New De Beers CEO Mellier Plans to Address Production Issues, Prices Not a Bubble

Conclude Botswana agreement, address production issues, not expected to replace Soc with tenders, new De Beers CEO Mellier.

(IDEX Online News) – Rough prices are not a bubble and negotiations with Botswana are expected to conclude in a month or two, say De Beers' new CEO, Philippe Mellier, and CFO, Stuart Brown.

The great results De Beers reported this morning (Tuesday) are allowing Mellier to step into his new position with ease. In a first interview with IDEX Online, Mellier said his first aim is to try to understand the company better. "I'll visit southern Africa in August, and then spend September and October meeting our Sightholders and customers,” he says. “The strong results give me the luxury to make these visits. Things are going well for De Beers, it is in a strong position."

De Beers today reported record diamond sales of $3.493 billion, a 33% increase compared to 2010 and a record figure for the Diamond Trading Company (DTC). While all the major diamond producers are also reporting sharply rising revenues – due to increasing rough diamond prices – they are also reporting a decline in production.

While De Beers is, so far, the exception, its production has increased only slightly, from 15.43 million carats in the first half of 2010 to 15.53 million carats this year.

"We need to address some issues, like production, especially down south [in Africa,]" Mellier acknowledges. De Beers' production declined in Namibia and South Africa, where it sold a number of mines. In Botswana, diamond production increased by about one million carats.

Asked about expectations for the second half of 2011, especially if rough prices will continue to rise, Brown says the company sees the market remaining strong. "The results of the recent JCK trade are positive and we remain positive for the Christmas season and Diwali."

Regarding prices, Brown does not think that the current high rough diamond prices are a bubble. "We are not in the same situation as in 2008 and 2009. The market is more stable, traders have greater liquidity and there is less [rough] supply," he says.

There is concern among DTC clients – the Sightholders – that De Beers will adopt auctions as the main selling channel of rough diamonds. Brown, echoing DTC CEO Varda Shine, rejects this speculation. "As we always said, Supplier of Choice will continue to constitute our main sales method. The use of auctions at Diamdel serves us for price discovery."

Where are the negotiations with Botswana standing? "The discussions took longer than planned," says Mellier. "We signed a confidentiality agreement so we cannot disclose anything at this stage,” he says. “Obviously, the talks are taking long, partially because of personnel issues, but we expect to conclude the agreement in a month or two."

Commenting on the mineworkers' strike that started in South Africa on Friday, Brown says that De Beers made a wage offer that was higher than inflation. "We are not happy with it but we recognize the right to strike,” he says “Meanwhile, we keep producing. Not all the workers are striking and we have strategic stockpiles that we are going through now," he explains.

Brown will leave De Beers at the end of the month, after not being appointed CEO. Where are you going from here? "On vacation!" he laughs. And after you return? "After that, I'll see."