De Beers weighs diamond ETF

| Wednesday September 8, 2010 00:00

Penny announced in July that he would be resigning from his post after a tenure covering some five years and a period of consolidation in the diamond firm's operations.

Penny says De Beers has been inundated by requests from financial institutions to become involved in a fund that will give investors a chance to invest directly in diamonds.

The idea is that in the wake of the recent financial meltdown - and resulting economic crash - investors prefer physical wealth over shares.

The thinking is the product would be like an exchange-traded fund. Therefore, De Beers is considering offering ownership of its diamonds without physically taking receipt.

'It's very interesting because it's part of a new mindset where people are seeing diamonds as a store of value,' says Penny.

Unlike gold or platinum, diamonds aren't a fungible product, with no trade in rough diamonds, for which there are so many categories, sizes and opinions of value.

'We've had so many things to get our minds around but we're interested. We're thinking about the implications. There are certainly people already buying diamonds for investment purposes but not necessarily in a formalised fund.

'Those kinds of instruments may well be something of the future, because as diamond prices increase they'll be an attractive option.

'People have taken a bath on all kinds of financial instruments that a while ago would have been regarded as blue chip. Diamonds for a number of people are an interesting incremental element - not a major part - of an investment portfolio.'

De Beers estimates less than one percent of diamonds sold would fall into the investment category. It's yet to decide what role it would play in such funds.

A proposal may be that a fund is set up with several hundred million US dollars to buy good quality diamonds, looking for capital gain by selling polished stones at higher prices to replenish the fund.'Up to now we've said this isn't our business.

There are a number of aspects that make it complex, such as the fact diamonds aren't fungible and that people want assurances how it would work. Though it's not going to be a major driver of the business I've certainly not seen this level of interest in the time I've been in this post.'

Another issue close to the heart of De Beers' shareholders is the repayment of $800m in soft loans.

Penny says that if the rough diamond remains strong and management continues its focus on operations to keep costs down repayments of those loans - which take various forms - will begin next year.

The immediate focus is paying down some of the roughly $1.6bn of debt to third parties likely to occupy management's mind for the remainder of this year.

Shareholders stumped up $1bn in a rights offering to knock De Beers' debt down to around $2bn. It also restructured its debt repayments from March 2010 to 2012, with an option to extend it by another year.

'Our intention is to normalise the business before year-end. The third-party debt level is coming rapidly under control,' Penny says, adding that normalising the business means bringing the level of debt to below three times earnings before interest, tax, depreciation and amortisation.

The production forecast for this year is between 30 million and 33 million carats, building up to a sustainable 40m plus carats next year.

The group's peak production was 50 million carats, but Penny says that was because certain plants - such as that at its Venetia mine - were pushed beyond capacity. That resulted in broken diamonds, a big issue for producers.

De Beers has sold five mines, taking 3m carats from its production profile.

'That will put more of a floor under rough prices, since it points to an even more constrained supply of rough from here on,' says Kilalea. The future of De Beers lies in the 8-Cut at the Jwaneng opencast mine in Botswana, which will absorb initial capital of 3bn Botswana pula and a life of project capex of 24bn pula. That is being funded from revenues generated at the mine.

The cut will take the mine to 2025 and produce 102 million carats. There's an option for a 9-Cut in the future.