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Lynette Gould: Demand is Likely to Outpace Lower Levels of Diamond Supply

10 december 2009

De Beers’ representative Lynette Gould shared her views of the current market and industry developments with the Rough&Polished Agency.

How would you evaluate the present condition of the rough market? What stipulates the recovery of demand for rough diamonds and is the trend likely to be long-term?

The short-term reduction in diamond inventories and sales, coupled with a significantly lower level of investment in exploration and new mining projects, is likely to create a shortfall in previously forecast levels of diamond supply in the medium-term.

In the long-term, even in a recession people continue to get engaged, married and celebrate special anniversaries, and diamonds are inherently linked to the marriage tradition in the US and emerging economies. Demand for diamonds has been consistently increasing for many years, and this is expected to continue in the long term – particularly as more high net-worth individuals emerge in the developing markets such as China and India.

What are preliminary financial results achieved by your company for the year 2009 (diamond output, diamond sales, expected net profit)?

We will announce full year results for De Beers in February 2010.

How has your jewelry project been advanced amid the crisis in diamond jewelry consumption? What is your forecast for the diamond jewelry market in 2010?

You should really address this to De Beers Diamond Jewellers, which is an independently operated and managed retail jewellery joint venture between De Beers and LVMH. What I can say as De Beers Group is that diamonds are a rare and finite treasure of nature and, with future demand growth in emerging markets, demand is likely to significantly outpace what is forecast to be lower levels of diamond supply for many years to come.

Do you intend to increase your diamond output in 2010? Will you raise the amount of rough offered to the market?

As we have said throughout 2009, we will continue to produce in line with demand from the DTC Sightholders.

How would you describe the current system of rough pricing on the market? Is it possible that transition of major diamond miners to a competitive model in their relationship will result in significant reduction of rough prices?

Obviously each company has its own system of pricing. De Beers is in a position to comment only on its model and, even then, only at a very high level. De Beers takes a long term, sustainable view on our pricing which we consider to be a fair reflection of market value. De Beers' pricing decisions are influenced first and foremost by the prevailing market conditions for polished. The rough diamond industry remains highly competitive.

How do you plan to reduce the company’s loan portfolio? What is the position of your shareholder, Anglo American, in respect of reducing debts? Is it possible that some stake in De Beers will be sold on the market?

We are currently in discussions with our banks about renewing a $1.5 billion loan facility scheduled to come due in March 2010. These have been positive and productive discussions and we are entirely confident about our ability to renew the financing. As with any refinancing process, once we have progressed sufficiently, our shareholders will review the terms and determine the best way forward. We won’t speculate on the final details of the refinancing until the process has concluded.

The five-year agreement between De Beers and Botswana on distribution of rough diamonds mined in this country will soon expire. Is there already any decision to extend this agreement? Some time ago the mass media circulated reports that the government of Botswana would be interested in expanding its stake in De Beers. Does this information agree with reality?

I can’t comment on behalf of the Botswana government. What I can say is that both De Beers and the Botswana government are aware that the marketing arrangements for the Debswana production are due to expire at the end of 2010. Negotiations on the renewal of these arrangements will begin early next year.

How is the beneficiation program being advanced in a crisis market?

De Beers recognises the importance of natural resources as vehicles for economic development, growth and diversification to Governments in the developing economies where it operates. Despite the economic downturn this remains a core part of De Beers’ business model.

In Botswana with the establishment of DTC Botswana in 2007 it is expected that, by the end of the decade, over US$550 million worth of rough diamonds will have been supplied to manufacturing clients in Botswana to be cut and polished in the emerging domestic manufacturing industry. DTC Botswana is currently supplying 16 licence holders in Botswana, drawn from the ranks of DTC’s international list of clients – each having committed to manufacture diamonds in the country. It is anticipated that, despite the downturn, with further development of the Botswana downstream industry, around 3000 jobs will be created by the end of the decade.

The formation of Namibia DTC (NDTC) (a 50:50 jv between the Government of the Republic of Namibia and De Beers) is a recognition and formalisation of GRN and De Beers’ efforts to make diamonds available for local manufacturing in support of the Government’s economic imperative to drive job and value creation from Namibia’s natural resources.

Through the establishment of DTC South Africa, DTC is contributing to beneficiation in South Africa by supporting the local cutting industry by offering a consistent and predictable level of supply to 17 clients, enabling the country’s downstream industry to maximise the efficiency of its operations in a secure supply environment. As a result, the downstream industry is able to invest with confidence in new capacity and marketing initiatives.

How do you develop your cooperation with other companies in marketing polished diamonds and supporting the diamond market? Is the IDB (International Diamond Board) functioning properly?

In response to fundamental changes in the diamond industry and extraordinary times – the recession and its effect on discretionary spending – this year De Beers introduced a new, innovative marketing concept. This model introduces an extensively consumer tested major new product concept - the Everlon Diamond Knot Collection – for the US Holiday 09/10 season, along with a full-scale integrated marketing campaign.

For the first time, a set of participating DTC Sightholders and retailers who represent the best-in-class at every level of the trade (from independents to small regional chains to department stores and national chains) are helping us to cooperatively fund this programme. 

In October members of the IDB steering group (BHP Billiton, Rio Tinto and De Beers) agreed to postpone the start-up phase of the IDB until Alrosa has had sufficient time to review its plans and confirm its participation. A key success factor for the IDB is to secure support from all parts of the diamond value chain and, to this end, the contribution of Alrosa is seen as critical. It is hoped that the situation will be clarified by the end of the year.

Alex Shishlo, Editor of the Rough&Polished European Bureau in Brussels