De Beers Group: Preliminary financial results for 2020
Press Release
Financial and operational metrics(1)
(1) Prepared on a consolidated accounting basis, except for production, which is stated on a 100% basis except for the Gahcho Kué joint operation in Canada, which is on an attributable 51% basis.
(2) Total sales volumes on a 100% basis were 22.7 million carats (2019: 30.9 million carats). Total sales volumes (100%) include De Beers Group’s joint arrangement partners’ 50% proportionate share of sales to entities outside De Beers Group from Diamond Trading Company Botswana and Namibia Diamond Trading Company.
(3) Pricing for the mining business units is based on 100% selling value post-aggregation of goods. Realised price includes the price impact of the sale of non-equity product and, as a result, is not directly comparable to the unit cost.
(4) Unit cost is based on consolidated production and operating costs, excluding depreciation and operating special items, divided by carats recovered.
(5) Includes rough diamond sales of $2.8 billion (2019: $4.0 billion).
(6) Total De Beers EBITDA margin shows mining EBITDA margin on an equity basis, which excludes the impact of non-mining activities, third-party sales, purchases, trading downstream and corporate.
(7) Other includes Element Six, downstream, acquisition accounting adjustments and corporate.
Markets
The diamond industry started 2020 positively after a strong US holiday season at the end of 2019, with robust demand for rough diamonds. The onset of the Covid-19 pandemic, and measures taken by governments in response, had a profound impact on global diamond supply and demand. Much of the industry was temporarily unable to operate, with up to 90% of jewellery stores closed at the peak of lockdowns, first in China, then in Europe and the US.
Reduced demand from jewellery retailers due to store closures, combined with the closure of diamond cutting and polishing factories in India from April to June, led to a substantial reduction in rough diamond purchases in the first six months. In response, De Beers reduced production and offered significantly increased flexibility to customers.
The gradual easing of restrictions across the globe led to improved trading conditions and an increase in demand throughout the supply chain in the second half of the year. Consumer demand for diamond jewellery improved in key markets, particularly in China, which continued its strong recovery, while demand in the US has also been encouraging. The recovery in consumer demand supported polished price growth in the second half and a rebuild in inventory levels in advance of the year end holiday season.
Financial and operational overview
As a result of the difficult market conditions, lockdowns in India and associated flexibility offered to customers, total revenue decreased by 27% to $3.4 billion (2019: $4.6 billion) with rough diamond sales falling by 30% to $2.8 billion (2019: $4.0 billion). Rough diamond sales volumes decreased by 27% to 21.4 million carats (2019: 29.2 million carats). The average realised price decreased by 3% to $133/ct (2019: $137/ct), with a 10% decline in the average rough index largely offset by an increased proportion of higher value rough sold in 2020, driven by midstream demand and inventory mix.
Underlying EBITDA decreased by 25% to $417 million (2019: $558 million) owing to the impact of the lower sales volumes and the lower rough price index reducing margins in both the mining and trading business, particularly in the first half of the year. Despite the reduction in production volumes, unit costs decreased by 10% to $57/ct (2019: $63/ct) owing to cost saving measures and favourable exchange rates that have resulted in a higher mining margin of 54% (2019: 43%).
De Beers’ capital expenditure decreased by 33% to $381 million (2019: $567 million) due to the deferral of stay-in- business projects into future years without compromising safety or operational integrity. This decrease was also driven by favourable exchange rates. Although there were Covid-19-related disruptions at De Beers’ expansion projects, execution of Venetia Underground and Jwaneng Cut-9 continued to progress, and the new AMV3 vessel for Namibia (the largest diamond recovery vessel ever built) remains on track for commissioning in 2022. The construction of the laboratory-grown diamond facility in Oregon for Lightbox Jewelry was completed in 2020 and will ramp up during 2021.
Operational performance
Mining and manufacturing
Rough diamond production decreased by 18% to 25.1 million carats (2019: 30.8 million carats) in response to lower demand due to the pandemic and the Covid–19-related shutdowns in southern Africa during the first half of the year.
In Botswana, production decreased by 29% to 16.6 million carats (2019: 23.3 million carats), with volumes at Jwaneng reduced by 40% to 7.5 million carats (2019: 12.5 million carats), while production at Orapa decreased by 16% to 9.0 million carats (2019: 10.8 million carats). This was largely due to a nationwide lockdown from 2 April to 18 May, and the planned treatment of lower grade material at both Jwaneng and Orapa, following their restart, as a production response to lower demand. Both mines substantially reconfigured their mining operations to preserve costs in light of the lower levels of production, thereby preserving the mining margin.
In Namibia, production decreased by 15% to 1.4 million carats (2019: 1.7 million carats), primarily due to the suspension of marine mining during part of the third quarter in response to lower demand. Production at the land operation decreased by 21%, principally as a result of the Covid-19-related shutdown.
In South Africa, production increased to 3.8 million carats (2019: 1.9 million carats) as the reductions experienced in the first half due to the national shutdown were more than offset by an expected increase in grade as the ore from the last cut of the open pit is processed as the mine transitions to underground operations.
In Canada, production decreased by 15% to 3.3 million carats (2019: 3.9 million carats) principally reflecting Victor reaching the end of its life in the first half of 2019. Gahcho Kué production decreased by 4% to 3.3 million carats (2019: 3.5 million carats) as a result of the implementation of Covid-19 workforce protection measures.
Brands and consumer markets
Covid-19 significantly impacted De Beers’ brand sales in 2020, with large-scale store closures in Asia in the first quarter, followed by western markets in the second quarter and beyond. However, both De Beers Jewellers and ForevermarkTM saw a strong recovery in sales as restrictions eased and stores reopened.
Online sales continued to show strong growth, reflecting De Beers’ investments in e-commerce and increasing consumer willingness to purchase diamond jewellery through these channels.
As part of the longer term strategy, De Beers announced 12 goals that are part of the company’s ‘Building Forever’ framework, a sustainability approach, aligned with the Anglo American Sustainable Mining Plan, that is focused on maximising the positive impact of diamonds on their journey from discovery to retail. The aim is to achieve a shared vision for a better future focusing on De Beers’ pillars of leading ethical practices across the industry, partnering for thriving communities, protecting the natural world and accelerating equal opportunity.
Operational and market outlook
Recent consumer demand trends have been positive in key markets and industry inventories are in a healthier position, providing the potential for a continued recovery in rough diamond demand during 2021, subject to the ongoing impact of Covid-19. Consumer desirability for natural diamonds is set to remain high over the medium to long term despite the economic impact of the pandemic and increasing supply of lab-grown diamonds.
In the longer term, the impact of Covid-19 has accelerated the transformation that was already underway across the industry and which is expected to continue at pace. This includes more efficient inventory management, increased online purchasing, and a growing consumer desire for products with demonstrable ethical and sustainability credentials, including an enhanced appreciation for the natural world. The long term outlook for the sector remains positive as De Beers continues to focus on its business transformation to support the continued growth of its own business and the wider diamond value chain.
For 2021, production guidance is 32–34 million carats, subject to trading conditions, the extent of further Covid-19- related disruptions and ongoing operational challenges. The higher production is driven by an expected increase in ore and improved grade performance at both Jwaneng and Venetia. Unit cost guidance is c. $55/ct, reflecting the increase in production volumes and the benefits of the restructuring undertaken in 2020.
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