Share of associate's
(2008: $508 m)
Share of Group operating
profit (2008: 5%)
Rough demand and market sentiment began to improve during the year.
|$ million (unless otherwise stated)||2009||2008|
|Share of associate's operating profit||64||508|
|Group's associate investment in De Beers(1)||1,353||1,623|
|Share of Group operating profit||1%||5%|
Anglo American's diamond interests are represented by its 45% shareholding in De Beers. The other shareholders in De Beers are Central Holdings (owned by the Oppenheimer family) with an effective 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 five continents, employing over 15,000 people. De Beers produces around 40% 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 diamonds distribution arm of De Beers. It also has a 50% interest with the GRB in Diamond Trading Company Botswana and a 50% ownership, along with the GRN's matching shareholding, in Namibia Diamond Trading Company.
De Beers and 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.
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 diamonds, 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.
During 2009, De Beers, in order to withstand the most severe and prolonged downturn in the diamond industry for decades, took bold action to remain profitable at a far lower level of sales, and to place itself in a robust position to benefit from the eventual recovery. The strategy focused on lowering production levels to match sharply reduced sightholder demand, identifying cost savings and operating efficiencies across the business, and seeking ways to stimulate consumer demand.
In consequence, diamond production was reduced by 49%, or 23.5 million carats, in comparison with 2008. This reduction was achieved through a series of production holidays and extended maintenance shifts at the company's mines in Botswana, South Africa and Canada through the first half of the year.
De Beers continued to drive demand in 2009 through its highly regarded marketing campaigns in the US and Asia. In the US, De Beers developed its latest Big Idea concept, creating a new model in which it launched the Everlon Diamond Knot Collection, along with a full scale integrated marketing campaign. For the first time with such a programme, funding is also being undertaken with a select set of participating sightholders and retailers.
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 of De Beers have accordingly all agreed to subscribe, in proportion to their current shareholding, for $1 billion of additional equity in De Beers. The Group's share of such additional equity, in line with its equity holding in De Beers, amounts to $450 million.
Anglo American's share of operating profit from De Beers decreased by 87% to $64 million.
DTC sales totalled $3.23 billion, significantly below the previous year (2008: $5.93 billion) owing to the impact of the global economic downturn. The DTC employed a flexible approach in response to the volatile levels of client demand for rough diamonds during the year. This agility enabled the DTC to continue making sales, albeit at a reduced level, throughout the year and to steadily increase levels of supply as rough demand and market sentiment began to improve during the year.
In line with most products in the luxury sector, the diamond industry was severely affected in 2009 by the global recession. The impact of high stock levels throughout the diamond pipeline constricted liquidity in the cutting centres and lower consumer demand led to lower demand for rough diamonds from the DTC Sightholders. The market was hit most acutely in the first quarter and, as the year progressed, industry sentiment improved, which allowed the DTC to increase prices and sales volumes throughout the second half of the year.
At the retail level, the 2009 holiday period took place amidst continued economic weakness, with American consumers continuing to spend less than previous years. The luxury goods and high-end jewellery sector appeared to perform slightly above expectations, outperforming other categories. In the emerging markets of India and China, demand for diamond jewellery remained positive in the face of a weaker economic climate.
In accordance with the strategy to stimulate demand, the Forevermark programme continued to expand in China, Hong Kong, Japan and Macau. The brand is now available in 245 stores across Asia and achieved over $100 million in retail sales in its first 12 months.
In the US, De Beers partnered with Sightholders and retailers to roll out an integrated marketing campaign for the holiday shopping season. The Everlon Diamond Knot Collection was marketed by leading major retailers and over 300 independent outlets in the US. Although sales figures have yet to be released, anecdotal reports from participating retailers and Sightholders described the campaign as being one of the few successes in an otherwise difficult marketplace.
At the beginning of 2009 and in response to reduced demand from DTC Sightholders, De Beers reduced production across its portfolio of mines. Through production holidays and extended maintenance shifts, output was significantly reduced in the first quarter, resulting in a 91% reduction in carats produced compared with the same period in 2008. As Sightholder demand increased gradually in the second quarter, which continued throughout the rest of the year, De Beers increased production to 18.0 million carats in the second half (2008: 23.9 million carats), an increase of 173% compared with the first six months and a reduction of 49% year on year. For 2009 as a whole, De Beers produced 24.6 million carats (2008: 48.1 million carats). Production from Debswana totalled 17.7 million carats (2008: 32.3 million carats), Namdeb produced 0.9 million carats from land and sea operations (2008: 2.1 million carats), while the output from South African operations also decreased to 4.8 million carats (2008: 12.0 million carats). The Canadian mines produced 1.1 million carats (2008: 1.6 million carats).
De Beers tackled costs aggressively, achieving a $1.1 billion reduction in operating and capital expenditure, a 45% reduction in production and operating costs and a 23% reduction in its global workforce.
The effects of the strengthening Canadian dollar, the impact of global recession on pricing and production levels at Snap Lake have led to a non-cash impairment charge of $595 million (attributable: $267 million) against the value of De Beers' Canadian assets and written off $101 million (attributable: $45 million) of deferred tax assets.
At the end of 2009, Debswana announced a major expansion project at Jwaneng, the world's flagship diamond mine in Botswana. This project, also known as Cut-8, will extend the mine life to 2025. Debswana will invest $500 million in capital expenditure, while the estimated project investment is likely to total $3 billion over the next 15 years. At its peak, the project will create more than 1,000 jobs and create access to a further 95 million carats, which could be worth in excess of $15 billion over the life of the mine.
De Beers will continue to take a cautious approach to production, sales and cost management in 2010, whilst anticipating a steady recovery of the industry.
As the world economy recovers, the global market for polished diamonds has stabilised and is also recovering. De Beers is encouraged by initial stronger levels of demand compared with those it witnessed at the same stage in 2009, and history has shown that demand generally rebounds strongly in post-recessionary periods as manufacturers and retailers look to rebuild their inventories. De Beers remains cautious as the global consumer demand for luxury goods is yet to fully recover to pre-crisis levels and will continue, therefore, to take a prudent approach to production during 2010. While production is planned to increase above 2009 levels, it is not expected to return to historical highs for the foreseeable future. De Beers will continue to focus on cost and capital management, further increasing efficiencies and reducing costs.
China and India are the two priority growth markets for diamonds and are expected to collectively account for one-third of global demand by the middle of the decade. De Beers launched the Forevermark programme in both the Chinese and Indian markets to support its partners in driving demand for diamonds. In the US, consumers were particularly hard hit by the economic downturn. However, the fourth quarter Everlon marketing initiative was received well and trends indicate the downturn has bottomed out, with growth over the Christmas season providing encouragement for the world's largest diamond consumer market.
De Beers' exploration maintained a high discovery rate in 2009, adding 45 kimberlites, up from the 37 discoveries in 2008.
Debswana's flagship Jwaneng mine. A recently announced expansion project will extend the mine's life to at least 2025 and will create access to an estimated 95 million carats of diamonds.