De Beers: Chal­leng­ing Mid­stream En­vi­ron­ment Hits H1 Earn­ings

Solitaire - - BULLETIN -

De Beers re­ported a 17% de­cline in to­tal rev­enue to $2.6 bil­lion for the first half of 2019 that ended June 30th 2019, with rough di­a­mond sales de­clin­ing by 21% year-onyear to $2.3 bil­lion. Con­sol­i­dated rough di­a­mond sales vol­umes de­creased by 13% to 15.5 mil­lion carats, while the av­er­age rough price in­dex de­creased by 4%. The lower rough di­a­mond sales re­flected higher than ex­pected pol­ished stocks at re­tail­ers and the mid­stream at the be­gin­ning of 2019, with over­all mid­stream in­ven­tory lev­els con­tin­u­ing to be high through­out the first half, De Beers said.

The av­er­age re­alised rough di­a­mond price de­creased by 7% to

$151/carat, ver­sus $162/carat in the same pe­riod last year, driven by the re­duc­tion in the av­er­age rough di­a­mond price in­dex and a change in the sales mix in re­sponse to weaker con­di­tions, the com­pany noted.

Un­der­ly­ing earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion (EBITDA) de­creased by 27% to $518 mil­lion due to the chal­leng­ing mid­stream trad­ing en­vi­ron­ment and slow­ing con­sumer de­mand growth, which has re­sulted in a de­crease in the rough di­a­mond price in­dex and re­alised price, as well as lower mar­gins in the trad­ing busi­ness.

De­mand for rough di­a­monds was sub­dued in the first half. In late 2018, US re­tail re­sults were im­pacted by stock mar­ket volatil­ity and US-China trade ten­sions which re­sulted in both re­tail­ers and the mid­stream start­ing 2019 with higher than an­tic­i­pated stock lev­els. Dur­ing 2019, de­mand out­side the US con­tin­ued to be im­pacted by US-China trade ten­sions, the Hong Kong protests and a stronger US dol­lar, par­tic­u­larly af­fect­ing China and the Gulf. In the US, re­tail store closures and de­stock­ing have also im­pacted de­mand for pol­ished di­a­monds and, in turn, mid­stream de­mand for rough di­a­monds.

On the pos­i­tive side, De Beers said un­der­ly­ing GDP growth re­mains sup­port­ive of con­sumer de­mand growth and is ex­pected to bring mid­stream and re­tailer

stocks back to more nor­malised lev­els as we move into 2020, sub­ject to an im­prov­ing macroe­co­nomic en­vi­ron­ment.

De Beers noted that H1 rough di­a­mond pro­duc­tion de­creased by 11% to 15.6 mil­lion carats, pri­mar­ily driven by a re­duc­tion in South Africa (DBCM) and Botswana (Deb­swana). As a result of weaker de­mand ex­pe­ri­enced in the pe­riod, ad­di­tional pro­duc­tion was not ramped up to com­pen­sate for Vene­tia’s tran­si­tion from open pit to un­der­ground.

In Botswana, pro­duc­tion de­creased by 3% to 11.7 mil­lion carats. Pro­duc­tion at the Orapa Regime was 16% lower fol­low­ing a planned shut­down brought for­ward from the sec­ond half of 2019, partly off­set by a 9% in­crease at Jwa­neng, driven by higher through­put and a de­ferred plant shut­down.

In Namibia (Namdeb Hold­ings), pro­duc­tion de­creased by 22% to 0.8 mil­lion carats. Out­put from the marine op­er­a­tion de­clined by 15% due to a planned in-port for the Mafuta crawler ves­sel. Pro­duc­tion at the land op­er­a­tions de­creased by 37% to 0.2 mil­lion carats as a result of tran­si­tion­ing El­iz­a­beth Bay onto care and main­te­nance in De­cem­ber 2018.

In South Africa, pro­duc­tion de­creased by 55% to 1.0 mil­lion carats due to lower ore vol­umes mined at Vene­tia as it ap­proaches the tran­si­tion from open pit to un­der­ground. Voor­spoed pro­duc­tion ceased as the op­er­a­tion was placed onto care and main­te­nance in the fi­nal quar­ter of 2018 in prepa­ra­tion for clo­sure.

In Canada, pro­duc­tion de­creased by 6% to 2.1 mil­lion carats due to the planned pro­cess­ing of lower grades at Gah­cho Kué. Vic­tor pro­duc­tion de­creased by 2% as it reached the end of its life dur­ing the sec­ond quar­ter of 2019.

De Beers Jewellers continues to progress by up­grad­ing and ex­pand­ing its net­work and in­te­grat­ing its on­line and store pres­ence into an im­proved com­bined of­fer­ing, the com­pany said. The over­all sales per­for­mance has been ad­versely af­fected, pri­mar­ily in high jew­ellery, by global trade ten­sions.

Forever­mark, avail­able in around 2,400 re­tail out­lets glob­ally, con­tin­ued its ex­pan­sion in Europe with the launch of the brand in Italy.

In its op­er­a­tional out­look, De Beers said that rough di­a­mond trad­ing con­di­tions in the mid­stream are ex­pected to con­tinue to be chal­leng­ing in the short term as a result of high pol­ished in­ven­tory lev­els. Longer term, the out­look re­mains pos­i­tive in light of the ex­pected growth in con­sumer de­mand and a re­duc­ing sup­ply of di­a­monds.

Pro­duc­tion guid­ance (on a 100% ba­sis, ex­cept Gah­cho Kué on an at­trib­ut­able 51% ba­sis) has been re­vised to around 31 mil­lion carats, at the lower end of the pre­vi­ous range of 31-33 mil­lion carats, in re­sponse to the weaker trad­ing con­di­tions.

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