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De Beers’ Mixed 2017: Revenue Down 4%, EBITDA Up 2%

De Beers’ 2017 Performance: A Strategic Review of Resilience and Growth in the Global Diamond Market

De Beers, a world-leading diamond company, navigated a dynamic global market in 2017, presenting a complex picture of financial results marked by strategic adjustments and significant operational advancements. While preliminary financial figures, released as part of Anglo American’s broader results, indicated a marginal decline in revenue, the underlying narrative pointed towards robust growth in production, improved operational efficiencies, and pivotal investments in technology and brand expansion. This comprehensive review delves into the key aspects of De Beers’ performance in 2017, offering insights into how the company adapted to evolving market conditions and laid foundations for future prosperity.

Financial Highlights: A Year of Strategic Adjustments and Underlying Strength

The year 2017 saw De Beers record total revenue of US$5.8 billion, a 4% decrease compared to the US$6.1 billion achieved in 2016. However, company executives emphasized that this outcome was largely anticipated. The previous year, 2016, had benefited from an exceptionally strong period of midstream restocking in its first half, creating a higher baseline for comparison. This anticipated normalization of inventory levels in the diamond pipeline influenced the year-on-year revenue comparison.

A more granular look at the financial data reveals that the average rough diamond price realized by De Beers experienced a 13% decline, settling at US$162 per carat, down from US$187 per carat in 2016. This reduction was primarily attributed to a lower value mix of diamonds sold during the period. However, De Beers adeptly counteracted this trend through a substantial 8% increase in consolidated sales volumes, which rose to 32.5 million carats from 30.0 million carats in the preceding year. This strategic focus on volume demonstrates the company’s agility in responding to market demand, particularly for lower-value goods, which saw stronger interest following the recovery from India’s demonetization program in late 2016. Furthermore, increased production from high-margin, albeit lower-value-per-carat, operations such as Orapa and Gahcho Kué contributed to this shift in mix. Despite the lower value mix, the average rough price index remained robust, registering 3% above that of 2016, indicating underlying price stability for comparable goods.

In a significant positive development, De Beers’ underlying EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) saw a healthy 2% increase, reaching US$1,435 million, up from US$1,406 million in 2016. This improved performance was a testament to enhanced operating margins, driven by several key factors. Lower unit costs, achieved through higher production volumes and widespread efficiency initiatives across the business, played a crucial role. Additionally, a strong contribution from Canadian operations, fueled by the ramp-up of the Gahcho Kué mine and the strategic closure of Snap Lake, significantly boosted profitability. The recovery in oil and gas markets also provided a lift to Element Six, De Beers’ industrial diamond business. These gains were partially offset by unfavorable exchange rate movements and an increasing proportion of waste mining costs being expensed rather than capitalized, a result of an improved strip ratio at the Venetia mine in South Africa, reflecting better operational planning and execution.

The company also demonstrated prudent financial management by achieving a substantial 48% reduction in capital expenditure. Spending decreased from US$526 million in 2016 to US$273 million in 2017. This impressive reduction was largely attributable to the successful completion of several major projects, including the state-of-the-art Gahcho Kué mine and Debmarine Namibia’s advanced new exploration and sampling vessel, the SS Nujoma. The SS Nujoma, delivered three months ahead of schedule and under budget, became fully operational in June 2017, underscoring efficient project management. Planned lower waste capitalization at Venetia further contributed to this significant capital saving, allowing De Beers to optimize its investment profile.

Global Production Overview: Fueling Growth through Strategic Mine Development

A cornerstone of De Beers’ strong operational performance in 2017 was a remarkable 22% increase in rough diamond production, soaring to 33.5 million carats from 27.3 million carats in the previous year. This significant surge reflected not only strengthening underlying trading conditions across the diamond market but also the substantial contribution from the strategic ramp-up of the Gahcho Kué mine in Canada, a major growth engine for the company.

Regional Production Highlights: Driving Volume Across Key Operations

De Beers’ diverse global footprint played a crucial role in its production success:

  • Botswana (Debswana)

    Production from Debswana, De Beers’ joint venture with the Government of Botswana, increased by 11% to 22.7 million carats, up from 20.5 million carats in 2016. This growth was significantly driven by the Orapa mine, which saw a 28% increase in output. This boost was primarily due to planned enhancements in plant performance and the successful ramp-up of Plant 1, which had previously been on partial care and maintenance in response to challenging trading conditions in late 2015. Moreover, a major milestone was achieved in June 2017, when the Jwaneng mine processed its first ore from Cut-8, a critical expansion project poised to become the mine’s primary source of ore throughout 2018. Botswana remains a strategic hub for De Beers, and these operational improvements underscore its long-term commitment to the region.

  • Namibia (Namdeb Holdings)

    Namdeb Holdings, De Beers’ partnership with the Government of Namibia, reported a 15% increase in production, reaching 1.8 million carats compared to 1.6 million carats in 2016. This growth was largely propelled by higher production from Debmarine Namibia’s Mafuta vessel, which achieved increased mining rates following an extended scheduled in-port period in 2016 for maintenance and upgrades. Despite challenging conditions faced by Namdeb’s land operations, they still managed a respectable 6% rise in production, highlighting the resilience and efficiency of the company’s diverse mining portfolio in the region.

  • South Africa (DBCM)

    In South Africa, DBCM (De Beers Consolidated Mines) witnessed a 23% rise in production, achieving 5.2 million carats from 4.2 million carats in the previous year. This impressive increase was predominantly attributed to the Venetia mine, benefiting from higher grades of ore and improved operational performance that enhanced the volume of tonnes treated. The Venetia Underground mine, currently under construction, represents a significant future investment and is expected to become the mine’s principal source of production starting in 2023, ensuring sustained output from this key South African asset.

  • Canada (De Beers Canada)

    De Beers Canada experienced a dramatic surge in production, which soared to 3.8 million carats in 2017, a substantial increase from 1.0 million carats in 2016. This exponential growth was almost entirely driven by the successful ramp-up of the Gahcho Kué mine, which commenced commercial production in March 2017. During its inaugural year of significant operation, Gahcho Kué benefited from higher-than-expected grades, although this was partly offset by a slightly lower average value of production. Concurrently, Canada’s Victor mine, in operation since 2008, saw its production increase by 21% to 0.7 million carats due to higher grades. However, Victor is on schedule to close in 2019 as its open pit is expected to be depleted, making Gahcho Kué’s robust performance even more critical for De Beers’ Canadian portfolio.

Market Dynamics and Consumer Trends: Understanding Global Diamond Demand

De Beers also provided valuable insights into global diamond jewelry demand, reporting early signs of positive growth in US dollar terms for 2017. The US market once again stood out as the main contributor to this positive outcome, demonstrating sustained growth in diamond jewelry demand. This robust performance in the US underscored its position as a critical market for the diamond industry.

In other key regions, demand from Chinese consumers showed marginal growth in both local currency and dollar terms, reflecting a steady but cautious market. In contrast, consumer demand for diamonds softened in India and the Gulf states, both in local currency and dollar terms, indicating some economic headwinds or shifts in consumer preferences. Japan’s consumer demand growth remained flat in local currency terms and experienced a slight decline in dollar terms, highlighting varied market conditions across Asia.

Regarding inventory levels, primary stocks held by diamond producers were estimated to have “reduced considerably” during the first half of 2017. This reduction was a positive sign, driven by improved sentiment in the midstream sector and a return to more normalized levels of rough and polished inventories across the value chain. However, a cautionary note was issued regarding a slight seasonal build-up of polished inventory in the midstream as the industry entered the fourth quarter. This accumulation was attributed to US retailers tightly managing their inventories and the earlier timing of Diwali in India, influencing supply chain dynamics.

Despite these inventory adjustments, De Beers remained optimistic about the performance of diamonds and diamond jewelry during the crucial year-end selling season. Early indications suggested that additional consumer marketing efforts undertaken during this period had a positive effect on polished demand in the US, China, and India. This increased demand ultimately led to a positive impact on overall polished inventories, signaling healthy consumer engagement and reinforcing the effectiveness of strategic marketing investments.

Strategic Initiatives and Innovation: Pioneering the Future of Diamonds

Beyond financial and production figures, 2017 was a year of significant strategic initiatives and technological advancements for De Beers, reinforcing its leadership position in the global diamond industry.

Brand Development and Expansion

A notable corporate development was De Beers attaining 100% ownership of De Beers Jewellers (DBJ) in March 2017. With full ownership of the business and the prestigious De Beers corporate brand, the company initiated a comprehensive process to integrate the DBJ brand and its network of 30 stores across 16 key consumer markets worldwide. This move is set to streamline brand strategy and enhance market presence for De Beers’ luxury retail arm.

The company’s premier diamond brand, Forevermark™, continued its impressive expansion of its retailer network. By the end of 2017, Forevermark™ diamonds were available in over 2,200 outlets across 25 markets, representing a substantial 10% increase since the close of 2016. A significant milestone was achieved by May 2017, when Forevermark™ inscribed its two-millionth diamond, with the second million taking only half the time it took to inscribe the first million. This accelerating pace underscores the brand’s growing global appeal and consumer trust.

Technological Advancements and Industry Integrity

De Beers made significant inroads on the research and development front, introducing groundbreaking technologies designed to enhance efficiency and maintain the integrity of the diamond pipeline. In February 2017, the company unveiled its next-generation automated melée screening instrument (AMS2™). This revolutionary device is significantly less expensive, screens diamonds ten times faster, can handle stones three times smaller than its predecessor, and boasts lower referral rates, setting a new benchmark for screening small diamonds.

Further bolstering industry confidence, June 2017 saw the launch of an industry-first synthetic-screening device specifically for stones in set jewelry (SYNTHdetect™). This innovation was accompanied by the rollout of a synthetics-detection training course by the International Institute of Diamond Grading & Research (IIDGR). These advancements highlight De Beers’ unwavering commitment to ensuring the authenticity of natural diamonds and protecting consumer trust against undisclosed synthetic stones.

Enhanced Marketing Investment and Industry Collaboration

De Beers’ marketing spend for 2017 exceeded US$140 million, marking a significant 19% increase over the previous year. This investment was strategically allocated across a combination of proprietary and partnership activities, primarily focusing on key consumer markets such as the US, China, and India. Furthermore, De Beers substantially increased its investment in the Diamond Producers Association (DPA), a producer-wide body dedicated to enhancing consumer demand by promoting the inherent appeal, integrity, and reputation of natural diamonds. This collaborative approach underscores the company’s belief in collective industry efforts to drive market growth.

Pioneering Blockchain Technology for Transparency

In a visionary move to further enhance transparency and trust across the diamond value chain, De Beers launched a new initiative in 2017: the development of a digital platform for the diamond industry, powered by highly secure blockchain technology. This innovative platform is designed to provide a single, immutable record for every diamond registered, creating an unprecedented level of traceability from mine to retail. Currently in its pilot phase, this initiative aims to underpin confidence in diamonds and the diamond industry for all stakeholders, simultaneously streamlining existing manual processes and creating new efficiencies throughout the value chain, marking a significant step towards a more transparent and accountable diamond industry.

Outlook for 2018: Continued Growth and Strategic Focus

Looking ahead, De Beers concluded its 2017 review with a positive outlook for the subsequent year. Forecast diamond production for 2018 (on a 100% basis, except for Gahcho Kué on an attributable 51% basis) was expected to be in the range of 34-36 million carats, subject to prevailing trading conditions. This forecast signaled the company’s confidence in sustained market demand and its ability to continue leveraging its expanded production capabilities, particularly from new and upgraded mining operations. The strategic investments made in 2017 across production, technology, and brand development positioned De Beers for continued leadership and growth in the dynamic global diamond market.