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www.diamondshades.com/diamondreport publication 1
Companies Diamond Industry Series
Equity Communications
De Beers Group
2013 Review
July 24, 2013
Table of Contents
Overview Page 2
Mine Portfolio Page 3
Exploration Program Page 14
Rough Diamond Sales Page 16
De Beers Diamond Jewellers Page 22
De Beers Forevermark Page 23
Conclusion Page 29
Outlook Page 31
www.diamondshades.com/diamondreport publication 2
Companies Diamond Industry Series
Overview
De Beers is an 85 percent owned
subsidiary of Anglo American Plc. The
government of Botswana has minority
ownership.
Originally established in 1888, De Beers
is the world’s premier diamond
company.
Together with its joint venture partners,
De Beers remains the world’s largest
diamond producer by value, with
mining operations across Botswana,
Namibia, South Africa and Canada.
With its Forevermark brand, De Beers is
also the largest supplier of branded
diamonds to the retail markets
Figure 1: De Beers Group De Beers Group
Main Office
London, UK
Mining Operations
Botswana 50%
Namibia 50%
South Africa 74%
Canada 100%
Development Projects
Northwest Territories, Canada
Explorations Projects
India
Canada
Angola
South Africa
Botswana
Rough Diamond Sales and Marketing
Global Sightholder Sales 100%
DTC Botswana 50% DTC Namibia 50%
Auction Sales 100%
Perth, Australia
Diamond Jewellery Sales
Forevermark Brand Licensing
De Beers Diamond Jewellers 50%
www.diamondshades.com/diamondreport publication 3
Companies Diamond Industry Series
Mine Portfolio
1. Namdeb
Figure 2: Namdeb Diamond Production
Source: Company Reports, Equity Communications
Namdeb is a 50:50 partnership between De Beers and the government of Namibia. Diamonds are recovered from the land and sea floor.
Namdeb has faced severe operating challenges in the last few years with no consistency in profitability. Marine operations have become the mainstay of Namdeb's production with land-based operations expected to have experienced steep decline by 2014.
Namdeb operations are currently unprofitable for De Beers. Safety concerns, equipment failure and the occasional strike have conspired to disrupt operations. Furthermore, for sea operations, extraction costs are above budget while resource recovered is below budget, combining to add an extra 50 percent on budgeted cost per carat of production. For land operations, the Daberas mine is at the end of its life, producing at lower grades and at higher costs. The Elizabeth Bay mine restarted operations in 2012 after being placed under care and maintenance in 2009. In the coming years, the mine will provide up to half of the annual production expected from Namdeb's land operations.
Essentially, Namdeb requires fresh investment of at least US$1 billion to extend and optimize the life of
its mines. The company has split its investment plans between short-term projects to be attained by 2020
and long-term projects to the year 2050.
www.diamondshades.com/diamondreport publication 4
Companies Diamond Industry Series
Namibia is the source of high value diamonds for De Beers with average prices ranging from US$450 to
US$611 per carat but this comes at significant cost to the company. Namdeb is required to pay a royalty
on turnover of 10 percent and company tax of 55 percent on its profits, the net effect being an effective
tax rate of around 65 to 72 percent that increases as profitability decreases due to the fixed element of
the royalty. At current tax and profitability rates, many of the projects that Namdeb would like to pursue
are not financial justifiable because it would take up to ten years to gain return on investment.
Furthermore, there are significant technological challenges to overcome before the achievement of
reasonable extraction costs.
For the above reasons, Namdeb hopes its new US$34 million Sendelingsdrif project will produce enough
large diamonds to help ease funding pressures. Sendelingsdrif is expected to replace production from
Daberas Mine toward the end of 2013 as well as extend the Orange River operations to at least 2022. The
mine is expected to yield about 45,000 carats per annum, with a single average size of 1.5 carats.
Namdeb is also optimizing its marine operations to help boost production. Debmarine Namibia is
currently operating at 100 percent of its fleet capacity with a total of five mining vessels, including the
Grand Banks mining vessel which was recommissioned in 2012 after being laid-up since 2009. The
previously chartered Peace of Africa vessel was purchased from De Beers Consolidated Mines at a cost of
US$79 million. The vessel is expected to produce an estimated 330,000 carats annually, equating to
around 30 percent of Debmarine Namibia’s total production. Capacity enhancements to the Peace in
Africa and the Debmar Atlantic will be implemented during 2013 to target currently unmineable areas
within Atlantic 1, the sea operations.
Nevertheless, we still expect reduced revenue and profitability for Namdeb in the period 2014-2017
mainly because of continuing inefficiency, reduced overall production and the mining of lower ore
grades. Production may increase in the medium term if Namdeb manages to overcome the signficant
technological challenges it currently faces.
Crucially for De Beers, the sales contract which allows De Beers to exclusively market Namdeb production
expires in 2013. Just as in Botswana, the Namibia Diamond Trading Company (NDTC) is compelled to
support efforts to grow the local manufacturing industry. The increase in the number of sightholders to
13 from 10 suggests that more diamonds will be sold locally in future. We expect that Namibia will want
to emulate Botswana's new agreement with De Beers.
www.diamondshades.com/diamondreport publication 5
Companies Diamond Industry Series
2. De Beers Canada
Figure 3: De Beers Canada Production
Source: Company Reports, Equity Communications
In Canada, De Beers wholly owns its two mining operations; Victor mine located in Northern Ontario and
Snap Lake mine in the Northwest Territories. De Beers also has a 51 percent shareholding in a joint
venture in Gahcho Kué, a project in the vicinity of Snap Lake. The project is at an advanced permitting
stage.
Figure 4: De Beers Canada Projects
Development Costs Operating Costs Revenue Snap Lake Mine 975 1200 682
Victor Mine 1022 650 1560
Total 1,997 1,850 2242
US$ millions…as at 31 December 2012 Source: Company Reports, Equity Communications Estimates
De Beers Canada's mining projects have so far proved to be an exercise in shareholder value destruction.
In 2007, De Beers took an impairment of US$965 million on its Canadian assets and shaved off about a
third of the carrying value of Snap Lake and Victor mines before they had even started commercial
production. Another impairment of US$696 million followed in 2009, essentially halving the carrying
value of Snap Lake and Victor mines in the second year of full operations.
www.diamondshades.com/diamondreport publication 6
Companies Diamond Industry Series
Initially conceived at an
investment cost of US$500
million, Snap Lake mine has been
a technical and financial disaster.
Through the end of 2012, De
Beers had invested more than
US$2 billion to build and operate
the Snap Lake mine. Additional
capital investment was made in
2012, with De Beers Canada
battling significant operational
issues at the mine. Combined
revenue for the two mines
operated by De Beers Canada
since 2008 is roughly equal to
what has been spent at Snap Lake
alone.
According to the initial mine
plans, Snap Lake was expected to
produce 1.4 million carats a year
for 20 years at a recovery rate of
1.2 carats per tonne. In 2012,
Snap lake mine produced 870 000
carats at a recovery rate of 0.95
carats per tonne. Carat recovery
decreased marginally from the
previous year due to higher than
expected ore dilution and lower
than expected ore grade.
Figure 5: De Beers Canada production economics
Source: Equity Communications Estimates
Figure 6: De Beers Canada revenue
Source: Equity Communications Estimates
Figure 7: Snap Lake and Victor Mines combined costs
Source: Equity Communications Estimates
www.diamondshades.com/diamondreport publication 7
Companies Diamond Industry Series
That being said, an Optimisation Study at Snap Lake mine was completed in 2011 with the hope that this
would help De Beers achieve its investment and production goals for the forecast 20-year life of mine. Full
production capacity of 1.4 million carats per year is now expected for 2014 after being initially planned for
2012. To achieve this, new areas of the Snap lake kimberlite are being opened up.
However, all indications are that Snap Lake will remain a value destroying asset for the foreseeable future.
De Beers faces severe technical challenges at the mine that have a lot to do with water management.
Furthermore, while the diamond bearing rock itself is quite high grade, significant dilution means that out of
every tonne of rock that goes through the processing plant, up to 40 percent is worthless. It is probable that
the mine may never provide a positive return on investment.
The Victor mine has approximately eight years remaining of the forecast life of mine. Extraction costs per
carat are within a similar range to those for Snap Lake, the difference being that the Victor pipe produces
enough high quality diamonds to sufficiently cover mining costs.
Plans are underway to extend the life of mine beyond 2020 but this is going to be very difficult. After several
years of analysis of other diamond-bearing kimberlites in the Victor cluster, the Tango Extension kimberlite,
while smaller and of lower grade than Victor, currently offers the best potential to extend the life of the
mining operation. However, it will not be profitable without a significant reduction in current operating
costs.
Tense relationships between De Beers and indigenous communities living near its mines are also of major
concern. De Beers Canada has recently had conflict with the Attawaspikat community, leading to blockades
of the road that provides access to the Victor mine during winter.
Providing background knowledge, De Beers and Attawapiskat First Nation entered into an agreement
whereby De Beers pays an annual royalty to the Attawaspikat in exchange for mining diamonds in the area.
Many in the Attawaspikat community feel this is not enough and they now want much more.
In general, moves to renegotiate mining agreements have gained traction in many of the indigenous
communities in Canada where there are mining operations. The crust of the matter is this: Indigenous
communities insist the compensation agreements entered into with mining companies are payments for
being displaced from traditional homelands. What they now seek is co-ownership of the resources being
mined - what they feel is real sharing of natural wealth.
For Victor mine, increased tensions between De Beers and the Attawaspikat community could frustrate
efforts to extend the life of mine. The economics of extension are already poor before any additional
concessions to local communities.
www.diamondshades.com/diamondreport publication 8
Companies Diamond Industry Series
Gahcho Kué Project
Figure 8: Gahcho Kué Project
Gahcho Kué
Project
Estimated Project Cost US$686 million
Probable Mineral Reserves 31.3 million tonnes
Grade 1.57 carats per tonne
Production Year 2015-2016
Life of Mine 11 years
Source: Company Documents
The Gahcho Kue project is a joint venture between De Beers Canada (51 percent) and Mountain Province
Diamonds (49 percent). It consists of a cluster of four diamondiferous kimberlites, three of which have a
probable mineral reserve of 31.3 million tonnes grading 1.57 carats per tonne for total diamond content
of 49 million carats. Known as 5034, Hearne and Tuzo, these three pipes will be mined in sequence as
open pits over a forecast 11 year mine life.
The Gahcho Kue Project is at the advanced permitting stage. We fully expect the required regulatory
approvals and permits will be obtained eventually. The time frame is what is not certain but the
development schedule is not threatened at present. Once all required licenses and permits are in place,
construction is expected to take about two years. Commercial production will likely begin in the last
quarter of 2016.
From a financial standpoint, the economics for De Beers Canada are quite poor. It will be a long time
before any positive return on investment if any. From a strategic standpoint, it sounds better for De Beers
in the current global social environment to say it is a global miner instead of a Southern Africa miner.
Crucially, production from De Beers Canada is very important for the long-term survival of De Beers'
supply contract system. Closure of unprofitable De Beers Canada operations would greatly compromise
De Beers' market share and influence in the diamond industry pipeline. When the supply contract system
was first conceived, De Beers could count on contracted production from all major producers to fulfil
client requirements. De Beers no longer markets rough diamonds produced by other producers, effectively
halving its market share of global rough diamond sales from fifteen years ago. Furthermore, decision
making authority on the marketing of production from its Southern Africa operations has gradually been
taken over by its producer-government partners. For this reason as well, we believe De Beers will at some
point try to purchase Mountain Province's 49 percent interest in the Gahcho Kue Project once commercial
production begins.
www.diamondshades.com/diamondreport publication 9
Companies Diamond Industry Series
3. Debswana
Figure 9: Debswana Diamond Production
Source: Equity Communications Estimates
In Botswana, De Beers’ interests are held through the Debswana Diamond Company, a 50:50 joint
venture with the Government of Botswana. Debswana’s operations include Jwaneng, the world’s richest
diamond mine; Orapa, the world’s largest open-pit diamond mine; Letlhakane; and Damtshaa.
Figure 10: Debswana Diamond Sales
Debswana contributes disproportionately to De Beers' earnings. Jwaneng, in turn, is the most valuable of
Debswana’s mines, contributing 60-70 percent of Debswana’s total earnings. It is also the most profitable
of all diamond mines in the world.
www.diamondshades.com/diamondreport publication 10
Companies Diamond Industry Series
Debswana's average annual
production in the period 2000-
2008 was 30 percent greater
than the 24 million carats
achieved in 1999, following a
decision to boost output. For
the period 2009 -2012, average
production has been 17 percent
lower than in 1999 in response
to reduced global demand but
also including operational
challenges at Jwaneng.
Debswana is very much a
company in transition. We have
gradually observed a changing
of roles at Debswana in recent
years with the government of
Botswana increasingly taking
over chief decision-making
roles.
Our opinion is that
management of Botswana's
principal diamond asset was a
bit irresponsible in the last
decade. It remains to be seen
whether Debswana can do
better with greater input from
Anglo American and the
Botswana government.
Figure 11: Jwaneng Mine contribution to Debswana Production
Source: Equity Communications Estimates
Figure 12: Jwaneng Mine diamond production
Source: Company Reports, Equity Communications Estimates
Figure 13: Jwaneng mining costs per carat
Source: Company Reports, Equity Communications Estimates
www.diamondshades.com/diamondreport publication 11
Companies Diamond Industry Series
Late-life mines continue to pose a sustainability challenge for Debswana. Botswana is determined to get as
much as possible out of its diamond resource before the shaky decade after 2020 when its flagship mines will
start to rapidly lose lustre. Nevertheless, the crucial Jwaneng Mine extension project continues to proceed
smoothly and on budget. The project will strip 713 million tonnes of waste, exposing an additional 75 million
tonnes of diamond bearing ore. At least 115 million tonnes of waste has so far been moved since 2010.
Cut-8 will provide access to approximately 95 million carats of mainly high quality diamonds and officially
extend the life of the world’s richest diamond mine to at least 2028, at an annual production rate of 8 to 10
million carats.
Going forward, the challenge for Debswana is to achieve optimum returns from its mines. In the last decade,
Debswana could not take advantage of increased output and rising diamond prices because growth in
production and overhead costs considerably outpaced growth in revenue. In effect, Debswana depleted more of
its resource without getting proportionate returns.
Our view is that there is no reason for Debswana to produce at capacity in the short term. Debswana should
first ensure mining efficiency with the view of boosting production in the medium term. Furthermore, we do
not subscribe to the idea that Debswana will run out of diamonds to mine in the next twenty years. With
balanced production, the cut 8 extension should extend the life of Jwaneng to at least 2030. After cut-8, we
predict the commencement of cut-9 or underground mining to further extend the life of Jwaneng to at least
2050.
All things considered, it is the long-term profit outlook for Debswana that is less impressive because of the
expected increase in extraction costs. Debswana's mines will be around for a long time.
www.diamondshades.com/diamondreport publication 12
Companies Diamond Industry Series
4. De Beers Consolidated Mines (DBCM)
Figure 14: DBCM diamond production
Source: Company Reports, Equity Communications Estimates
In South Africa, De Beers has a 74 percent interest in De Beers Consolidated Mines (DBCM), with the
remaining 26 percent held by Ponahalo Holdings, which is a black economic empowerment consortium.
DBCM’s operations include Venetia, which produces about 70 percent of De Beers’ production from South
Africa; Voorspoed, a source of large and exotic coloured diamonds; and Kimberley Mines, a tailings
processing facility.
De Beers Consolidated Mines, in its presence form, is a shadow of its former illustrious self. DBCM has sold
five of its mining operations that it was failing to operate profitably to focus on the Venetia and Voorspoed
mines. DBCM was guilty of over-mining in the period leading up to the onset of the global financial crisis.
For instance, by the end of 2008, Venetia mine had incurred a backlog of 40 million tonnes in waste
stripped. Consequently, current focus for DBCM is on improving mining efficiency. The job is made difficult
by the significant problems that afflict the whole mining industry in South Africa such as persistent skills
shortages and often tense labour relations.
DBCM will invest US$2 billion to build the Venetia underground mine. When completed, the new
underground mine will extend the life of Venetia beyond 2040 and replace the open pit as South Africa’s
largest diamond mine. The life of mine plan contains an estimated 96 million carats in approximately 130
million tonnes mined.
www.diamondshades.com/diamondreport publication 13
Companies Diamond Industry Series
Section Commentary
Figure 15: De Beers Group diamond production
Source: Company Reports, Equity Communications Estimates
Figure 16: De Beers Group quarterly production
Source: Company Reports, Equity Communications Estimates
De Beers practiced unbalanced mining in the decade 2000-2010 in its efforts to crank up production. Production
was boosted by working high grade areas and by reducing stripping. Now De Beers has got to work lower grade
areas and at the same time make up for the stripping that was postponed until 2010. This mainly affects Debswana
where the Jwaneng mine appears to have been mismanaged for years. Mines which were overmined in South
Africa have been sold off to smaller specialized operators who have since turned them around.
De Beers is now focused on rationalizing its operations in Southern Africa. We are also waiting to find out just
how Anglo American will tackle the very costly Snap Lake mine in Canada in the coming years. Perhaps it would
be in the mine's long-term interest to mothball operations until De Beers can comprehensively determine the best
way to get the mine closer to the initial plans for it.
We believe De Beers will maintain the current level of production until at least the second quarter of 2014. In the
current year, the higher level of production from Debswana will offset reduced production from South Africa.
www.diamondshades.com/diamondreport publication 14
Companies Diamond Industry Series
Exploration Program
Figure 17: De Beers Group exploration spending
Source: Company Reports, Equity Communications Estimates
Figure 18: De Beers Group exploration spending
Exploration Ground Holdings (square kilometres)…as at 31 December 2012
2007 2008 2009 2010 2011 2012
Angola 12000 9000 6000 6042 3017 0
Botswana 28800 10000 3300 3383 7655 7804
Canada 148000 2100 700 605 248 170
DRC 18800 12000 0 0 0 0
India 0 19700 9300 8733 2128 0
Namibia 0 0 0 0 0 0
South Africa 0 700 1000 995 325 455
Total 207600 53500 20300 19758 13373 8429
Company Reports, Equity Communications Estimates
Figure 19: De Beers Group exploration spending
Source: Company Reports, Equity Communications Estimates
www.diamondshades.com/diamondreport publication 15
Companies Diamond Industry Series
De Beers’ exploration focuses on the discovery of diamondiferous kimberlites with the best potential to go
into commercial production within five years.
De Beers prioritises its exploration activities in Angola where more than 117 kimberlites have so far been
discovered at a cost of US$250 million. 22 of these have been prioritised for deposit-phase diamond grade
testing to confirm their economic viability. Drill testing for diamond grade in the Lunda Northeast
concession was completed on 14 of the 22 priority pipes with results expected in 2013. The concession’s
seven-year term expired in August 2012. Negotiations are underway for a Mineral Investment Contract
under the more favourable terms and conditions set out in the new Angolan Mining Law, which came into
force in late 2011. The conceptual study for the Mulepe-1 kimberlite was completed in November but
indications suggest a stand-alone deposit is uneconomic under current assumptions
In India, the Mahabubnagar reconnaissance permit period expired during 2012. Application is underway
for the prospecting licence and a number of other reconnaissance permit applications remain pending.
In South Africa, ground geophysical surveys were completed in the Finsch area, and targets selected for
drill testing. South Africa remains highly prospective and specialist reviews of the historical databases
continued in 2012. Several of the De Beers prospecting licence applications are pending.
In Canada, Peregrine Diamonds purchased BHP Billiton's 51 percent participating interest in the 8,580
square kilometre Chidliak project for US$9 million dollars paid over three years. The company
subsequently received US$10 million funding boost from Newstar Securities and the Dundee Corporation
plus a US$5 million investment from De Beers, effectively securing working capital to fund administrative
costs and planned exploration to 2014. The deal also gives DeBeers the option to acquire up to 51 per cent
ownership of the Chidliak project before the end of 2013.
www.diamondshades.com/diamondreport publication 16
Companies Diamond Industry Series
Rough Diamond Sales
Around 1999, with the help of Bain and Co, De Beers reviewed its struggling operations and concluded that it
was no longer viable and also no longer in the company's interest to seek to physically control other producers'
supply of rough diamonds. Instead, De Beers would focus on marketing its own diamonds and become 'Supplier
of Choice' for the downstream market in the diamond value chain.
The Diamond Trading Company (DTC) was then incorporated to replace the Central Selling Organization (CSO)
as the new marketing arm of De Beers. This would also appease regulators in USA and Europe who had become
frightfully dissatisfied with De Beers' monopolistic inclinations. De Beers subsequently implemented a
Sightholder System through which a small number of carefully selected companies would be contracted to move
De Beers produced diamonds down the diamond value chain. These companies would also be required to adjust
their business strategies and align them with De Beers' new goals. At least 90 percent of De Beers' annual rough
diamond sales are to sightholders.
Figure 20: De Beers Sightholders
Source: Company Reports, Equity Communications Estimates
In 2011, a 10 years sales agreement was signed with the government of Botswana that requires the transfer of
all of De Beers’ functions which relate directly to the sale of Debswana diamonds to Botswana by the end of
2013. Furthemore, the government of Botswana is now entitled to purchase the equivalent of 10 percent of
Debswana production on a run of mine basis and growing to 15 percent by 2016. At capacity, Debswana
produces up to 80 percent of De Beers' annual supply of diamonds.
Because De Beers prefers to mix production from its mines located in Canada and Southern Africa before
distributing it to its clients, the DTC was therefore compelled to move its sales and marketing operations to
Botswana in order to maintain efficiency. DTC Botswana has capacity to handle 40 million carats of diamonds at
any given time. Through various sales agreements in South Africa, Namibia, Botswana and Canada, the DTC is
also compelled to supply local processors with usually up to 10 percent of locally produced diamonds.
www.diamondshades.com/diamondreport publication 17
Companies Diamond Industry Series
Figure 21: De Beers rough diamond sales
Source: Company Reports, Equity Communications Estimates
Figure 22: DTC price index
Source: Company Reports, Equity Communications Estimates
www.diamondshades.com/diamondreport publication 18
Companies Diamond Industry Series
Section Commentary
De Beers will gradually phase out its
global sales of diamonds and
concentrate its sales in Southern
Africa. This is inevitable because of
the push by its producer government
partners for more 'local' sales. For
instance, Botswana intends to demand
a greater local allocation of
diamonds from De Beers for
beneficiation purposes in the
remaining two years of the 2012-
2015 contract period. Furthermore,
Botswana has indicated that it will
demand even greater local allocation
of Debswana production in the next
sales agreement for the post 2020
period. In addition to this, the
Botswana government will soon be
distributing up to 15 percent of
Debswana production outside of De
Beers' sales channels.
Figure 23: DTC sightholder sales
Source: Company Reports, Equity Communications Estimates
Figure 24: DTC sightholder sales Southern Africa
Source: Company Reports, Equity Communications Estimates
Consequently, diamond processors in other regions of the world should expect a sharp decline in the availability
of De Beers produced rough diamonds. The DTC forecasts that over 50 percent of global availability of high
quality diamonds will be offered to producer countries. Therefore, we expect greater consolidation in diamond
processing of high quality goods. (More analysis is provided in the Manufacturing Review section of the 2013
Diamond Report)
www.diamondshades.com/diamondreport publication 19
Companies Diamond Industry Series
Figure 25: Botswana Beneficiation Drive
Botswana Beneficiation Drive
25 Companies licensed in diamond cutting and polishing since 2004
21 cutting and polishing factories with DTC guaranteed rough diamond supply and 4 with different sources of supply
Goods polished locally grown from US$28 million in 2005 to just above US$748 million in 2012
One of the companies cutting and polishing diamonds in Botswana opened a jewellery factory in 2011
Licensing conditions that require new mines to market their diamonds locally
New goals
Botswana's new marketing agreement with De Beers places greater emphasis on the introduction of advanced cutting technologies
Government of Botswana established a Okavango Diamond Company (ODC) to market 10-15 percent of Debswana production independently
Grow value of rough diamonds polished locally to US$800 million
www.diamondshades.com/diamondreport publication 20
Companies Diamond Industry Series
Auction Sales
Figure 26: Diamdel Auction Sales
Source: Company Reports, Equity Communications Estimates
Diamdel is a business, wholly owned by De Beers, focused on auctioning rough diamonds. Diamdel traditionally
sold rough diamonds sourced from DTC to non-sightholders through face to face negotiations. In recent years the
company has been transformed to conduct international online auction sales of rough diamonds. These now
account for at least 95 percent of all rough diamond sales by Diamdel. Furthermore, De Beers has now extended
participation in auction sales to the entire market of rough diamond buyers including current sightholders.
www.diamondshades.com/diamondreport publication 21
Companies Diamond Industry Series
Section Commentary
Beginning in the year 2000, De Beers has tried to sideline pure dealers in rough diamonds, preferring to take on
clients that can demonstrate strong manufacturing ability and so forth. Consequently, sightholders in De Beers'
Supplier of Choice system for the distribution of diamonds are obligated to participate in downstream pipeline
activities. For this reason, Debeers prefers to enter into long-term supply agreements with vertically integrated
companies. (Analysis is provided in the Rough Trade Review section of the 2013 Diamond Report)
Key points
Historical working stock valued at US$2.5 billion is no longer available
Current stocks available to clients range from US$400 million to US$800 million
Availability of goods changes from sight to sight in response to short-term production,
Greater volatility in supply volumes and quality
We believe it is purposeless for De Beers to push its clients further downstream when the company does not have
the ability to provide all the necessary inputs required for efficient and sustainable manufacturing operations.
First,De Beers no longer maintains stocks of rough diamonds, striving to produce according to client demand.
Second, De Beers no longer markets rough diamonds from other producers. Finally,the company continues to
experience production shortfalls in some categories for various reasons that include poor mining strategies at
some of its mines. This results in stockouts for some categories. Consequently, some long-term clients have
experienced shortfalls in their allocation of diamonds. The impact varies from sightholder to sightholder because
of De Beers' obligations to government selected sightholders in Southern Africa and Canada.
In reality, no producer has the ability to provide all the diamonds required by a verticallly intergrated
manufacturer in the right quantities. Sightholders based in Southern Africa routinely process 30 percent of
allocations in producer countries and export the rest that often cannot be processed economically in Southern
Africa. With so many forced specialist manufacturers in the dynamic secondary markets, space for profitable
trading activities has opened up in rough and polished diamond markets.
www.diamondshades.com/diamondreport publication 22
Companies Diamond Industry Series
De Beers Diamond Jewellers
Figure 27: De Beers Diamond Jewellers store network
Source: Company Reports, Equity Communications Estimates
Figure 28: De Beers Diamond Jewellers Revenue
Source: Company Reports, Equity Communications Estimates
De Beers Diamond Jewellers (DBDJ) is an independently managed 50/50 joint venture partnership between
De Beers and LVMH Moët Hennessy Louis Vuitton SA.
The joint venture was formed with the aim of developing a retail strategy for the De Beers brand based on the
De Beers name which has a very strong consumer awareness and credibility. The idea was to gradually open
150 stores in the main diamond markets from 2002 to 2012.
Key Points
DBDJ is precluded by EU competition authorities from sourcing diamonds directly from De Beers
The joint venture is not yet profitable
The idea has caught on in the diamond industry that it is possible to launch instantly successful international
luxury diamond jewellery brands without first acquiring the heritage and legacy of outstanding craftsmanship.
However, on the other hand, prestigious international luxury jewellery brands with the heritage and legacy
like Tiffany spend at least US$200 million annually on marketing.
www.diamondshades.com/diamondreport publication 23
Companies Diamond Industry Series
De Beers Forevermark
After carefully looking at the dynamics of the global diamond industry value chain, we have had to significantly
reconsider our analysis of De Beers Forevermark. It appears De Beers is using Forevermark to create a diamond
pipeline more in tune with its ambitions for the industry. De Beers Forevermark provides incentives for
salespeople to mention to customers that a particular diamond has been produced by De Beers. It wants
consumers to be aware of De Beers as the premium diamond producer with the aim of greatly boosting the
impression that a De Beers diamond is the best diamond to purchase.
Figure 29: De Beers Forevermark retail doors
Source: Company Reports, Equity Communications Estimates
Forevermark is fast gaining momentum; in a few years competitors will have to respond in one way or another.
Business Model for the Forevermark Brand
Forevermark, unlike De Beers Diamond Jewelers, is a brand targeted at the diamond industry pipeline, a point
missed by industry observers. The ultimate goal of Forevermark is to make De Beers’ rough diamonds more
valuable than diamonds of other producers. Essentially, De Beers is branding its diamonds so that the diamond
industry pipeline prefers them to diamonds of other producers.
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Stage 1
Ninety-percent of Forevermark diamonds come from De Beers owned mines. De Beers selects only top quality
diamonds - within the top 2 percent of global supply - for its Forevermark brand.
Stage 2
Leaning on the strength of its sightholder system, De Beers urges selected manufacturers (Forevermark
Diamantaires) to produce high quality polished diamonds suitable for the Forevermark pipeline. These
diamonds are brought back to De Beers to be graded at the Forevermark Diamond Institue in Antwerp, which
issues a passport-sized report. Manufacturers pay the normal certification fee. De Beers then provides a
Forevermark Diamond Grading Report, featuring the unique identification number inscribed on the diamond
and a specifically designed security hologram, providing reassurance that the Forevermark Diamond Grading
Report is valid and genuine.
Stage 3
De Beers encourages pre-selected retailers to become Forevermark Jewellers. Forevermark Jewellers sell the
branded diamonds to consumers. The license fee is US$10, 000 per store or US$25, 000 per Forevermark
vendor. The sweetener is that De Beers handles all marketing for the Forevermark brand using its vast financial
resources and considerable diamond marketing expertise.
It is a win-win for everyone involved. De Beers gets to control distribution of its top quality diamonds,
Forevermark manufacturers gain pre-qualified retail clients, Forevermark retailers do not have to spend a
fortune to market branded diamonds.
De Beers' vision is for Forevermark to be the world's leading luxury diamond brand by 2015. This is easily
achievable because no other organisation is actively stamping diamonds for branding purposes to De Beers'
level.
Assumptions and Analysis
Stage 1
In theory, the more Forevermark-licensed Jewellers there are out there, the greater the strain on De Beers
already limited high quality production. If the assumption is that consumer demand for expensive high quality
diamonds is strong and growing, the end of it all is that De Beers will sell its top diamonds at a higher price.
These diamonds are already a significant component of De Beers' total production by value.
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Top end retailers who are not a part of the Forevermark system may eventually lose their ability to access
high quality diamonds from the De Beers production system.
Tiffany has responded to this competitive assault by entering into long-term supply agreements with small
diamond mines that produce or seek to produce high quality diamonds. (Please refer to the production section
of the 2013 Diamond Report for this analysis.
Harry Winston diamond brand is largely protected because of its association with Dominion Diamond
Corporation, majority owner of Ekati mine and part owner of Diavik Mine. It can also rely on the sourcing
strength of the Swatch Group, its new owner.
Stage 2
In theory, De Beers can now trace all of its gem diamond production from mine to store. That could still
happen within the next decade. So far De Beers has chosen to concentrate its branding effort at the top end of
the market. Starting branding initiatives at the top end makes sense because consumers in this segment are
less price conscious and decidedly more brand focused. There already exists a market for Tiffany diamonds,
routinely sold at a premium to other diamonds of the same specifications.
The requirement for ethical diamonds has gained momentum amongst members of the diamond trade who are
based in traditional markets for diamonds. De Beers is responding to popular pipeline concerns and has
positioned itself well. Forevermark branded diamonds give De Beers’ diamonds protection against
reputational risks like treated diamonds and conflict diamonds.
It is quite possible that the majority of all high quality diamonds will eventually end up being Forevermark
diamonds. The nature of the diamond market is that De Beers' strongest manufacturers are also clients of the
leading diamond producers like Dominion, Alrosa and Rio Tinto. Forevermark manufacturers have the
freedom to produce polished diamonds as they please - as stones or finished pieces, relying on collaborative
research with De Beers on popular trends in the consumer markets. If De Beers' marketing initiatives manage
to grow demand for Forevermark-inscribed jewellery, logic dictates that manufacturers will switch an
increasing proportion of their high quality production to Forevermark.
As such, we expect that grading of high value diamonds may shift from the traditional grading institutions like
the Gemological Institute of America (GIA) to De Beers' Forevermark Institute. Tiffany already successfully
produces its own grading reports. De Beers is of the opinion that those who sell Forevermark diamonds should
not add another report on top of the one it provides to discourage comparison-shopping.
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Consumers do not normally differentiate between grading laboratories but De Beers new marketing focus may
reshape opinions. De Beers is improving its grading systems, targeting consistency. The issue of different
grading labs providing different colour grades for similar diamonds has taken centre-stage as it considerably
impacts the final value of a diamond. To gain competitive advantage, De Beers is working with proprietary
colour grading machines at the Forevermark grading facility in Antwerp which have so far proved to be more
consistent and reliable than human graders on colour and clarity. The machines work at high speeds and,
crucially, De Beers is not willing to share the technology with other grading labs.
The Forevermark Institute does some private label for grading for other diamond brands. De Beers only does
this for diamond brands that meet its stringent requirements. Since certification is an important component of
the diamond purchase decision in emerging markets where consumers are less trusting of diamond retailers,
Forevermark can move in to capture significant market share based on the strength of its strong marketing
push.
In 2012 De Beers' Forevermark launched FMX, an online trading platform for its partners to buy and sell
Forevermark diamonds. This platform will likely provide the backbone for the Forevermark pipeline and is
only accessible to those companies - traders, manufacturers and jewellers - that are part of the Forevermark
system. FMX allows authorized suppliers to upload details directly and elect to have their diamonds appear
online automatically, within a few hours or less of when they are graded by the Forevermark Diamond
Institute
The U.S. Patent & Trademark Office (USPTO) issued in 2013 the trademark 'Forevermark Diamond Institute' to
De Beers. De Beers filed for the trademark in 2011. The description of the trademark includes the words
"FOREVERMARK DIAMOND INSTITUTE" inside an outer circle with two black dots adjacent the word
FOREVERMARK. There is an inner circle within the outer circle and that inner circle contains the view of a
diamond from above.
The goods and services provided under this trademark cover scientific and technological developments
through research and design in the fields of minerals and gems; industrial analysis and research services in the
fields of minerals and gems; design and development of computer hardware and software all relating to the
grading, identification, observation, measuring, testing, checking, analysis, inspection, inscription for the
purpose of certifying diamonds, jewellery, precious and semi-precious stones.
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Stage 3
The diamond industry has bemoaned the lack of generic marketing of diamonds in consumer markets. Generic
marketing of diamonds was the responsibility of De Beers when it exclusively sold much of the world’s annual
production of diamonds. Times have changed, it is a different world today.
However, what is clear is that the absence of generic marketing has slowed the growth of diamond markets.
Retailers operating in the targeted segment may find it to their advantage to join the Forevermark system if it
means shifting some of the marketing costs to someone else. Forevermark retailers have a high degree of
freedom to display the Forevermark as they wish and one could use the association to drive store traffic. For
example, Forevermark's Center of My Universe campaign appears to have done extremely well in the United
States market.
So far the Forevermark brand has focussed its marketing efforts on diamond products that are generally resilient
in periods of weak demand - bridal jewellery and diamond stud earrings. The target mrket is the luxury focussed
consumer with an annual income of at least US$70,000 and is in the market for large size high quality
diamonds. Incidentally, this is the most popular segment in the top market of USA where Forevermark has
targeted 750 retail doors as quickly as possible.
The Forevermark brand was introduced in Asian markets in 2008 after years of testing. It has now spread to
traditional diamond markets such as the US. De Beers says it has inscribed 500 000 Forevermark diamonds
since 2008. Forevermark has gained momentum since it experienced 40 percent volume growth in 2012 in the
number of diamonds branded. De Beers expects to inscribe 200 000 diamonds in 2013. US$1 billion of
Forevermark diamonds have also been sold in consumer markets since 2008.
De Beers hopes that the growth of Forevermark will eventually allow the company to produce rough diamonds
annually to exactly match world demand.
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Section Commentary
DeBeers is aggressively inscribing its diamonds so that jewellers can easily identify diamonds sourced through
the official De Beers network.
Forevermark has not yet reached tipping point. This may happen within five years if volume growth continues
at current pace. Forevermark growth feeds off sentiment in the diamond industry pipeline.
There are two main issues that fuel the growth of Forevermark:
1. If we exclude De Beers and Rio Tinto Diamonds, the other diamond producers have neglible marketing
spend in the diamond industry pipeline.
2. Then there are diamond producers who do more than enough to ruin the image of diamonds
The diamond pipeline is being remodelled to try and emphasize that diamonds from different producers should
not be treated equally. The movement has been growing for years and attention now appears to have shifted to
polished diamonds. The movement seeks to devalue diamonds produced from regions that carry significant
reputational risks through their exclusion from marketing initiatives in consumer markets.
Of the major diamond producers, diamonds from Angola, Zimbabwe and DRC face the greatest risk of
exclusion. Nevertheless, diamonds from these regions would still find acceptance in emerging consumer
markets, where the ethical diamonds movement is not strong.
Balancing things out, the ethical diamonds/branded diamonds movement is only as strong as the chaos, real or
imagined, in Angola, Zimbabwe and DRC - diamond producers with questionable diamond production policies.
When all is said and done, the majority of consumers will always choose the cheaper diamond if there is little
to no difference in quality and specifications.
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Conclusion
Figure 30: De Beers Group Revenue
Source: Company Reports, Equity Communications Estimates
We get the sense that De Beers is a company that is trying to achieve too much in the diamond industry. It appears
De Beers is still trying to implement recommendations that were borne out of the strategic review of 1999. This is
despite the fact that De Beers is a very different company from what it was at the turn of the century.
Ultimately, De Beers wants to be the preferred supplier of diamonds for the diamond pipeline. This is a very
flawed strategy that has also ultimately confused issues for De Beers. Somewhere along the road it got lost to De
Beers that the reason for buying diamonds from other producers was actually for the purposes of controlling
supply into the diamond pipeline. It was Ernest Oppenheimer who first correctly observed that supply and
demand for diamonds needed to be expertly balanced. Nowadays, all diamond producers compete to get their
diamonds into the industry pipeline without much consideration for its health.
Can De Beers brand its diamonds and achieve higher prices in the long-term? The answer is no. A different
producer will soon flood the market and depress prices for De Beers branded diamonds. Afterall, a 1.00 carat F-
color, VS2-clarity, excellent cut round diamond has the same properties the world over no matter who the
producer. Furthermore, it is virtually impossible to stamp diamonds in a way that is visible to the naked eye,
effectively taking away the bragging factor that drives the sales of many luxury goods.
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DeBeers can brand its diamonds to prove that they have been sourced responsibly but this can never be used to
achieve differential pricing for diamonds the commodity. If it cannot be done for gold, it certainly cannot work
for diamonds. When prices for a certain category of diamonds rise, they rise for all producers. When prices for
that same category fall, they fall for all producers. If we look at the Kimberley Process statistics for 2012, we
can see that the year was generally not good for producers of high quality diamonds like Botswana, Canada and
Lesotho. On the other hand, Australia, Zimbabwe and Russia did well.
DeBeers appears to be envious of the mark-ups and margins achieved by true luxury goods producers, believing
that their business model can be copied. However, this just adds to the confusion on profit margin expectations.
Luxury goods are proprietary products while diamonds are luxury commodities. Luxury goods producers can
manipulate global distribution of goods by virtue of ownership. For De Beers to control global distribution of
diamonds, it would have to corner the market for diamonds. Put differently, De Beers would have to become a
global monopoly again.
It remains that the best way to manipulate the price of a commodity is to control supply. In this regard, Alrosa
is behaving more like the old De Beers. When diamond markets are soft, Alrosa has the ability to stockpile
diamonds through its arrangement with Gohkran. For this reason, the company has achieved better margins
and less price volatility than De Beers since 2008, the last year of Alrosa sales through De Beers.
De Beers, on the other hand, reversed its strategy of a century by first offloading its substantial stockpile of
diamonds and then subsequently cranking up production (over mining) in its efforts to maintain market share
of sales. Debswana mined more of its high value diamonds while achieving less profit for the efforts because
costs rose faster than revenue. To this day, polished diamond markets are still feeling the impact of De Beers'
decision to offload a substantial volume of diamonds into the pipeline in a short space of time.
Since there are too many companies seeking to enter into long-term supply contracts with a limited number of
major producers, a number of producers have cranked up production to satisfy insatiable pipeline demand.
However, we believe demand fundamentals at the retail end should ultimately influence supply strategies. All
major producers including Alrosa, De Beers, Dominion, Rio Tinto and the Zimbabwe groups have specific
categories of diamonds that they specialize in. We believe it is possible to optimize supply of specific categories
of diamonds with the aim of steadily increasing prices in the long-term. Alrosa appears to be implementing this
strategy quite well, maintaining its average supply at 33 million carats in the last six years. In the same period,
the average price of Alrosa's gem quality diamonds has gone up by 67 percent while the average price of its
non-gem quality diamonds has gone up by 348 percent.
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It is well understood that producers need to stimulate consumer demand for the type of diamonds that they
produce. Producers like Zimbabwe and Alrosa have benefited from the growing consumer demand for
affordable diamond jewellery in Asia without having to spend a fortune on marketing initiatives.
De Beers had hoped to grow consumer markets for diamonds to US$90 billion by 2010 through its branding-
inspired marketing initiatives introduced after its strategic review of 1999. The company suspended generic
marketing of diamonds to concentrate its marketing initiatives at the top third of consumer markets for
diamonds, where much of its production is directed. However, De Beers has not been able to meet its goal for
various reasons:
Mature traditional markets are in a period of decline while emerging markets are growing from a very
small base.
De Beers oversupplied its markets cheaply from 2000 and 2008.
Incorrectly targeted marketing initiatives introduced by De Beers have greatly underperformed.
The Forevermark/ethical diamonds/branded diamonds movement is only as strong as the chaos, real or
imagined, in Angola, Zimbabwe and DRC. It is therefore not sustainable to let the threat of conflict and human
rights diamonds be the chief basis for De Beers' long-term strategy. Such issues are a moving target. Moreover,
De Beers cannot guarantee that its mining operations in Canada - where relationships with indigenous
communities are sometimes tense - will never come under attack.
Outlook
Extensively, De Beers has been in the doldrums for more than a decade now, losing a lot of value since the turn
of the century. The recent shareholding change, along with changes at the top of the company, is therefore
viewed in a positive light. Anglo American appears to be in the middle of a comprehensive review of De Beers'
operations, following their acquisition of the Oppenheimer family's stake in the company.
For this reason, it would be superfluous to make future predictions for De Beers at this juncture. A revision of
rough diamond sales processes is already underway.
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Progression of the Diamond Market
Our expectations for the diamond market in the short-to-medium term are less aggressive. In the next three
years, we believe annual world production of rough diamonds will receive a boost of 10 to 15 million carats in
mainly lower quality diamonds as the Argyle underground mine also expands to full production. We already
anticipate increased production from Zimbabwe after four new companies were awarded mining licences for
different areas of the Marange concession, doubling the number of companies mining diamonds in Chiadzwa.
What this means is that diamond prices will likely rise at a slower pace than had been anticipated just two years
ago. Add to this the fact that emerging diamond markets are not growing quickly enough to replace diminishing
demand in developed diamond markets.
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General Disclaimer
This document is produced and circulated for general informational and educational purposes only. It is provided by Equity Communications.
Equity Communications research utilizes data and information from public, private and internal sources. While we endeavour to keep the
information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy,
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© Copyright 2013, Equity Communications Private Limited, ALL RIGHTS RESERVED.
This publication is part of the Diamond Industry Series, a series of diamond industry reports produced by Equity Communications ahead of the 2013 Diamond Report. Equity Communication’s Diamond Report provides detailed analysis of trends in the diamond industry value chain in 2012-2013, from the production end to the retail end. It is in its third edition.
About Authors
Alrosa 2013 Review is based on research by the Diamond Industry Research Team at Equity Communications:
Tinashe Takafuma, Gerald Manyengavana, Romeo Takafuma and Fred Divine.
Supervision was provided by Tinashe Takafuma, Head of Research at Equity Communications. You may contact him by email at: [email protected]
For Further Contact
If you would like to discuss this report, please contact Tinashe Takafuma on the above e-mail address. To find the latest Equity Communications content and register to receive notifications on new diamond industry reports and luxury goods sector reports, please visit www.diamondshades.com
Please Note
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