga — in 1996 in a joint venture with Endiama. Due to security issues, no work was conducted in Quela and Mavinga. After discovering 59 new kimberlites in the Lundas concession area in the northeast of the country, De Beers suspended exploration activities in 2001 pending negotiations with the Angolan Ministry of Mines and Geology concerning terms applicable to mining and marketing of diamonds from any future mines.
Exploration activities continue to expand in India where 12 kimberlites were discovered in 2004. New permits were granted in Orissa, Madhya Pradesh and Uttar Pradesh, in addition to those in Karnataka, Andhra Pradesh and Chattisgarh. Hindustan Diamond Co. (HDC), a rough diamond trading company held 50-50 by De Beers and government of India, has acquired a 26% stake in De Beers’ India exploration subsidiary by investing US$3.7 million. “Hence, we shall have the Indian government effectively as an indirect 13% investor in our prospecting in India,” said Ralfe.
In Russia, De Beers is moving away from what has been a 40-year business proposition around trading of diamonds to one where it is looking to invest in exploration and mining in Russia. “Russia is very important geologically as a prospective source of new diamond development,” explained Ralfe. Exploration work has been carried out on the Luzhskaya property in western Russia in joint venture with the local company Petroneft Diamant. Investigations of joint ventures continued elsewhere in the region.
Rough diamond sales
Throughout the first half of the year, demand for rough diamonds from the cutting centres was strong.
Rough diamonds are sourced by the DTC through some 20 mine 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
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The DTC added 11 new clients in June, bringing its customer base to 93 in total. A new contract period, the second under its “supplier of choice” strategy, covers 2.5 years. “The significance of an increased client list shows our confidence in the availability of diamonds that the DTC will have at its disposal over the next 2.5 years,” said Ralfe.
With the U.S. accounting for more than half of the world’s retail diamond jewelry sales, demand in that country is up an estimated 5-6% over the first half of 2004. Ralfe says polished prices are edging up but still have some distance to go to catch up to rough prices.
“We expect the consumer to continue to buy strongly,” said Ralfe. “With the macroeconomic indicators we see in the United States and with the amount of investment that is going into downstream marketing for diamond jewelry, we are looking to a 6% increase in are retail market, measured in local currency.”
As a counterpoint to the U.S., De Beers is seeing growing and important new markets in China, India and the Gulf, along with a blossoming out of the Japanese market. India has registered better than a 20% growth in each of the last two years. “Nine out of ten diamonds are polished in India and, in addition to that, it is emerging as a major market for diamond jewelry,” noted Ralfe.
Continuing on the retail side, De Beers LV has launched a new store on Fifth Avenue in New York City. This will be followed by the opening of a shop in Los Angeles in the fall. “It is difficult and expensive to launch a brand; we are learning the virtues of patience, but clearly all the indications are is that the name De Beers is so well known to the consumer that with the right execution, we still believe passionately that this brand will be succeeding in the retail marketplace,” says Ralfe.
In terms of earnings, De Beers turned in a steady-state performance for the first six months of 2005 now that the company has achieved its goal these past few years of reducing its stockpile of diamonds, which stood at more than US$5 billion when it began its transformation process in 1999-2000.
De Beers’ own earnings for the first six months of 2005 were off 8% from a year ago at US$345 million, whereas “headline earnings,” which takes into account the company’s share of Debswana and Namdeb, were substantially down 21% at US$336 million. The decrease in earnings is attributed to the continuing impact of a weaker U.S. dollar and to tighter margins arising largely from a significant reduction in its stockpiles of rough diamonds, which are now at working levels. Operating cash flow in the first half of 2005 fell to US$158 million, compared with US$871 million for the same period of 2004 when there was a draw down of stocks of nearly US$500 million.
“The very impressive cash flow that we have generated over the last few years as a result of running down the substantial stockpile that we used to have was always going to come to an end and this is the time that it has happened,” says Paddy Kell, De Beers’ director of finance.
In line with the lower earnings and cash flow, De Beers has declared a reduced interim dividend of US$150 million, which compares with US$250 million paid out at this stage in 2004.
In the words of De Beers’ Chairman Nicky Oppenheimer: “We had a disappointing first half, but that has to compare with the positive outlook for the diamond industry as a whole, both on the production side and the market side.”