De Beers Reports Mixed H1 FY Results: Higher Vol. Rough Sales, Savings Offset Lower Prices, Revenues

Mining and Exploration
27/07/2017 12:04

De Beers and parent company Anglo American (AA) today announced their interim financial results for the six months ended 30 June 2017, with the diamond giant reporting a mixed bag while the diversified miner saw its massive restructuring bear fruit. De Beers underlying financial result were positive, as Underlying EBITDA (earnings before interest, taxes, depreciation, and amortization) increased by 3% to $786 million (H1 2016: $766 million), capital expenditure (Capex) dropped significantly and its return on capital employed (ROCE) for the year increased from 7 to 11%. De Beers attributes the increase in EBITDA primarily to savings resulting from the closure of Snap Lake and a continued efficiency drive across the group. which overcame a 4% decrease in revenue to $3.1 billion (H1 2016: $3.3 billion).

Their lower rough diamond revenue was not unexpected, given the strong midstream restocking in H1 2016. Furthermore, the average realized rough diamond price decreased by 12% to $156/carat (H1 2016: $177/carat), partially offset by a 7% increase in consolidated sales volumes to 18.4 million carats (H1 2016: 17.2 million carats). This reflected stronger demand for lower-value goods in Q1 2017 following a recovery from the initial impact of India’s demonetisation program in late 2016, the company explains. The lower-value mix was compensated in part by a higher average rough price index, which was 4% higher when compared with H1 2016. Efficiencies, they note, contributed to a 3% decrease in unit costs.

On the operational side, rough diamond production increased by 21% to 16.1 million carats (H1 2016: 13.3 million carats), in line with the higher production forecast for 2017, reflecting stable trading conditions as well as the contribution from the ramp-up of Gahcho Kué in Canada. In Botswana, Debswana increased production by 6% to 11.1 million carats (H1 2016: 10.5 million carats). Production at the Orapa Mine increased by 22%, driven by the ramp-up of Plant 1 - following its having been on partial care and maintenance - together with higher grades. This was marginally offset by Jwaneng, where production decreased 6% owing to lower grades. The first ore from Jwaneng Cut-8 was extracted and processed in June 2017. Cut-8 will become Jwaneng’s main source of ore starting in 2018. 

In Namibia, Namdeb Holdings' production increased by 17% to 0.9 million carats (H1 2016: 0.7 million carats), mainly due to production recovering following Debmarine Namibia’s Mafuta vessel having been on extended planned in-port maintenance in Q2 2016. Debmarine Namibia’s new exploration and sampling vessel, the SS Nujoma, was officially inaugurated in June 2017 and is now fully operational. Meanwhile, South African production increased by 43% to 2.5 million carats (H1 2016: 1.8 million carats) as a consequence of higher grades at Venetia. In Canada, production increased to 1.6 million carats (H1 2016: 0.3 million carats) due to the ramping up of Gahcho Kué, which entered commercial production on 2 March 2017. Production at Victor increased by 21% to 0.4 million carats as a result of higher grades. At Snap Lake, flooding of the mine, which commenced in January 2017, is now complete, thereby minimising holding costs while preserving the long-term viability of the orebody.

Markets

De Beers provides its take on the current market situation for the diamond trade, remarking, "preliminary consumer demand data for diamond jewelry for the start of 2017 showed continued growth in the US and slight improvements in China in local currency. In India, retailer sentiment improved due to a return to more normal trading conditions following the government's demonetisation program. Underlying US results reflected the broader changes in consumer behavior affecting the overall US retail environment, with growth in the independent jewellers’ sector contrasting with some weakness from large chains. Sentiment in the midstream remains positive following a reasonable Q4 2016 retail season, with evidence of Chinese retailers restocking and demonetisation in India having less impact than anticipated. This has supported good demand for De Beers’ rough diamonds. Spot polished prices remained broadly flat in H1 2017."

As for the outlook, "Macro-economic conditions underpinning consumer demand for polished diamonds globally remain supportive of marginal demand growth in 2017. The extent of global growth, however, will be dependent upon a number of macro-economic factors, including the effect of US and China government policies on exchange-rate movements. Correspondingly, midstream demand for rough diamonds is expected to depend on the strength of different markets’ restocking requirements. Forecast diamond production (on a 100% basis) for 2017 remains unchanged and is expected to be in the range of 31-33 million carats, subject to trading conditions."

Anglo American resumes dividend

Anglo American (see half-year financial report here) has significantly restructured its portfolio of mining assets since 2013, moving from 68 assets to 37 at the end of June 2017. For the six months ended 30 June 2017, Anglo American reported a 68% increase in underlying EBITDA to $4.1 billion, while operating profit of $2.6 billion increased by $2.6 billion (H1 2016: $34 million loss). Mark Cutifani, Chief Executive of Anglo American, said: "The benefits of our relentless focus on driving efficiency through the operations and on upgrading the quality of our portfolio have resulted in a step-change in operational performance and profitability. In the first half, we have delivered a further 20% increase in productivity, a 68% increase in underlying EBITDA and $2.7 billion of attributable free cash flow - the outcome of extensive self-help work and tightly controlled capital expenditure, within a stronger price environment."

"We have nearly halved our net debt to $6.2 billion over the past year to take us well below our year-end target of $7 billion," he continues. "Our materially improved balance sheet strength has supported the decision to resume dividend payments six months early, establishing a pay-out policy at a targeted level of 40% of underlying earnings. This equates to a dividend payment of 48 US cents per share for this half year. Looking forward, our focus will continue to be on improving operational performance and converting production and improving costs into consistent cash flow generation, while maintaining strict capital allocation discipline. We are now in a position to consider value accretive growth options and capital returns from within our substantial undeveloped mineral endowment."