Following an exceedingly magnificent financial performance for the year 2010, a De Beers executive has said the diamond mining group is in a much better position to start repaying the lifeline credit facility that was extended by Botswana Government following the grueling 2009.
In an interview, Stephen Lussier said the company was now reaping the result of “the right” decisions made following the global economic crisis that reached a peak between 2008/9.
In response to a drop in consumer demand that ensued, De Beers decided to scale down their mining operations and in some instance totally shut down.
The decision, said Lussier, was meant to align production levels with demand with the major objective of saving cash reserves.
It was at that time that De Beers approached shareholders for refinancing.
Botswana Government which has a 15 percent stake in the De Beers global structure forked out close to P1 billion in loans to keep De Beers afloat.
While the United States continues to be by far the most dominant market for diamonds, the De Beers 2010 results show India and China as resurgent and potential areas of substantial growth.
“After two very difficult years [2008/9] clients are back buying more diamonds. India and China have proved a big story contributing 20 percent of the total demand,” said Lussier.
It is not by accident that India and China are proving key areas of future growth.
Available information indicates that De Beers spent the last ten years nurturing Asia to become new markets of diamond jewelry.
“That investment is now coming through,” says Lussier.
He says the United States recovery, especially over the Christmas holidays, was much more than was expected, and the marketing arm, DTC was able to use the holiday window to push through sales as a result of the recovery.
“The decision we took with Government to reduce production has proved he right thing to do. Now we are reaping the rewards,” Lussier told Sunday Standard.
He said an alternative was going to lead to a scenario where the company sold its goods at excessively low prices as demand had plummeted to record lows.
“You can only sell a diamond once. And selling at such a low price would have been a disservice to the shareholders.”
Lussier said it is important to always remember that every citizen of Botswana is a shareholder in De Beers through the 15 percent stake held by Botswana Government.
“The rebound has been dramatic, debt has become manageable, costs have reduced significantly, sales are up, demand has increased and the company is in a very strong position of profitability. A strong De Beers means we will continue to do what we should do n Botswana,” said Lussier.
He said the immediate responsibilities include widening explorations and reinvesting into the expansion of the Jwaneng mine.
A key asset, which is by far a crown jewel for both De Beers and Debswana, Jwaneng mine is currently undergoing an ambitions multi billion Pula programme dubbed cut 8, which aims to increase the mine’s life and production.
Not for the first time the results indicate just how Debswana is to the overall health of De Beers.
Of the group’s 33 million carats produced in 2010, a staggering 22 million came from the Debswana operations alone.
In monetary terms, Debswana contributed a little less than half of the total
gross.
Other than commencing the repayment of the loan that was given by Botswana Government, Lussier said De Beers is also in a position to start declaring dividends to shareholders.
With 2010 prices 27 percent higher than the previous year, Lussier says a strategy primarily recommended by the Diamond Trading Company in 2009 to reduce production and wait for price recovery was a painful decision in the short-term, which thankfully will prove a right one in the long term.
“De Beers doing well is also good for Debswana. Increased demand means a rise in prices,” said Lussier who is also the Chairman of De Beers Botswana.
He said it is important to remember that 80 percent of all of Debswana profits end up in the coffers of Botswana Government through royalties and taxes.
Debswana is a 50/50 partnership between Botswana Government and De Beers.
The results, which were released Friday morning, indicate that total sales were US$5.88 billion for the full year, a 53 per cent increase compared with 2009.
De Beers management says a considerably reduced cost base enabled De Beers to be highly cash generative with a free cash flow of US$943 million compared with 2009’s US$35 million.
While Lussier is generally upbeat about the market prospects, he says going forward the company continues to be “cautiously optimistic”. He says so far 2011 has proved “very good” and expects the United States market to record a five percent growth.
“Of course we do not want to get ahead of ourselves,” he says somewhat modestly.
The good results by De Beers and an announcement that the company is now in a position to start servicing the Government loan will come as political relief for Government in general and Minister of Minerals Ponatshego Kedikilwe and President Ian Khama in particular, the two leaders who had come under immense pressure from opposition to justify the huge loan that government extended to De Beers at a time when government fiscus was going through unprecedented strain.
