Is De Beers in financial trouble? Will Diamond Trading Company (DTC) box discounting become a permanent feature? Will it now resort to tendering and selling rough to Arab sheikhs? These are but a few of the wide range of questions posed in an exclusive interview with the Managing Director of De Beers Group of Companies, Gareth Penny, earlier this week at the company’s London offices.

 

Below are excerpts from the interview. The full interview will be published next week on IDEX Online.

 

Chaim Even-Zohar: Can you shed some light on reports that suggest that De Beers has financial issues, and will not be able to renew a $1.5 billion credit facility that is due in March 2010?

Gareth Penny: We are confident that we will service our debt in 2009 and beyond, have the full support of our shareholders and our bankers and, most importantly, world class mines that will generate strong future cash flows for decades to come.

 

CEZ: So much has been speculated about the indebtedness of De Beers, ranging between $3.5 to $4 billion. What caused these debts? How comfortable are you that they can be reduced significantly?

GP: De Beers’ external debt of $3.5 billion (down from $4 billion at the end of 2007), has principally arisen because of the range of major new capital projects that have been undertaken over the last five years. These projects have included Snap Lake and Victor mines in Canada, Voorspoed and the "Peace In Africa" vessel in South Africa, and our share of a range of capital projects in Botswana, Namibia and elsewhere. All of these decisions were taken many years ago, given the length of time mining projects generally require but they provide us with mines that are an important part of De Beers’ future. Fortunately, unlike some other companies, we had largely completed our capital projects enabling us to reduce capital expenditure sharply in 2009 without jeopardizing projects under construction. When the recovery comes, and it will, with our lower cost base and excellent diamond assets we will be in a good position to generate strong cash flows to reduce our debt.

 

CEZ: When can we expect Element Six to start marketing gem quality synthetics? Would you be willing to say, “We will never do so?”

GP: We have made it clear over the years that De Beers (through Element Six) is the leader in synthetic industrial diamonds and that we have no plans to be in the business of manufacturing synthetic gem qualities.

 

CEZ: Your 2009 revenue might well be 50 percent below 2008, while your profit margin also may dip well below the normal 19-20 percent margin (in your diamond account). Can you comment on this?

GP: We are not saying that we expect sales to be half of what they were in 2008, but rather that if they are, we should still be in positive profit territory as a result of our determined and rapid effort to lower our on-mine and off-mine costs by 50 percent.

 

CEZ: Do you believe that rough prices have bottomed?

GP: It does seem that rough prices have bottomed, and we may well see some shortages in certain categories as the year progresses.

 

CEZ: As recently as 2004, you passionately argued that beneficiation in Southern Africa did not make any economic sense. Soon thereafter, you made a commitment to Botswana with binding contracts that even penalize you for factories not reaching certain thresholds in employment or rough purchase levels. Some of the 16 factories there have closed, while others are struggling. Were you right in 2004, or do you now feel that beneficiation makes good economic sense, and that these factories can compete effectively in the world markets? Aren’t there “too many” factories and would you encourage consolidation?

GP: I have never argued "passionately," as you say, that beneficiation in southern Africa did not make sense. Rather I have always been aligned with southern African governments in understanding their desire to encourage local added-value, but fully aware of the competitive challenges in doing so. However, with technology and innovation in sorting and manufacturing, and improvements in global communications allowing for immediate market to factory feedback, the timing was right for Botswana. We have worked tirelessly over the past few years to try to ensure the success of this strategy and good progress has been made. Clearly, this is a long term plan and cannot be evaluated under current market conditions, where every cutting centre in the world is struggling. I would not say there are too many factories but would say to those that have made commitments there that this is likely to be, in the long run, a good strategic decision.

 

CEZ: Why are you so opposed to tendering, and will you drop your opposition if your partners insist?

GP: In the current climate, we feel that tendering may be less effective, but it nevertheless remains an option within the parameters described above. For producer governments it is even more important that factories in those countries are given consistent supply. Diamantaires are having to make multi-million dollar investments in infrastructure, technology and training and they need confidence in terms of supply. Otherwise, all incentive to establish such factories is likely to be removed. Interestingly this seems also to be the view of most other major producers.

 

CEZ: We all look for silver linings. We all hope that someone has the magic words for what we, the industry, need to do in order to come out of the crisis stronger, better, more resilient, with a bright future. If I would ask you to summarize what you think should be done, what would they be?

GP: I am pleased you asked the question about silver linings. While no business leader would wish for the current environment, it is always important in dealing with the challenges of today to consider if there are opportunities that could only be achieved in this environment that will improve the business, but for De Beers some of the things include:

·        Permanently change the corporate culture and ensuring all we do is simple, fast and effective.

·        Working more closely with our producer partners and Sightholder customers.

·        Ensuring all our mines move permanently down the cost curve.

·        Reducing the size of the corporate centre and driving accountability to the operating units.

·        Developing new marketing approaches (for example: the industry marketing association).

·        Consolidating operations to reduce duplication.