De Beers sightholders: �whine and dine�...
Correspondent | Friday February 28, 2014 15:36
For the first time in decades, De Beers’ new controlling shareholder has made a policy decision to report natural rough and industrial synthetics sales in one figure. In contrast, the $6.1 billion figure from 2012 listed the company’s industrial synthetic sales (through Element 6), which, that year, amounted to $600 million, as part of a sales breakdown.
These different accounting principles that Anglo American applied to De Beers’ first full year as a consolidated subsidiary have considerably reduced the transparency and level of disclosure we had previously grown to expect and appreciate. According to Lynette Gould, the eloquent De Beers spokesperson, who checked with Anglo American: “Consistent with Anglo American’s reporting requirements, we report total sales for the De Beers Group of Companies – $6.4 billion. We don’t break this down any further, but Global Sightholder Sales makes up the vast majority,” says Gould.
Diamond price index
Let’s figure this out. De Beers says that its “diamond price index” had risen by 2 percent since the start of 2013. This figure is meaningless though, as in virtually every sight there were goods that went up or down in value by several percentages. I found it far more interesting to discover that in 2013 there was a US$126 million depreciation called “reversal of De Beers inventory uplift” – indicating that in spite of the rising rough price index, the inventories of De Beers had been overvalued and needed a downward adjustment. This made me question whether the company is sitting on dead stocks or stocks that are difficult to move. Apparently, on this point, my understanding is completely wrong. Corrects Gould: “This has nothing to do with our sales. This relates to a technical acquisition accounting adjustment as a result of the 2012 transaction and does not relate to the realisable value of inventory at the 2013 year-end.” So now we know – or do we?
Turning a challenging year into a good year
In the Anglo American press statement, De Beers also made the statement that “average realised rough diamond prices were 5 percent higher, driven by the product mix.” This is, presumably, the result of the company’s production profile. Overall, De Beers reported a 12% increase in 2013 production to 31.2 million carats, driven largely by Jwaneng’s recovery from a June 2012 slope failure. Jwaneng’s average per-carat output value is much higher than Botswana’s or global averages, thus Jwaneng’s greater production by itself could account for the 5 percent higher income per carat. (In fact, increases or decreases in the output of other De Beers’ mines were of little relevance: Debswana production went up – from 20.2 million carats to 22.7 million – by the very same percentage as De Beers’ global production rose...)
For De Beers, Botswana has firmly entrenched itself almost as the “only mining game in town,” given that 73% of its group’s production (by volume) comes from there. As most of the De Beers Group’s mines are joint ventures with other companies, it can only call some 17.9 million carats (or 58% of output) as “its own.” It is because of the decreasing importance of its beneficiary- owned mining that other sources of revenues will steadily become more important.
Arriving at the total rough sales figure: $5.85 billion
The company says that its production is based on the rough demand from clients. In other words: it isn’t producing to increase inventory levels. So if the miner, theoretically, had sold 12% more carats at unchanged 2012 prices, last year’s rough sales should have been US$6.16 billion. If De Beers got 5 percent better prices for its output (because of change of mix), it should have received US$6.5 billion. However, the company announced US$6.4 billion for everything – including synthetics. So the figures don’t add up.
My colleague, Pranay Narvekar, and I went back to the drawing board and looked at what “really happened” in 2013:
Looking at the 2 percent figure of higher prices reported by De Beers, and comparing this to similar statements over the last two years, we concluded that the 2 percent “better realisation” is compared to the end-of-the-year price and not an average price for 2013.
The average price for 2013 was surely lower than that of 2012. (It should be about 8-9 percent lower given that prices in the third quarter of 2012 fell by about 15%).
Assuming that De Beers had a 5 percent product-mix boost, the company would still have a 4-5 percent drop in prices. Stickingto this theoretical US$6.16 billion and assuming a 5 percent percent reduction in price, this would make for a De Beers rough diamond sales total of US$5.85 billion. We checked out our estimate with De Beers’ Head of Communications, David Prager, who turned out to be a good sport: “Lest you think we are mixing natural and synthetics [figures]... of the total revenue of $6.4 billion for 2013, revenue from the sale of rough diamonds was $5.8 billion. The comparable figure for 2012 was $5.5 billion.” So, it’s official. Rough diamond sales improved by 6 percent, while industrial synthetic diamonds may have slightly gone below its US$600 million level of 2012.
De Beers results from a market perspective
Was this a good year for De Beers? In the eyes of Anglo American, its subsidiary performed extremely well. In his remarks to analysts, Anglo American CEO Mark Cutifani went out of his way to be complimentary toward De Beers CEO Philippe Mellier.Showing an operating profit of $1.003 billion, De Beers contributed 15% to the overall Anglo’s profit of $6.620 billion.(De Beers’ profits were a stunning 42% higher than in the previous year on a “pro forma” basis, but an entirely different accounting regime makes comparisons more difficult.)
Anglo American looks at its Return on Capital Employed (ROCE), and here De Beers delivered 11%. That is, by any standard, on the low side. But for Anglo American, which faces major problems in other areas, 11% is the corporate average. Philippe Mellier has received a target of ROCE of 15% by 2016. That requires a combination of further driving costs down, increased production and stronger prices.
De Beers was able to sell what it wanted to sell. It may not have fully achieved the prices it wanted, but it apparently met its targets and made its parent company happy. At the end of the day, that’s what Philippe Mellier and his team are paid to do.
As for this year, 2014 has started well for De Beers. At its first sight, the company increased prices around 3-4 percent across the board, with some categories closer to 7-8 percent. In some instances, part of these price increases may have been compensated by improvements in assortment, but that hasn’t changed the underlying message. Boxes were trading at two-digit premiums, which above all else, reflects market shortages of rough. From a corporate De Beers perspective, if the prices go up significantly at the year’s first sight, it makes it easier to achieve the average targeted annual increase that the company wants to achieve.
In the prevailing market conditions, De Beers’ 2013 performance and beginning of 2014 must be viewed as quite an achievement. In a challenging market, De Beers has demonstrated that it did not lose its considerable “placing power” over its clients.
However, let’s not kid ourselves – there are plenty of DTC sightholders who are less than happy, who complain, who defer sales, and who might even “return their sight privileges.” Among these sightholders there are those who have good reasons to continue the time-honoured tradition of, what I have coined, “whining and dining.” The Gaborone restaurants are ready to serve.
CHAIM EVEN-ZOHAR