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Big Three Report Diamond Production Policy

24 february 2009

De Beers has stated it is going to significantly cut diamond production levels to align them with the levels of demand. During 2008, De Beers and its joint venture partners produced 48.1 million carats, compared to 51.1 million carats in 2007. De Beers’ sales of rough diamonds for 2008 compared to 2007 remained static at $5.9 billion, reported.
The 6% cut in De Beers's mine output last year came mainly from South Africa, where diamond production fell to 12 million carats (2007 - 15 million carats) primarily due to the sale of the Cullinan diamond mine and the closure of the Oaks mine.
Production in 2008 from Debswana was marginally down at 32.3 million carats (33.6 million carats in 2007),  while the only growth reported in the annual results came from Canada, where the newly-opened Victor and Snap Lake diamond mines produced 1.6 million carats (81,000 carats in 2007).
Industry sources are pointing to a production level for 2009 of 29 million carats - a cut of 40%.  Debswana - the De Beers, Botswana joint venture -  has scaled back diamond production, with the closure of Damstha and Orapa number 2 plant. There is an unconfirmed report that a Debswana spokesman said late last week that all of the diamond mines, including Jwaneng and Orapa, are on hold.  De Beers said in November it expected to cut back output at Snap Lake and Victor by 10 to 20%.
The tough economic environment has forced De Beers to borrow $500 million from Anglo American, its biggest shareholder with a 45% stake, and the other shareholders – the Oppenheimer family which owns 40% and the Botswana Government 15%.
The new loan - reportedly for a two-year term, without interest - comes on top of a $300 million loan from the shareholders, probably on similar terms, issued late last year.
Neither loan was disclosed in De Beers's official report for 2008; the details emerged in questioning of De Beers executives by analysts on February 20.
Whether the Oppenheimer family is facing dilution of its shareholding in De Beers, in securing this new cash, has not been disclosed. The two new loans for equity cast a shadow over De Beers's claim in its financial report that the company's indebtedness has been shrinking.
“Net interest bearing debt", the diamond company reported, "fell to US$3.55 billion (2007: US$4.06 billion) as a result of the benefits of a stronger US Dollar, the repayment of debt and shareholder support.”
If non-interest bearing debt has now increased by $800 million, making the total debt $4.35 billion, then that would tend to confirm the market speculation that the company is facing severe refinancing difficulty, and the Oppenheimer family even more so.
BHP Billiton which claims it produces about 3% of global diamond supply from the Ekati mine in Canada, has said its diamond mine plan is unaffected, and there are no shutdowns. However, in its report of February 9 on production in the six months to December 31, 2008, BHP disclosed that it had mined just 1.4 million carats; that was drop of 27% on the same period of 2007. This is not a market cutback by another name.
BHP spokesman Iltud Harri told PolishedPrices: “BHP Billiton hasn't announced any cutback in terms of our diamond production. However, actual production for the first half was 27% lower than the corresponding period last year due to lower grades following changed ore sources. In terms of the future, as Ekati - BHP Billiton's only diamond producing asset - transitions from open pit mining to underground mining, the mix of ore processed will change from time to time." BHP's sales policy in the present market, Harri added, is that "we sell at the market price and always sell what we can."
He said data on the company's diamond inventory are "commercially confidential."
Rio Tinto, with an 18% share of the rough diamond market from the Diavik, Argyle, and Murowa diamond mines, has already told the market it is suspending diamond processing at Argyle for three months, and halting the move to underground production.
In a press release on January 16, the company said: "In response to Rio Tinto’s debt reduction plan and the current global market conditions Rio Tinto’s Argyle Diamonds Limited will slow down its underground diamond mining project and ease diamond production in 2009. Effective immediately the Argyle Underground Project will be slowed to only critical development activities, resulting in a workforce reduction and a demobilization of contractors."
 “Given global market conditions, we will also reduce diamond production by taking an extended maintenance shutdown of the diamond processing facilities for up to three months, commencing in March,” said Kevin McLeish, Chief Operating Officer of Argyle Diamonds.
A month earlier, on December 10, Rio issued a statement regarding its operations at Diavik, saying “Diavik Diamond Mines Inc. is taking a series of measures to reduce and defer costs.
As part of the measures, the small diamonds project announced earlier this year has been put on hold.
However, construction work on the underground diamond project remains largely unchanged at this stage, as this project is essential to future diamond production. Underground production will be deferred several months to the third quarter of 2009. This will decrease Diavik’s overall operating cost, as underground diamond mining labor and supply costs are higher than surface mining.
Open pit diamond mining in the A418 pit is expected to remain at full production for the entire 2009 year.
Exploration on the extensive Diavik claim and lease holdings will be reduced from the current aggressive program to one focused on the immediate diamond mine site area and on maintaining existing claims and leases. Cost management will be sought through efficiency and productivity gains and by finding and removing less efficient or less value adding activities.
Each individual and department within Diavik will be asked to contribute to cost management."
London-based company spokesman Nick Cobban told PolishedPrices: "Rio Tinto has announced the slowing of capital projects at Argyle and Diavik in response to the global economic crisis. Diamond production at Argyle will be reduced by a maintenance shutdown of the diamond processing plant for up to three months.
The Argyle underground diamond project has also been slowed to encompass only critical development activities. At Diavik the commencement of the underground diamond operation has been delayed until Q3, 2009. Rio Tinto's approach to sales is one of caution in light of market conditions and the need to be aware of the circumstances faced by our customers. Rio Tinto does not release details of inventory."