Diamonds Are Not Forever, Anymore
De Beers, the world’s biggest diamond miner, is planning for its turnover to halve this year, it emerged on April 8, 2009, in the latest sign of how the once-mighty group is struggling to cope with a downturn in an industry it no longer controls.
With diamond prices tumbling by at least 30 per cent over the past year, De Beers has cut production at its mines by 40 per cent year-on-year and mothballed its flagship mines in Botswana. Its two new Canadian mines, whose costs led the company to take on so much debt, lowered production soon after they opened in August.
As the diamond market faces one of its bleakest years in a generation, Christopher LaFemina, an analyst at Barclays Capital concluded that De Beers was “bleeding cash” and that its problems might be “under-appreciated” by the market. However, in a rare public fightback, the South African group, which mines 40 per cent of the world’s diamonds, has told the Financial Times it is convinced it can survive two more years of recession.
“Trading conditions are tough,” said Stuart Brown, De Beers’ finance director. “But because we saw it early and took very dramatic steps around the business, we are in a position to weather trade in 2009 and 2010 without any recourse to shareholder funds.”
De Beers disputed Barclays’ estimate that it lost $100m (£68m) per month in the first quarter this year. “Our plan for 2009 sees us remaining profitable, cash neutral and meeting covenants on our loans, even if overall turnover drops by 50 per cent,” said Mr Brown.
De Beers, whose control of the global diamond trade has slipped over the past decade, saw demand decline last year as consumers shied away from luxury goods. Demand plummeted, however, after the September collapse of Lehman Brothers froze financiers’ access to credit.
Questions about the privately held former cartel’s financial position multiplied after it accepted $500m in loans from its three shareholders, Anglo American, South Africa’s Oppenheimer family, and the government of Botswana, in February 2009.
The loans, interest-free for the first two years and replacing bank loans of the same amount, mark the first stage of refinancing De Beers’ $3.5bn in debt, including $1.5bn due in 2010.
For most of the 20th Century De Beers was synonymous with the diamond industry. It was founded by Cecil Rhodes, the British imperialist, who named his new company after the Boer farm where the first stones were discovered, and swiftly grew to dominate the market.
It began to lose its dominance in the 1990s as new mines were discovered outside southern Africa. De Beers is facing its first crisis without power to control supply, said Des Kilalea, diamond analyst at RBC Capital Markets, and the strain is showing.
